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WHITE PAPERS06/WINNING WORK IN CHINA

A PRODUCT


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2 A PRODUCT

/CONTENTS

/EXECUTIVE SUMMARY

/OVERVIEW OF CHINAS CONSTRUCTION MARKET

.Economic context

.Spending on construction

.Drivers for investment in construction

..Population growth

..Urbanisation

..Energy targets

..Government stimulus

..Foreign direct investment

.Tender price and construction cost trends

/MARKET OPPORTUNITIES AND CHALLENGES BY SECTOR

.Residential

..Private housing

..Affordable housing

.Commercial

..Commercial offices

..Retail

.Hotels, leisure and tourism

.Industrial

.Healthcare

.Education

..State funded education work

..Privately funded education work and international schools

.Transport infrastructure

..Urban transit and transport oriented development

..Aviation

..Rail

..Highways

..Waterways

.Outward investment

/MARKET OPPORTUNITIES AND CHALLENGES IN KEY REGIONS

.Key first tier cities

..Beijing

..Shanghai

..Guangzhou

.Key second tier cities

..Nanjing

..Chongqing

..Chengdu

.Interview with Professor Li Shirong, Chongqing Foreign Trade and Economic

Relations Commission and CIOB China ambassador

/HOW CHINAS CONSTRUCTION MARKET OPERATES

.Procurement routes

..Private sector clients

..Public sector clients

.Planning system

.Chinese experience

.Opportunities and challenges for western firms

..Architects

..Engineers

..Consultants

..Contractors

..Specialists and manufacturers

.Case studies and interviews:

..TFP Farrells and Ryder Architecture

..Interview: Sun Jinke, executive director, Shanghai Jianke Project Management

/DOING BUSINESS IN CHINA

.Geography

.Licensing

..Arup case study

.Language

.Recruiting and retaining staff

.Corruption

/SUSTAINABILITY

.The rise of the sustainability agenda

.Key sustainability policies and initiatives

..Eco cities and community scale developments

..Legislation and incentives

.Ratings systems

..Three Star

..LEED

..BREEAM

..Alternative rating systems

.Demand for sustainability: key trends

..New construction

..Retrofitting

..Technologies

..Design

.Leading companies in China for sustainability

..Consultants

..Developers/investors

..Provinces

.Challenges to achieving a more sustainable built environment

/RULES AND REGULATIONS

.Completion

.Building regulations

.Health and safety

/KEY CONTACTS

/METHODOLOGY AND ACKNOWLEDGEMENTS

1/CONTENTS


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3 A PRODUCT

China has been the worlds largest

construction market since , when it

overtook the US with about of global

work. Construction spend reached bn

in ; the latest step in a dramatic upward

trajectory which has seen the market increase

in value by since . A report by

Global Construction Perspectives, published

in , forecast that Chinas share of theglobal construction market will rise to by

, as the market continues its growth at

a time when other more established markets

are contracting as a result of global recession.

The Chinese economy has been

experiencing a much publicised slowdown,

with the .growth rate in the second

quarter of its slowest in three years.

This is likely to impact on some areas of

construction in the short term. However,

this effect has so far been very limited,

and longer-term market prospects remain

strong as growth in Chinas construction

sector is being fuelled by strong underlying

trends in the countrys wider economic and

social development. First, rapid population

growth has vastly outpaced development of

infrastructure in the country. The population

of mainland China has grown by

million people since , and despite the

slowing effect of Chinas one child policy,

introduced in to limit population

growth, it is expected to expand for at

least another five years. This has created

urgent and continuing demand for

residential development and social and

transport infrastructure.

This demand has been increased

by a politically driven trend towards

urbanisation. The Chinese governments

th Five Year Plan, which outlines its

political and economic priorities for the

period -, emphasizes the desire

for rapid urbanisation, continuing the

development of previously rural economies

within China. Particular areas of focus are

the expansion of second and third tier cities.The government is also aiming to create

cities in the next years.

The Chinese governments desire

for urban development is also aimed at

attracting increased foreign investment to

the country, albeit while adopting a tandem

strategy of offering Chinese businesses

market advantages that will increase their

domestic and international competitiveness.

In particular, it is attempting to encourage

multinational businesses which have

traditionally focused on the most developed

cities of Shanghai and Beijing to enter thecentral and western regions, as part of an

aim to rebalance Chinas national economy

away from low-tech manufacturing and

towards high-tech products and research

and development.

This is contributing to demand for

improved local, regional and national

transport systems at the same time as the

growth in foreign-owned or foreign-invested

businesses entering the market is increasing

demand for commercial premises, and for

higher standards in retail and office space.

A growing number of commercial clients are

focusing this interest towards second and

third tier cities as their accessibility improves,

particularly as these tend to offer lower

cost bases than Shanghai and Beijing.

Another significant driver of construction

demand is an increasing consciousness of

sustainability within China. This is being

led partly by the government, which since

the mid s has come under increasing

international pressure to address Chinas

escalating contribution to global energy use

and carbon emissions. In , the Chinese

government agreed to reduce the countrys

carbon intensity a measure of carbon

emissions as a proportion of GDP by

-by .

To achieve this, Chinas th Five Year Plan

has set out a sizeable growth programme

for renewable energy generation, including

wind farms and facilities for harnessing solar

energy. The government has also set out

an ambitious strategy for community scale

sustainable development, with a target that

of its proposed new cities shouldbe eco cities although it has not defined

this term in detail. Finally, and perhaps

most significantly, it has developed and

introduced a green building code the Three

Star system, which is designed to promote

sustainable construction. Although voluntary,

the use of the code is steadily increasing,

with the number of buildings accredited

increasing threefold between and .

The government is strongly pushing

the adoption of Three Star; however,

international commercial clients in particular

are also often demanding buildings that meetthe standards of the US LEED system. In this

way, the growing number of foreign owned

or invested businesses in China is also

driving increased demand for sustainability

expertise in construction.

Until recently, the growth in Chinas

construction market has been fuelled

primarily by the housing sector, which has

accounted for just over half of all construction

spending. However, residential development

is now reducing as a proportion of spend as

a result of government policies introduced

to cool the market amid concern over the

possibility of a housing bubble. House prices

have increased roughly every five years

over the last decade, according to data from

the International Monetary Fund, with

demand driven partly by a trend for Chinese

to invest in property rather than the countrys

fledgling stock market. The government

has now limited the number of homes

families can purchase in about cities, and

increased the minimum down-payment on

homes in cities with the highest rises. This

has led to a clear slowdown in the market.

Short-term and medium-term growth

is now expected to be led by government

spending on infrastructure projects, with

growth in non-building construction spend

slightly outpacing the overall construction

spend growth rate. Commercial and leisure

and tourism projects, including hotel

developments, are also expected to account

for a significant proportion of work.

For western construction firms, the

scale and projected growth of the Chinese

construction market represents an obviousopportunity, particularly in a time when

many other markets including the UK, US,

Europe and Middle East continue to be

adversely affected by the global downturn.

2/EXECUTIVE SUMMARY


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4 A PRODUCT

Since , when the Chinese government

began a system of economic reform to

replace its command economy with elements

of a capitalist system, including laws that

allowed foreign direct investment, the

market has gradually become more open to

western businesses. This has both created

an environment where western construction

companies can operate, and stimulated

client-led demand for western construction

services, particularly in engineering and inarchitecture, where western aesthetics have

carried considerable prestige. This process

has been particularly evident since the

s, spurred by dramatic growth of

western commercial interest in developed

cities including Shanghai, and, latterly,

by Chinas entry to the World Trade

Organization in .

As a consequence, there has over the

last years been a steady flow of western

companies establishing a presence in China,

and opportunities for these and new entrants

is continuing to grow as the market expands.

