Overview of China’s Building and Construction Market
Since 1978, the construction industry has grown at an average annual growth rate of 16.6%, according to the National Bureau of Statistics (NBS). In 2017, the value-added output of the industry reached RMB 5.57 trillion (US$830 billion), compared to only RMB 13.9 billion (US$2.07 billion) in 1978.
During this period, the share of the value-added output to the GDP increased from 3.8% in 1978 to 6.7% in 2017. Between 1996 and 2017, the share of state-owned companies decreased rapidly from 20% to 2.5%.
2018 and onwards
In 2018, the Chinese construction sector grew by 4.5%, up from 3.5% in 2017. Despite the growth in 2018, the overall pace of expansion of the sector was relatively slow, compared to the 11% growth witnessed in the preceding decade in the construction industry.
According to a report by Fitch Solutions, provider of credit and macro intelligence, the construction industry is forecast to grow by 5.9% and 6.1%, respectively in 2019 and 2020, largely driven by railway projects, such as high-speed rail and urban/inter-city rail.
Between 2018 and 2022, industry’s output value in real terms is expected to rise at a compound annual growth rate (CAGR) of 4.24%, lower than the 6.84% during 2013-2017, according to Globaldata, data analytics and media company.
In 2018, the total floor space of buildings completed decreased by 1.3% compared to 2017, with buildings for residential and commercial or service use declining by 0.7% and 4.77% respectively.
According to the Council on Tall Buildings and Urban Habitat (CTBUH), China constructed 11 “supertalls” buildings more than 300 meters in 2018, accounting for over 60% of the total number of supertalls constructed in 2018. China expects to complete the construction of a further 30 supertalls in 2019.
In addition, China also maintained its lead when it comes to the construction of buildings of 200 meters or above, with 88 completions in 2018, accounting for 61.5% of the total. Second place was again held by the United States, with 13 completions, up from 10 in 2017.
China has by far the most number of supertall buildings in the world, with 68 completed projects, according to the CTBUH. The country accounted for 61.5% of new buildings recorded in the CTBUH's 2018 figures.
In 2019, around 60% of all of the world’s extremely tall buildings (supertalls) expected to be completed will be in China.
Going forward, the construction industry will face several challenges such as a slowdown in economic activities due to the ongoing trade war and the need to control public debt, which has led to excess capacity in infrastructure and industry and oversupply in real estate.
However, to ensure steady economic growth and reduce the impact of the trade war, the government is likely to increase spending on infrastructure projects.
The performance of the industry will continue to depend on how the Chinese government balances the need for supporting economic expansion while reducing public debt and financial risks.
Government-driven infrastructure investments in the first two months of 2019 increased by 4.3% year-on-year compared to a 3.8% growth rate from 2018. During this period, the expansions in spending on roads and railways grew by 13% and 22.5% respectively. According to the National Development and Reform Commission, China's infrastructural investment would grow by 8% this year compared with 3.8% in 2018.
Investments in the real estate sector in the first two months of 2019 rose by 11.6% year-on-year, up from 9.5% growth rate in 2018. Floor space sold reduced by 3.6% year-on-year in the first two months of 2019, compared to 1.3% growth in 2018. Property sales grew 2.8% in the first two months of 2019, much lower than the 12.2% growth witnessed in 2018. Among them, residential sales increased by 4.5%, office building sales decreased by 6.2%, and commercial business premises sales decreased by 9.4%.
Between the start of 2018 and February 2019, the National Development and Reform Commission, China’s top economic planner has approved 27 infrastructure projects with a total expected investment of RMB 1.48 trillion yuan (US$220.45 billion). Of these 27 projects, 16 projects worth around RMB 1.1 trillion (US$ 163.85 billion) were approved since the start of November 2018.
The Ministry of Transport, China Railways Corporation and Civil Aviation Administration of China have all released their infrastructural construction targets for 2019, including fixed-assets investment of RMB 1.8 trillion (US$ 268 billion) in highways and waterways, RMB 800 billion (US$ 119.15 billion) in railway investment, and RMB 85 billion (US$ 12.66 billion) in airport construction.
Legislation and Government oversight
In addition to the People's Republic of China (PRC) Construction Law, there are several other implementing rules and regulations issued by the Ministry of Housing and Urban and Rural Development (MOHURD) and its local counterparts (which are responsible for the administration and supervision of construction activities) for the construction industry.