The major opportunities for western

firms continue to be in architecture and

consultancy, as opposed to contracting,

which is almost entirely dominated by state-

controlled or state-invested companies a

legacy of Chinas historic command economy.

However, the Chinese industry itself has

developed rapidly over the last years,

and western firms are now under greater

pressure to demonstrate specialist technical

expertise in order to win contracts ahead of

Chinese counterparts, as well as offer greater

competition on fees. Areas where western

firms are still perceived to have clear

market advantage are in multidisciplinary

offerings, technical expertise such as

high-rise development, iconic design,

and sustainability.

Despite the opening up of Chinas

economy, and the size of its construction

pipeline, however, there also remain

significant barriers to entry for western

construction firms which limit both the scale

of opportunity on offer, and potentially, theprofitability of contracts. The most powerful

of these is government attitude towards

foreign-owned construction firms in

terms of its overall policy framework and

in its actions as a client.

In terms of policy, despite moves to

increase the amount of foreign businesses

operating in China, there remain significant

restrictions in place designed to protect

the interests of Chinese industry. In the

construction sector, chief among these is the

licensing regime which applies to architects

and engineering consultants. It is extremely

difficult for foreign owned enterprises to

obtain full design licences, which means thatmany firms can only work to concept design

stage before handing over to, or partnering

with, a Chinese company.

When government bodies, or state

owned enterprises, act as clients, there are

also often procurement practices applied

which overtly give preferential treatment to

Chinese firms: for contracts procured directly

for government buildings, for example,

legislation states that foreign services can

only be used in exceptional circumstances.

In addition, even for the majority of public

sector contracts, which are covered by more

flexible laws, information on forthcoming

tenders is often incomplete or published

at short notice. This gives an advantage to

Chinese companies, which are more likely

to have closer historical ties to public

sector clients.

In several sectors, including highways

development and air-side aviation work, the

effect of these policies has been to virtually

exclude western involvement in some or all

construction disciplines. The government

procurement landscape also inherently

creates opportunities for corruption, which

remains a significant problem for western

companies seeking compliance with

international anti-bribery legislation.

Chinas sought-after entry to the

World Trade Organizations Government

Procurement Agreement (GPA), a plurilateral

agreement in which members open up public

procurement markets more to each other, in

theory should remove some of these barriers.

However, the country has so far refused to

offer sufficient concessions on the amountof government procured work it will open up

to overseas companies and as such, its entry,

for which it has been bidding since , has

been delayed amid continuing negotiations.

Its last offer was rejected in late ; there is

little expectation of a swift resolution.

Western firms operating in China have also

encountered significant business risks, with

those most frequently cited during interviews

for this White Paper including difficulty in

securing payment and the lack of a developed

legal system for resolving disputes. Other

downward pressures on profitability include

rapid salary inflation: salaries for consultancy

roles in China are rising by an average of-a year, and experienced staffare

requesting rises of as much as to

move companies.

This White Paper examines the short- and

medium-term opportunities and challenges

in every major development sector in China,

and sets out in detail the opportunities for

and barriers to western involvement for firms

offering services in architecture, consultancy,

engineering, and contracting. It also outlines

current practice and trends affecting

construction procurement, including

the contract forms, tendering routes and

sustainability measures most frequently

being employed by private and public sector

clients, and trends in construction costs.


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5 A PRODUCT

.ECONOMIC CONTEXT

Over the last years, Chinas economy

has altered from being a centrally

controlled system that was virtually closed to

international trade to become more market

driven, with an expanding private sector.

During this time it has experienced rapidgrowth, with GDP increasing from RMB

.bn in to RMB .trillion in

(US .trillion). In it became the

second largest economy in the world after

the United States, and in April , the

International Monetary Fund predicted that

Chinas GDP would overtake that of the US

in . China was the fastest growing major

economy in according to the CIA World

Fact Book, with a growth rate of ..

Growth has been driven partly by private

sector expansion since the government

began economic reform in by

introducing aspects of a capitalist economic

system. These included a decision to

allow foreign direct investment in special

economic zones a move which paved the

way for a rapidly expanding multinational

presence in China. Today, although some

restrictions still exist on foreign investment,

the market is much more open than at any

point in its history.

Chinas growth has also been fuelled

by extensive state investment to achieve

two aims. The first is the move from a

rural to an urbanised nation, which has

led to the government investing

considerably in infrastructure. Second is

the rapid development of industry, as

China strives to meet ambitious annual

GDP growth targets and provide employment

for the countrys expanding population.

Traditionally, Chinas industrial growth

has focused on heavy industry and low

cost exports; however, a central tenet of

the governments th Five Year Plan its

policy outline for the period - is apolicy of developing the countrys economy

into one based on high-tech industry and

research and development. The government

is also striving to move the economy from

export dependency by encouraging a strong

domestic market a move given particular

impetus by the impact of the global recession

on exports to the US and EU in particular.

Chinas economy avoided contraction

during the recent global recession.

However, it did experience a significant

slowdown at the end of and earlyas the result of the impact on its

exports, which accounted for roughly

of GDP at the time the crisis hit. To

counteract the impact, the Chinese

government introduced a RMB

trillion stimulus package at the end of

, involving an extensive two-year

infrastructure spending programme across

areas including affordable housing, rural

infrastructure, transport and rebuilding

following disasters including the

Sichuan earthquake. The government also

introduced tax cuts and loosened credit

conditions: it instructed the banks, the

most dominant of which are state-owned, to

increase lending, with the result that loans

grew at a rate of more than over the

next year. The majority of the new funds

were used for infrastructure projects.

But although Chinas economy has

continued to grow, the scale of expansion,

particularly in real estate, has led to fears

of a crash. These fears have been increased

by concern over the potential for loans

made during the governments stimulus

period to prove unprofitable, which would

create a burden for the banking system.

To attempt to cool the market, the

government in introduced a series

of policies aimed at slowing down the

residential property market, particularly

in major cities, to achieve a stated aim of

sustainable, manageable growth [see

section .]. This has led to a demonstrable

slowdown in the market: between February

and March , out of major cities

monitored by the government experienceda drop in new house prices.

The effect of the policies towards

residential development, combined with the

continuing weak global demand for Chinas

exports which was exacerbated by

the eurozone crisis, has been a slowdown

in GDP growth. In Q, GDP expanded

by .over the previous quarter,

compared with a recent average growth

rate of .. Year-on-year growth was

.. In Qthe growth rate was . the

slowest in three years.Amid fears of a correction going too far,

the Chinese government is preparing to

speed up infrastructure spending once more.

However, this policy has been described by

market commentators as fine tuning rather

than a major stimulus package such as that

of . Continuing fears over the impact

of the eurozone crisis on exports have also

prompted the Chinese government to take

steps to boost domestic demand to stimulate

its economy. These steps include the central

bank cutting its reserve ratio requirement

the amount of money banks need to hold

in reserves three times since November

, giving banks more available funds for

lending. The most recent reduction, in April,

will mean that large banks will be required

to hold reserves equal to of deposits

instead of .. However, as of May ,

the government was insisting that it will not

relax its policies on the housing market in

the short term.

The Chinese government has an official

growth target of ., the lowest since

. However, the latest Reuters consensus

estimate, taken from a poll of private sector

economists, forecasts .growth in Qand

full year growth of ..

.SPENDING ON CONSTRUCTION

Chinas annual construction market has

increased from bn in to around

bn in , according to research by

Global Construction Perspectives. In

it overtook the US as the worlds largestconstruction market with of global

work, despite having less than of the

global market in the early s. Global

Construction Perspectives predicts that

3/OVERVIEW OF CHINAS CONSTRUCTION MARKET


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6 A PRODUCT

figure will rise to by [Fig ].

Chinas recent construction growth has

been fuelled by the housing sector, which

accounted for of construction

spend in . However, this is reducing

as a proportion of spend as the government

takes steps to avoid a housing bubble by

introducing greater restrictions around

property ownership in key cities [see

section .]

Total investment in real estatedevelopment including residential and

commercial in January-March was

RMB ,.bn, a year-on-year growth of

.. This was .percentage points

lower than that in the same period of last

year. Over the first four months, the overall

rise was even slower at ..

Instead, growth is expected to be

propelled by government spending on

infrastructure projects, as it pursues a policy

of greater urbanisation and connectivity

between Chinese cities. Business research

organisation the Freedonia Group forecast

last year that construction spending in

China would rise .annually through to

, with non-building (i.e. infrastructure)

construction growing .annually.

.DRIVERS FOR INVESTMENT INCONSTRUCTION

..POPULATION GROWTH

The population of mainland China at the

end of was .billion people, close to

of the population of the world, and a rise

of million people since . The

figure represented an increase of .millionon , despite a flat birthrate, controlled

by Chinas continuing one child policy. This

was introduced in to limit population

growth, and remains in place despite recent

relaxations for certain groups, including

ethnic minorities and parents of disabled

children. China is expected to remain the

most heavily populated country in the world

until , with its population continuing

to expand for a further -years, reaching

around .billion at its peak [Fig ]. By

Indias population is expected to overtake

that of China.

The rapid growth of Chinas population

over the last years, and its continuing rise,

has led to high demand for residential, social

infrastructure and transportation projects, the

development of which has been vastly outpaced

by the increase in population. This demand is

continuing despite the slowdown in population

growth, as a result of historic under-provision.

..URBANISATION

The demand for construction work that has

been created by the need to serve Chinas

expanded population has been increased by

a trend towards rapid urbanisation. By the

end of , for the first time, more than halfof Chinas population .- was living in

urban areas as opposed to rural, according to

Chinas National Bureau of Statistics.

The government is pushing to continue

this trend, and has stated an aim of creating

cities in the next years. Its th Five

Year Plan for -emphasizes the desire

for greater urbanisation, and in particular to

expand Chinas second and third tier cities.

Chinas urbanisation is expected to continue

at an annual rate of .between now

and , according to the US Central

Intelligence Agency.

..ENERGY TARGETS

Chinas industrial development has led to

a dramatic increase in its contribution to

Year Population

,,

,,

,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

,,,

Forecast

FIG . CONSTRUCTION OUTPUT FORECAST ($BN AT PRICES ANDEXCHANGE RATES) (SOURCE: GLOBAL CONSTRUCTION PERSPECTIVES, OXFORD ECONOMICS, )

FIG . CHINA POPULATION -(SOURCE: CIA WORLD FACT BOOK)

China US Japan Indiabn


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7 A PRODUCT

global energy use. It overtook the US as the

worlds largest energy consumer in , and

in the same year accounted for a quarter of

global carbon dioxide emissions, according to

research from BP. Its emissions rose by

more than over the year.

Following international pressure

the Chinese government agreed at the

Copenhagen Climate Change conference in

December to reduce its carbon intensity

a measure of a countrys carbon emissionscompared with its GDP by -by

. In it backed up this commitment

by agreeing to allow international authorities

to audit its calculation process for carbon

reduction for the first time.

The increased awareness of energy

consumption, combined with international

scrutiny over carbon emissions, is

driving a series of major programmes of

construction work.

First, the government is looking to increase

greatly the countrys use of renewable energy,

and has made the construction of large-scale

hydro power, wind power and solar energy

power stations a clear priority in its th Five

Year Plan (-). Targets to be reached by

, compared with levels, include:

increase in installed capacity of

hydropower, from GW to GW

increase in installed capacity of

wind power, from GW to GW (offshore

to account for GW of new capacity)

increase in installed solar capacity,

from .GW to GW.

Secondly, it has advocated a sustainable

approach to its urbanisation programme,

including the construction of large-scale eco

city developments and the improvement

of energy efficiency of individual buildings

residential, commercial and industrial

through retrofitting. Thirdly, it is continuing

a programme of projects begun during

its th Five Year Plan to address specific

environmental problems that have resulted

from pollution in areas that have experienced

rapid industrialisation.

..GOVERNMENT STIMULUS

The Chinese government has over the past

four years been fast to react to protect its

economy from the effects of international

recession through stimulus measures that

have centred on improving the countrys

infrastructure development. Programmes

funded by an RMB trillion stimulus

package introduced in designed as

a two-year programme have largely been

completed. In May the government-

controlled central bank relaxed the

reserve ratios of banks in China in order

to increase lending.Economic commentators have taken this

move as confirmation that the government

is ready to act quickly to boost the economy

if the adverse impact on trade continues.

Transport infrastructure, including roads

and airports, is expected to be a main target

of any future stimulus, although potential

increases in spending have been described

by officials as fine tuning and there is no

short term expectation of another major

stimulus package.

..FOREIGN DIRECT INVESTMENT

Since , when the Chinese government

began to alter regulations to allow foreign

investment in China, the country has

proved increasingly attractive to foreign

investors. Forms of permitted foreign direct

investment in China include Chinese-foreign

joint ventures, exclusively owned foreign

enterprises (although there are restrictions on

how these can operate) and foreign-funded

shareholding companies.

This is contributing to the demand for

development, both directly in commercial

and industrial premises but also in increased

demand for better infrastructure as the

Chinese government attempts to attract

more foreign investors to the market. The

involvement of foreign investors in

businesses is also increasing demand for

higher standard premises, particularly in

the commercial sector.

During , the number of newly

approved foreign-funded enterprises in China

was ,, an increase of .year on year,according to statistics compiled by Foreign

Investment Bulletin. Actually used foreign

investment was up .at US .bn.

Levels during the first four months of

have dropped year on year, because

of the maturing of the Chinese market and

the continuing economic turmoil acting

as a break on investment. The number of

newly approved foreign funded enterprises

was down year on year at ,, while

actually utilised foreign investment was down

.at US.bn. However, the Chinese

government is continuing to pursue a strategy

of attracting foreign direct investment, and

is attempting to encourage multinationalbusinesses to enter the central and western

regions in particular.

In the main countries of origin of

actually used foreign capital in China were:

.Hong Kong (US .bn),

.Taiwan (US .bn),

.Japan (US .bn),

.Singapore (US .bn),

.USA (US .bn),

.Republic of Korea (US .bn)

.UK (US .billion),

.Germany (US .bn),

.France (US m),

.Netherlands (US m).

.TENDER PRICES ANDCONSTRUCTION COSTS

Construction in China has been affected by

increasing materials prices as demand for

development has grown. The main drivers

for rises are increasing labour costs, which

increased .during -according

to research by EC Harris, and rising cost of

cement, which rose .in the same period.

China price rises -

Material

Increase

Reinforcement steel .

Portland cement .

Pre-mixed concrete .

Skilled labour .

Source: EC Harris research, November

Cement price rises are likely to slow as new

production capacity comes online throughout

and ; however, demand continues

to outstrip supply and EC Harris reported in


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8 A PRODUCT

November that some plants were two

years or more away from operation. [Fig ,

Fig , Fig ].

In the short term, however, cost consultants

are not forecasting dramatic overall cost rises.

Rider Levett Bucknall reported in its Q

outlook: It is anticipated construction costs

in major cities will remain rather stable in

the coming months. [See Fig and Fig for

detailed cost breakdowns by sector].