The local departments of MOHURD are responsible for the supervision of construction projects. Governmental approvals and registrations are required for design and construction commencement. In addition, other authorities such as environmental protection may be involved depending on the project.
To start construction, a commencement permit is required.
Developers are allowed to develop projects themselves or with other entities, with the limited liability company being the most commonly used form of entity. In addition, one can also engage with partners through contractual agreements.
According to the Special Administrative Measures (Negative List) for Foreign Investment (2018) certain projects involving foreign capital such as nuclear power plant, gas/water/sewage pipe networks, and civil airports can only be implemented through a Sino-foreign joint venture, with the local Chinese partner being a majority partner.
For projects based on turn-key or EPC (engineering, procurement, and construction) model, the contractor is responsible for procurement, while the owner is responsible for other types of projects.
National standard construction contracts for construction, EPC, project design, site supervision, and other consultancy services are published by the Ministry of Housing and Urban and Rural Development (MOHURD).
For local projects, the most common contract used is the Model Construction Project Contract, while for international projects, the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils) (FIDIC) are preferred.
Companies involved in construction, project designs, surveys, and supervisions in China must hold qualifications issued by the Ministry of Housing and Urban-Rural Development (MOHURD) or its local branches.
A foreign design firm can engage in engineering design services by incorporating a foreign construction design enterprise in China and conducting activities as per the scope in their qualification certificate.
They can also enter into a co-operative design agreement with a qualified Chinese design firm, and engage in construction design work.
Construction enterprises can hire foreign workers as well as employ foreign nationals after obtaining Certificates of the People's Republic of China Permitting the Employment of Foreigners.
Disputes can be settled either through litigation or arbitration in China. Firms engaged in Chinese construction projects (not in international projects) usually opt for arbitration. However, firms involved in government invested public utility projects, large projects, or local companies usually opt for litigation, while contracts with foreign-owned firms usually choose institutional arbitration.
Companies can also settle disputes by negotiation and mediation, through courts, mediation committees, or government institutions.
The largest national construction association, representing contractors, project investors, and labor service companies is the China Construction Industry Association (http://www.zgjzy.org/). It works closely with the industry and government in areas such as policy reforms and public education.
In addition, the Architectural Society of China (http://www.chinaasc.org/) is an academic body that promotes technological development, organizes domestic and international academic exchange, and provides education to professional engineers.
Architectural design is one of the major sub-sectors in the construction industry that has attracted the majority of the global players to China. Most of the opportunities are in the high-end of the commercial real estate sector. The low to mid-end of the market, along with most of the residential property, is dominated by local architects. Most of the opportunities are for companies engaged in integrated urban planning design, materials and systems with high reliability, and quality supervision.
In addition, the rise in green-building designs in China also opens up opportunities for firms involved in:
- Green energy
Smart-grids, renewable energy
- Green buildings
Environmental-friendly construction materials, energy-saving renovation
- Green transportation
Construction of facilities such as charging stations, energy saving renovation in airports, bus stations, railway stations.
Waste and water management, treatment of pollutants
Equipment, machinery, and materials
The Chinese government spending on infrastructure projects in the short-term will continue to drive growth in the machinery, equipment, and construction materials market. Although domestic investments may slow down compared to the previous decade, the construction sector driven by public-sector infrastructure projects still offers opportunities for domestic as well as international manufacturers of construction equipment and machinery as well as suppliers of construction materials. In addition, the Belt and Road initiative will continue to drive growth for the manufacturers and suppliers in the long-term.
Recently, due to stricter lending conditions and tighter regulatory enforcement for domestic developers and real estate funds, the participation of local companies in the real estate sector has reduced. In 2018, foreign investors invested RMB 94.6 billion (US$14.08 billion) in the property market, accounting for 32% of the total, and more than double the amount invested in 2017.
Foreign companies can take advantage of the credit squeeze and work with domestic companies looking to raise cash and invest in the development, acquisition, rentals or leasing of commercial property.
For example, in 2018 Canada Pension Plan Investment Board (CPPIB) and Longfor Group Holdings Limited (Longfor Group) launched a new investment cooperation focusing on rental housing programs in China with an investment of approximately US$817 million. As of December 2018, China accounts for around 8.78% of CPPIB’s global real estate holdings.Footnote 1
For more information on the infrastructure market in China, please refer to Building Products & Construction Sector Profile - Shanghai, China.
- Footnote 1
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