FIG . PRICE RISES OF REBAR (SOURCE: EC HARRIS)

FIG . PRICE RISES OF PORTLAND CEMENT (SOURCE: EC HARRIS)

FIG . PRICE RISES OF PREMIXED CONCRETE (SOURCE: EC HARRIS)

Rebar RMB/t Annual increase

,

, .

, -.

, .

, .

Portland RMB/t Annual

cement increase

.

-.

.

.

Premixed RMB/t Annual

concrete increase

.

-.

.

.

st half yr

st half yr

st half yr

grade I mm grade I mm

grade I mm grade II mm

grade II mm grade II mm

grade III mm grade III mm

grade III mm

grade .(bagged)

grade .(bagged)

grade .(bulk)

C, D-C, D-

C, D-

C, D-

RMB/tonneinc VAT

RMB/tonneinc VAT

RMB/tonneinc VAT


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9 A PRODUCT

The following data represents estimates of current building costs in the respective markets.

Costs may vary as a consequence of factors such as site conditions, climatic conditions,

standards of specification, market conditions etc.

Range of cost per mof gross floor area

Offices Retail

Premium Grade A Mall Strip Shopping

Location Low High Low High Low High Low High

Beijing RMB , , , , , , , ,

Guangzhou RMB , , , , , , , ,

Shanghai RMB , , , , , , , ,

Shenzhen RMB , , , , , , , ,

Rates are per mof construction floor area, measured to outer face of external walls.

All hotel rates are inclusive of furniture fittings and equipment (FF&E).

Range of cost per mof gross floor area

Hotels Industrial Residential

Star Star Warehouse Multi-storey

Low High Low High Low High Low H i g h

Beijing RMB , , , , , , , ,

Guangzhou RMB , , , , , , , ,

Shanghai RMB , , , , , , , ,

Shenzhen RMB , , , , , , , ,

FIG . BUILDING COSTS BY SECTOR (SOURCE: RIDER LEVETT BUCKNALL, JANUARY)

FIG . BUILDING COSTS BY SECTOR (SOURCE: RIDER LEVETT BUCKNALL, JANUARY )


10/35


10 A PRODUCT

.RESIDENTIAL

Demand for residential property in China

has an underlying basis in the countrys

growing population, which stood at .

billion at the end of and has a current

estimated annual growth rate of ..

The demand for the construction ofresidential property has been increased

further by the trend towards urbanisation.

For the first time, by the end of , more

than half of Chinas population . was

living in urban areas as opposed to rural,

according to Chinas National Bureau of

Statistics. The government aims to continue

and accelerate this trend with the creation

of cities in the coming years.

A third factor that has driven the

development of Chinas residential market

is the attitude of Chinese society towards

owning property. There is very little demand

for rental property in China, with individuals

and families tending to own their own homes.

In addition, the Chinese preference for

investing in property over its fledgling

stock market has led to many families

buying homes years in advance for their

childrens use.

..PRIVATE HOUSING

Chinas private residential market was

only established around years ago, and

has experienced dramatic growth during

that time.

When China became the Peoples Republic

in , initially all housing was provided

by the state. However, three decades later

the government made a legal shift towards

private home ownership; although the state

still legally owns the land, it leases this out for

residential development. Individuals can live

in those residential developments, and have

the right to sell or rent properties. Another

major milestone occurred in the late swhen the government began discouraging

state owned organisations from giving free

or subsidised housing to employees, instead

encouraging these enterprises to give housing

benefits to employees to use in the

private market.

Since then, the combination of market

drivers has led to a rapid rise in private

house prices, which have increased roughly

every five years over the last decade,

according to the International Monetary

Fund. This price growth has been mainlyconcentrated in larger cities, and particularly

on the eastern coastal region with the

biggest effects in cities including Beijing,

Shanghai, Shenzhen, Tianjin and Hangzhou.

In an effort to cool this market, and prevent

a housing bubble, the central government last

year increased the minimum down payment

on homes in cities with the highest rises,

including Shanghai, with down payments

higher for second mortgages. It also

limited the number of homes families can

purchase in around cities, and

introduced property taxes for the first

time in Shanghai and Chongqing.

This has led to a clear slowdown in the

market. House prices fell in of major

cities monitored by the government between

November and December , and in

between December and January .

The trend continued throughout the first

half of , with prices falling in cities

in March and in May. Prices in some

cities have dropped by almost , and the

falls have led to a drop in investment and

development. However, there were signs in

June that the market was beginning to warm

again, with only cities experiencing a drop.

There were rises in cities over the month,

including Beijing, Shanghai and Guangzhou.

Several city level governments,

concerned about the slowdown, relaxed the

governments rules in the first quarter of

after experiencing a strong drop in the

market. Some commentators believe that the

government will increasingly turn a blind eye

to such decisions this year, thereby boosting

the market; however, the government hassaid that it will not tolerate relaxation of its

policies, and in fact the attempts to relax

rules have in many cases been retracted,

fuelling uncertainty in the market. The local

In an effort to cool this market,

and prevent a housing bubble,

the central government last year

increased the minimum down

payment on homes in cities with

the highest rises

4/MARKET OPPORTUNITIES AND CHALLENGES BY SECTOR


11/35


11 A PRODUCT

government in Shanghai restated home

purchase restrictions on second homes only

a week after relaxing them, and in March the

eastern city of Wuhu reversed its decision to

waive a deed tax and subsidise purchases.

Despite this, however, many commentators

expect that will be the lowest point of

the residential cycle in China, as the inherent

demands of the population, combined with

the tight control of the government, will

not allow the market correction to descendinto a crash. Daneo Shen, associate director

at consultant Sweett, interviewed in

February for this White Paper, said:

The demands in the residential market are

still at a high level and the residential sector

is near to the bottom now.

For western companies, opportunities

in private sector housing tend to be on

mixed-use projects or those residential

schemes funded by major developers

and investors, particularly international

organisations, rather than smaller local

projects. There is also demand for western

design expertise on senior housing, which is

relatively new area in China but one which

is growing as the population ages, due to the

impact of a lower mortality rate and Chinas

one child policy. In , people over the age

of accounted for .of the population, a

rise of almost since , according to the

latest national census [Fig ].

..AFFORDABLE HOUSING

The Chinese governments th Five Year

Plan for -set a target for completing

million units of affordable housing during

the period. These projects are designed to

help citizens who cannot afford to enter the

private property market, and also to help

compensate on a national economic level for

the slowdown in the private housing sector.

However, the programme has already

fallen behind schedule, with a third of the

million units started in being

only at very early stages of site preparation,

according to the housing ministry. Deputyhousing minister Qi Ji said at the end of

that the government would aim for fewer

than the million further starts originally

envisaged for , although he did not

specify a number.

The delay has been attributed partly to an

apparent clash of private and public housing

policies: local governments rely on land sales

for about a third of their income, and so the

slowdown in private housing investment has

limited the funds they have available to invest

in affordable housing. The impact of this is

significant because the affordable housing

programme, which covers five categories of

social housing including low-rent homes,only receives a fraction of its funding from

For western companies,

opportunities in private sector

housing tend to be on mixed-

use projects or those residential

schemes funded by major

developers and investors

FIG . HOUSING INVESTMENT (SOURCE: NBS, MOODYS ANALYTICS, RICS)

Annual change

Housing investment - left scale

House prices - right scale

Annual change

-


12/35


12 A PRODUCT

central government. The Ministry of Finance

said in its budget that it planned to

spend RMB .bn on the construction of

affordable housing, which is up from

last years actual expenditure, but is less

than of the total needed to fund this

years programme. The remainder is

intended to be funded by local governments,

banks and developers.

The heavy involvement of local

government in funding and procuringaffordable housing means that there is

limited opportunity for international

involvement, particularly given the small

scale of many individual developments.

The vast majority of work, including

consultancy services, will be provided by

local Chinese firms.

.COMMERCIAL

Chinas commercial sector has seen

significant growth over the past two years as

developers and investors have shifted their

focus to the sector in light of government

measures to cool the housing market.

There has been a rapid expansion of

mixed-use developments typically

comprising residential, high-rise office

buildings, retail and hotel space and also

of large-scale office and retail developments

built by developers more traditionally active

in the residential sector.

Investment in commercial property

exceeded RMB trillion in , up from

RMB bn in . This trend is

continuing, and is being fuelled further

by the expectation of sizeable investment

demand from Chinas insurance companies,

which in late were given government

approval to invest up to of their assets

in property with restrictions on the amount

that can be invested in residential schemes.

These insurance companies, including

China Life and China Pacific, have about

assets worth about RMB trillion in total,

creating the potential to invest up to RMBbn in property. So far, only a small

fraction of this sum has been invested, and

there is significant potential for future growth

as insurance company assets are growing at

a rate of around a year.

However, there are fears of a bubble

forming in Chinas commercial property

market, even before significant investment

from insurance companies, as the prices of

office and retail space continue to rise, while

rental yields have fallen due to speculative

buying. This is particularly the case in some

second tier cities, with Chengdu, Shenyang

and Tianjin among those cities which have

seen a recent surge in development but wherethere are doubts over future demand.

Despite these fears, the sector continues

to offer significant opportunity, which is

enhanced for international construction firms

by the growing presence of multinational

businesses in China, acting as both clients

and tenants. This increases opportunities for

construction firms who can demonstrate an

understanding of these companies business

ethos and property needs.

The Chinese government has a stated

policy of attracting more foreign companies

to establish operations in China by improving

laws and regulations on foreign trade and

enhancing intellectual property rights

protection; a trend which will continue

the countrys attractiveness to foreign

enterprises and therefore demand for

commercial property. However, it should be

noted that there remain significant barriers

to competitiveness for foreign firms, which

are often not afforded the same operational

business licences as Chinese competitors,

which may serve to deter some firms from

entering or expanding in the market. An

annual survey by the American Chamber

of Commerce in China, published in March

, found that of members surveyed,

said foreign businesses could not be

awarded the same licences in their field as

Chinese companies an increase from

in . The percentage saying Chinese and

foreign companies were treated equally fell

to from .

..COMMERCIAL OFFICES

There is still high demand for quality

office space in Chinas first tier cities, with

prices and rents continuing to rise in cities

including Shanghai and Beijing.

These insurance companies,

including China Life and China

Pacific, have about assets worth

about RMB trillion in total,

creating the potential to invest up

to RMB bn in property


13/35


13 A PRODUCT

According to research by Knight Frank,

the rent and prices of Grade A offices in

Shanghai are expected to grow by and

respectively this year. In its latest market

outlook, Knight Frank forecasted price and

rent rises in Shanghai and Beijing in

Q, with prices rising in Guangzhou

but rents remaining stable.

There is also increasing demand for

commercial office space in second tier

cities, as businesses look to reduceoperation costs by opening bases away

from the highly developed areas of Shanghai

and Beijing. This trend is likely to increase

as infrastructure improvements are made

between second tier cities and the eastern

coastal region.

Demand for office space is coming from

both multinational corporates and Chinese

businesses. The demand from multinational

corporates in particular offers opportunities

for western firms who may have worked

with these businesses internationally, or

in the case of speculative developments

whose design expertise is viewed by

developers as an advantage in attracting

multinational tenants.

..RETAIL

Retail rents have been rising in China at

the same time as rents for commercial

offices, and according to Knight Frank are

expected to continue this upward trend in

. Analysis by the consultant in its latest

retail market report predicts rises in six of

seven cities studied: Shanghai, Guangzhou,

Shenzhen, Beijing, Hangzhou and Chengdu,

with Tianjin remaining static.

Demand for retail space is particularly

strong in the supermarkets sector. Tesco has

said it plans to invest more than RMB bn in

China between -with supermarkets

often incorporated into major shopping

developments that house other retail space,

food centres and cinemas.

Significant opportunities exist for

western firms with multinational retailclients expanding their operations in China,

which is seen as a growth market by major

companies including Apple, Wal-Mart and

Carrefour. However, the pace of expansion

for some of these firms has been limited by

the continuing international downturn, with

some US companies in particular lacking

funds to invest.

.HOTELS AND LEISUREAND TOURISM

Hotel development is a major growth market

in China, being fuelled primarily by businessand international travel. According to

the March STR Global Construction

Pipeline report, the Asia/Pacific hotel

development pipeline includes ,hotels,

including ,rooms of which ,

are in China. This pipeline represents a

growth in the number of rooms in China,

which currently total .million.

Hotel development is increasingly being

incorporated into mixed-use schemes, as

local and regional councils attempt to develop

cities in a balanced way. Attracting a major

hotel brand offers a significant increase in

the likelihood of securing planning

permission and development funding, a

fact which has contributed to the growth

of international hotel chains in China,

particularly five-star brands.

Marriott, for example, counts China as its

fourth largest market, and as of December

had properties in the country covering

,rooms. The chain has a share

in rooms under construction in China,

according to chief executive Arne Sorenson.

Hilton, which has properties open in

China, has a pipeline of more than hotels

in the country and expects to have a portfolio

of more than hotels open within the

next five years.

There is also potential within the

mid-range hotel market. Wyndham Hotel

Group, which operates brands including Days

Inn, said last year that China was its largest

international market. The company has a

pipeline of around ,rooms in China.

Chinas hotel market is prevalent both in

cities that are targeting business travellersand in areas that are being developed as

resorts or have the potential to be so. The

opening of China to the west has led to a

rapid expansion in the number of tourism-

Demand for retail space is

particularly strong in the

supermarkets sector. Tesco has

said it plans to invest more than

RMB bn in China between

-with supermarkets

often incorporated into major

shopping developments


14/35


14 A PRODUCT

focused schemes, including dedicated

regions, such as Hainan Island, and major

schemes such as Disneyland in Shanghai.

.INDUSTRIAL

Chinas industry traditionally focused

on heavy industry and low-cost

manufacturing has grown by around

annually over the last five years,according to government figures.

Chinas current five-year plan

emphasizes the long-term goal of continuing

and accelerating industrialisation, with a

particular focus on promoting technologically

advanced industries. It also lays out a policy

of green industrial development, under

which China will promote sustainable ways

of developing industry and will follow an

approach of energy saving measures and

emissions reduction.

In Chinas National Development

and Reform Commission published an

extensive plan to modernise Chinas

economy, outlining its transition to a more

technologically advanced and sustainable

industrial economy.

The plan sets out industry segments

that will be encouraged, that will be

phased out and that will be restricted

based on criteria such as minimum size.

The plan promises backing for enterprises

wishing to develop technologies including

clean vehicles and solar power, and asks for

small coal mines and steel mills to be shut as

part of a drive to consolidate heavy industry

under state owned companies.

Correspondingly, there are opportunities

in the industrial sector for construction

firms with clients carrying out research

or operation in more technologically

advanced areas.

As well as energy efficient technologies,

these include the pharmaceuticals sector,

where the presence of multinational

clients makes it a particularly approachable

market for western firms. The Chinesegovernment has been trying to encourage

multinational companies to build research

facilities in China.

Another significant driver of opportunity

in the industrial sector is that the government

is applying pressure to industry to vastly

improve its energy efficiency, which is leading

to the creation of more advanced facilities

and a fledgling retrofit programme.

Energy consumption in industrial

production currently accounts for around

of the national total. In April the

government issued an annual industrial

energy-saving target of , up from a

level in . This is driving investment inretrofitting, which offers openings for western

firms with demonstrable international

expertise in sustainable technologies and

low-energy design. However, there remains

a reluctance to invest from some clients,

particularly Chinese companies, so firms

seeking work in this area may need to offer

fee models that enable clients to pay for work

out of the savings on energy costs delivered

through improvements.

The government is also trying to facilitate

industry transfer among different regions,

to reduce the impact on local environments

which have been polluted by the rapid growth

of industrial facilities.

.HEALTHCARE

Chinas healthcare system is facing major

challenges. Rapid urbanisation has outpaced

the provision of healthcare services, and

at the same time demand is increasing as

a result of an ageing population and an

increasing prevalence of western health

problems such as diabetes, heart disease and

cancer, as calorific intake has increased.

Historically, China has lacked a primary

care system, with most primary care being

administered in hospitals. In addition, access

to healthcare facilities in rural areas has been

far more restricted than in urban areas in

particular there has been limited access to

western medical practices, which are growing

in popularity. By the s, western style

medical practitioners in China outnumbered

practitioners of traditional Chinesetechniques, yet the vast majority of these

were located in urban areas.

In , China launched a major

healthcare reform initiative, with the aim of

The opening of China to the west

has led to a rapid expansion in

the number of tourism-focused

schemes, including dedicated

regions, such as Hainan Island,

and major schemes such as

Disneyland in Shanghai


15/35


15 A PRODUCT

establishing a basic healthcare system for all.

Since then, according to the China National

Health Development Research Center,

RMB bn has been committed to five

priority areas:

Accelerate the establishment of basic

health protection

Set up a national essential drugs system

Improve the delivery system for grass

roots health services

Gradually equalise public health servicesPilot test hospital reforms.

Since then, some progress has been

made in the construction of facilities: the

percentage of rural households residing

within minutes of a health facility

increased from .in to .in

, according to the China National Health

Development Research Center.

However, China is still falling far

short of the level of provision that it needs,

meaning that there are clear opportunities

in healthcare construction. In the th Five

Year Plan, launched in , the government

outlined investment to develop ,

healthcare facilities across the country,

including ,A hospitals acute facilities

with more than ,beds. It also restated

its commitment to move towards greater

community healthcare and a primary

healthcare system.

The government is placing increased

emphasis on private healthcare provision as

a way of meeting its needs meaning greater

opportunities for western construction firms

because contracts will be let by private clients

rather than by Chinese governmental clients,

which tend to award individual schemes,

in particular, to local firms. In a new policy

introduced in , the Chinese state council

said it would sell offsome publicly owned

healthcare facilities to private firms to

facilitate the acceleration of this market.

In November the government

introduced policy changes intended to open

up the private healthcare market much

more to foreign investment. Previously,

foreign investors could only enter the privatehealthcare sector in China through joint

venture with a Chinese partner, and the

level of investment which could be held by a

foreign partner was capped.

However, policy changes will mean a

gradual easing on the level of investment

allowed by foreign firms, and firms will be

able to set up completely foreign owned

healthcare facilities with approval from

Chinas Ministry of Health and Ministry

of Commerce. The changes, again, are

designed to speed up the creation of

private healthcare facilities.

The impact of these changes in practice

has not yet been fully realised; however, anincreased emphasis on private healthcare

provision and the increase in the amount

of international investment in healthcare

facilities should create opportunity for those

western firms with existing expertise in the

construction of medical facilities, particularly

those who have worked with the clients

entering the Chinese market.

Overseas healthcare providers with a

strong interest in China include: Parkway

Holdings, an integrated healthcare provider

based in Singapore which has opened

hospitals across Asia; and United Family

Healthcare, a hospital chain which was

formed out of Chindex (previously the US-

China Industrial Exchange) in JV with the

China Academy of Medical Sciences.

.EDUCATION

The demands of Chinas rapidly growing

population, together with a historic disparity

in education provision across the country

and an increasing emphasis on the quality of

education by the Chinese government, mean

that investment in the education sector from

both private and public sectors has risen

dramatically, and continues to do so.

China introduced a nine-year compulsory

education policy in . Since then, the

education system has developed to consist

of pre-school, then nine years of compulsory

primary and junior middle school education,

followed by non-compulsory senior high

school (middle school) or vocational school,

and then university or college. Primarytypically covers pupils aged -, junior

middle aged -, and middle school or

vocational school -.

..STATE-FUNDED EDUCATION WORK

The central Chinese governments spending

on education will reach of GDP for the

first time in , according to a statement

made by prime minister Wen Jiabao to the

National Peoples Congress in March. The

target was set by the government in , and

its achievement emphasizes the importance

the government is now placing on improved

education provision. Taking into account

the governments year-on-year GDP growth

rate target of .for this year, education

spending could reach more than RMB

trillion. Spending was .of GDP in .

State spending on education is being

targeted in particular at addressing the

disparity of provision, with the government

pledging that the additional spending

involved in meeting the target will be

directed at poorer areas. In particular, the

government has said that more spending will

be directed to central and western regions,

rural and remote areas and areas with high

concentration of ethnic groups.

Publicly funded education construction

work is being particularly targeted at primary

and junior middle school level. Work is paid

for both directly by the central Chinese

government, via the Ministry of Education,

and local governments, who are responsible

for managing schools in their areas.

The government is targeting investment atbuilding new schools in areas where provision

is lacking, particularly in developing cities

and rural areas. It is also currently investing

in improving the quality of buildings at

Chinas healthcare system is

facing major challenges. Rapid

urbanisation has outpaced the

provision of healthcare services,

and demand is increasing as a

result of an ageing population

and an increasing prevalence of

western health problems


16/35


16 A PRODUCT

existing schools, prompted by the

Sichuan earthquake, which destroyed an

estimated ,school buildings. A three-

year programme to rebuild or renew existing

school buildings, launched in , has

led to renovation projects being started in

about ,primary and middle schools,

equating to of the schools scheduled

for inclusion in the programme as of March

, according to Ministry of Education

data. Central and local government spendingon the programme has reached RMB bn,

according to the Ministry of Education.

However, although investment in the state

funded schools market is increasing, the

market is extremely challenging for western

firms to enter as work is usually carried out

at a local level by Chinese firms hired by

local government.

..PRIVATELY FUNDED EDUCATION WORK AND

INTERNATIONAL SCHOOLS

A far greater area of opportunity for western

firms lies in privately funded schools

construction, particularly in the international

schools market, where opportunities exist

with Western clients.

Growth in the international schools

market is being fuelled by the rising number

of expats in China, and also by explicit

backing from the government, which has

introduced a series of legislative measures

which are advancing the development of

international schools.

In the Chinese government

introduced the Law Promoting Private

Education, which lent government

support to the growth of private sector

education and included measures aimed at

encouraging the establishment of private

sector schools, including a directive that

regional governments should give preferential

treatment to private schools above other

projects in decisions about land allocation.

Another significant development has

been Chinas entry to the World Trade

Organization, which entailed the Chinesegovernments agreement to allow foreign

organisations to provide education services.

China is looking to enhance international

school provision in second and third tier

cities in particular, in tandem with the drive

to attract more businesses to these areas.

Data from ISC Research, an organization

established to map international schools

worldwide, indicates China has the third

highest number of international schools in

Asia, with , compared with in the

UAE and in Pakistan. Most western

institutions looking to establish a school

or university in China will partner with a

Chinese organisation.International schools and universities

active in China include Nord Anglia,

Dulwich College, Manchester University

and Birmingham University.

.TRANSPORT INFRASTRUCTURE

..URBAN TRANSIT AND TRANSPORT ORIENTED

DEVELOPMENT

Urban transit is a major area of development

in China, where the burgeoning population

and urbanisation have given rise to serious

concerns over traffic and local travel. Urban

transit systems, including metro lines, are

usually procured at municipal government

level, after plans are approved by central

government. Currently only around cities

in China meet government requirements for

transit planning a further have central

government approval for their proposals,

and as of February another eight were

awaiting approval. The remainder of Chinas

cities are engaged in developing proposals,

offering a stable pipeline of work. The th

Five Year Plan lists as priorities the urban rail

traffic work in the following cities: Beijing,

Shanghai, Guangzhou, Shenzhen, Tianjin,

Chongqing, Shenyang, Changchun,

Wuhan, Xian, Hangzhou, Fuzhou,

Nanchang and Kunming.

The urban transit sector offers

opportunities for western firms. The fact

that the sector is relatively young means

that Local Design Institutes (LDIs) tend tolack the design expertise needed on projects,

and the multidisciplinary nature of the

work favours international companies. The

traditional separation of disciplines in China

means that many local firms will not be able

to provide a full service offering. The major

opportunities for international firms are

therefore in design and technical consultancy

and masterplanning, with opportunities also

in detailed design work where companies are

licensed or team with an LDI.

The demand for urban transit has also

opened up linked opportunities in transport

oriented development (TOD), where

developments include a mix of transport andcommercial development on government

land. There is a growing trend towards this

type of development, particularly in second

and third tier cities where urban transit

systems are being developed at the same time

as sizeable programmes of commercial work.

The majority of LDIs do not have extensive

experience in transportation, which has

created opportunities for western firms.

Openings for western firms are also boosted

by the requirement for commercial projects to

go to open tender, which in turn has opened

up opportunities in related transport work.

Key areas of demand for western firms are

urban masterplanning, concept design, and

project and technical consultancy.

..AVIATION

China is undergoing a rapid expansion of

aviation facilities in order to meet demand

for both international and domestic travel.

In its latest five year masterplan, the Civil

Aviation Administration of China (CAAC)

said that it expects Chinese airlines to carry

million passengers in , compared

with million in , with passenger

traffic growing at an annual rate of

between now and then. It expects airline

revenue passenger kilometres (RPKs a

measure of the total distance travelled by

fare paying passengers) to increase by

annually from - . In addition,

cargo volumes are expected to increase by

annually to million tonnes in

from .million tonnes in .

To meet this demand, the CAAC is aimingto build around airports during the current

Five Year Plan period, increasing the number

of airports in China to at least by .


17/35


17 A PRODUCT

The CAAC believes this will help serve

of Chinas population meaning that there

is strong scope for further expansion beyond

this point. In addition to its new airport

programme the CAAC wants to strengthen

the capacity of existing regional airports

to enable them to become regional hubs.

These include airports in Xian, Xiamen

and Chengdu. The th Five Year Plan lists

as priority projects the construction of a

new airport in Beijing and the expansion ofairports in Guangzhou, Nanjing, Changsha,

Haikou, Harbin, Nanning, Lanzhou and

Yinchuan. The plan also lists feasibility

studies of new airports in Chengdu,

Qingdao and Xiamen as priorities.

Airport projects are managed by state

clients at a regional level after being approved

by central government. This presents a high

barrier to entry for western firms, as state

owned companies tend to be awarded the

majority of masterplanning and high security,

airside work.

However, there are opportunities for

western companies in land side aviation

work. These include the concept design for

terminals Foster + Partners designed the

Beijing Capital International Airport terminal

completed in although as with other

architectural work, detailed design work will

be carried out by a Local Design Institute.

Airport terminals also offer opportunities for

engineering and cost consultants. There are

also opportunities for western involvement in

infrastructure surrounding airports, and in

early stage consultancy on major and regional

aviation hub projects.

..RAIL

The pace of Chinas investment in rail

has slowed over the last two years, but it

nonetheless remains an area of significant

spending. The rail ministry is spending

RMB bn on railway infrastructure in ,

compared with RMB bn in and more

than RMB bn in .

The slowdown can be attributed largely toa slowing of the high speed rail programme,

prompted by safety concerns following a

fatal crash in Zheijiang province in ,

in which people were killed. However,

despite speculation that the programme

would be halted, work is continuing. There

are currently high speed railways under

construction and a further planned,

adding to already in operation. The high

speed rail network is projected to grow to

,miles of track by from

miles in .

Although Chinese expertise in high speed

rail work has increased as the programme

has developed, western firms services,particularly in construction management, are

still in high demand. This is partly because

the rapid growth of the sector has outpaced

the growth of Chinese capacity, and partly

because the increasing awareness of safety

concerns has led the Ministry of Rail to

open up roles such as that of construction

supervisor to foreign firms.

There is also opportunity in rail

improvement work, particularly in relation to

improving the operational safety of existing

systems. The government is directing part of

its budget towards work to improve signalling

equipment and protection against lightning

and earthquakes.

However, firms working in rail need to

be aware of the significant problems with

corruption in the sector, particularly given

the UK governments introduction of the

Bribery Act , which allows prosecutions

within the UK of bribery committed abroad.

The former minister of railways, Liu Zhijun,

left his position in February amid

allegations of corruption within the ministry,

and is currently facing a charge of serious

disciplinary violations. Although the

Communist Party is now working to improve

transparency within the sector, contractors

quoted anonymously within Chinese media

have also alleged that they have been

squeezed by government officials who keep

some of the money allocated for construction,

leading to contractors taking short cuts on

materials in order to make a profit.

..HIGHWAYS

Construction of highways in China is

directed by the Ministry of Transport. This

sector is virtually closed to western firms,

however, with the Local Design Institutes

and state owned contractors carrying out

the vast majority of work. There is some

limited opportunity for foreign companies in

consultancy work; however, this is a marginal

area of interest as there is little technical

expertise western firms can offer that is not

provided by Chinese firms. In addition, the

investment peak for national investment

in highways in terms of market volume has

passed, with the market gradually cooling

over the last years.

..WATERWAYS

Waterways construction, like that of

highways, is directed by the Ministry

of Transport. Similarly to the highways

sector, there is little demand for western

involvement due to the capacity and expertise

of Local Design Institutes and state owned

contractors. However, one area that does

offer opportunity is the construction of

cruise terminals the demand for which

has increased as living standards within

China have risen. There is an appetite

for landmark designs for these projects

creating opportunities for western architects

and also for technical expertise from

consultants with international experience

of similar projects. For example, Aecom

has acted as transportation adviser on the

landmark Xiangyun Island International

Cruise Terminal, designed by Heller Manus

Architects. The design was procured through

competition, with the brief stating that the

terminal should incorporate recent design

trends of international cruise terminals in

its size and configuration.

.OUTWARD INVESTMENT

The increase in Chinese outward investment,

particularly to the west, means that

relationships established with Chinese clients

are likely to lead to opportunities for firms

in western markets, giving companies that

work in China a potential advantage on majorschemes in their native markets in future.

Chinese annual investment overseas has

increased by since , from .bn

to .bn, according to statistics from the


18/35


18 A PRODUCT

Chinese Ministry of Commerce [Fig ].

This investment is being increasingly

targeted at Europe, including the UK, as

China has a stated policy of reducing the

proportion of its investment in the US.

Within Europe, the UK accounted for

the biggest share of Chinese investment,

with bn.

The regional breakdown of foreign

investment for is shown in Fig (right).

Investment from China takes three forms:Financial investments by the state,

implemented by organisations including the

State Administration of Foreign Exchange

(SAFE) and China Investment Corporation

(CIC), the sovereign wealth fund with a stake

in Songbird Estates, the company which

controls developer Canary Wharf Group.

Private investment by high-wealth

individuals. A joint survey by Bain &

Company and China Merchants Bank,

published in the Economist in ,

estimated that the investable wealth of

Chinese individuals was RMB trillion.

Wealthy Chinese have doubled the proportion

of their portfolios invested abroad from

in to in , according to Bain.

Investment by Chinese corporates.

Property in the UK is an increasing target

for all three forms of investment. According

to Jones Lang LaSalle, mainland Chinese

are the fastest growing group of foreign

investors in top-end property in London.

Chinese companies and government have

also expressed an interest in investing in UK

infrastructure, with CIC, a Chinese sovereign

wealth fund, taking a stake in Thames Water

in January .

Region bn

US .

EUROPE .

Britain

France .

Switzerland .

WEST ASIA .

Iran .

Kazakhstan .

Russian Federation .

EAST ASIA

Indonesia .

Vietnam .

Singapore .

AUSTRALIA .

WESTERN HEMISPHERE .

Brazil .

Canada .

Argentina .

SUB-SAHARAN AFRICA .

Nigeria .

South Africa .

Democratic Republic of Congo .

ARAB WORLD .

Saudi Arabia .

Algeria .

Iraq .

FIG.FOREIGNINVESTMENTFOR(SOURCE:THEHERITAGEFOUNDATION)

FIG . ANNUAL INVESTMENT OVERSEAS: TWO VIEWS (SOURCE: MINISTRY OF COMMERCE AND THE HERITAGE FOUNDATION)

bn

bn

bn

bn

bn

bn

bn

bn

bn

Ministry of Commerce (total:bn) The Heritage Foundation (Total:bn)

.

..

. .

. .

.

.

.

. .

.

.


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19 A PRODUCT

.KEY FIRST TIER CITIES

..BEIJING

The pace of construction in Chinas capital

Beijing has slowed since the Olympics,

but despite the large amount of developmentwork that has taken place over the last

decade, there is still a steady pipeline of

construction work, as the city expands

outwards from its core.

The recent introduction of government

policies to limit the amount of residential

property that can be purchased in first

tier cities, including Beijing, has led to a

significant cooling of the residential market:

new house prices in Beijing fell .between

January and April, but were flat in May and

picked up .in June.

Developers have discounted the selling

prices of some new units in developments

in the citys Tongzhou and Daxing areas,

according to research by Rider Levett

Bucknall (RLB) published in January .

Several commentators have said that they

expect this trend to continue, and RLB says

it is likely that the effect of property market

control policies should last until at least mid

before there is any lift in momentum.

The commercial market in Beijing remains

steady, however. It has been boosted by the

launch of projects linked to the eastward

expansion of Central Business District (CBD)

areas, with the local government announcing

in late that it intended to double the size

of the kmCBD in the hope of attracting

more multinational corporations and creating

,jobs. Projects already under way

include what will become Beijings tallest

tower the m Zhongguo Zun project,

which includes office space, apartments

and hotels which began construction

last September.

In addition to opportunities in thecommercial and hotel sectors, the

local government is carrying out an

ongoing programme of infrastructure

improvement works.

..SHANGHAI

Despite its maturity, the construction market

in Chinas largest city Shanghai is continuing

to grow steadily. Between January and

October , investment in the property

market reached RMB .bn, according to

analysis by Rider Levett Bucknall, which wasan increase of .over the same period in

. The consultant reports that the total

area under construction in the city reached

,,m, an increase of .compared

with the same period in .

During this period, the residential

market was the main driver of investment;

however, in the first half of government

policies to limit the number of homes that

can be purchased by individuals, plus the

introduction of a property tax in Shanghai,

have led to a cooling of the market. New

house prices in Shanghai fell .between

January and May, experiencing falls each

month, but picked up .in June.

As investors and developers look to

commercial property in the wake of

the slowdown in residential, there exist

significant opportunities in commercial

offices, retail and hotels.

A total of RMB .bn was invested in

office buildings between January to October

, according to RLB, a .rise on the

same period in the previous year.

Shanghais hotel market will also be

boosted by the construction of a RMB

bn (bn) Disneyland resort, due to

open in .

..GUANGZHOU

In common with Chinas other maturing

first tier cities, which have been hit by the

governments attempts to cool the housing

market, developers in Guangzhou in

southern China are increasingly turning

their attention away from residentialconstruction towards commercial.

The local government also has an extensive

programme of planned infrastructure and

low energy industrial developments. Key

projects over the period to include a

major extension to the regions metro system,

earmarked at RMB .bn between and

, including RMB .bn in .

.KEY SECOND TIER CITIES

..NANJING

Nanjing has become the focus for a steady

stream of investors keen to escape rising

prices in neighbouring Shanghai, driving

development in the commercial sector in

particular. The majority of construction

businesses operating in Shanghai interviewed

for this White Paper reported a steady flow

of enquiries for work in Nanjing.

The city is a traditional base for the

automotive, electronics, iron and steel

and petrochemical industries, but the

local government is promoting the area as

a destination for businesses focusing on

renewable energy, pharmaceuticals, and

advanced ship manufacturing.

Nanjing is carrying out major upgrades

to its infrastructure, including expansion

of its metro system. Nanjing metro Line

, scheduled to be launched in , will

incorporate stations over a length of

about km.

..CHONGQING

Chongqing, one of four directly controlled

municipal cities in China alongside Beijing,

Shanghai, and Tianjin, is identified in the

Chinese governments th Five Year plan as

a priority for investment and development.

This state backing for development means

that significant investment in the region is

likely to continue despite recent turmoil over

its leadership, with the citys former leading

official, Bo Xilai, being replaced by vicepremier Zhang Dejiang.

Bo Xilai has been suspended from his post

by the Communist Party of Chinas central

committee on suspicion of being involved in

5/MARKET OPPORTUNITIES AND CHALLENGES IN KEY REGIONS


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20 A PRODUCT

serious violations of discipline in the wake of

the allegations that his wife murdered British

businessman Neil Haywood.

Zhang has held meetings with leading

multinational businesses in the region,

including Hewlett Packard, to assure them

of the regions intentions to continue its

policy of openness towards investors.

The region had a notional GDP growth

rate of around .in , making it

Chinas fastest growing economy over theperiod. GDP for Qincreased by .

compared with Q, up to RMB .bn,

according to the regions statistics bureau.

The growth rate was .higher than the

national average.

Growth has been fuelled by state backed

incentives to businesses relocating to the

region. Businesses have also been attracted

by the relatively low wage expectations of

workers in the region: the average income

in Chongqing is about half that in Beijing

and Shanghai.

The major opportunities for construction

in Chongqing, as the city expands in line with

this economic growth, are in the commercial

and infrastructure sectors: the development

of an urban rail traffic network in the region,

for example, was listed as an infrastructure

priority in the governments Five Year Plan.

The government has taken steps to cool the

residential sector in the city, with Chongqing

and Shanghai being the only two Chinese

cities subjected to its recent introduction of a

residential property tax. So far, however, the

impact of this has been limited: house prices

dropped about in Q, according to Knight

Frank, but this was broadly in line with

average falls in China. It is therefore likely

that there will be a short-term slowdown in

development in the sector, but the majority of

commentators expect that in the medium to

long term the market will remain strong.

..CHENGDU

Chengdu, capital of Sichuan province and

one of the central Chinese second tiercities, is one of the regions identified by the

governments th Five Year Plan as an area

to be promoted for development, as part of

plans to enhance the Chengdu-Chongqing

economic belt.

Work is focused on the Chengdu Tianfu

New Area, the programme of development

for which extends from to . The

Chengdu Tianfu New Area includes about

kmof land earmarked for construction,

within a planning area of ,km.

The aim of the programme is to

create a district which focuses on high-

end manufacturing, within a balanced

development that incorporates a modern

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