Chapter 17

Chapter 17 The Construction and Real Estate Industry

The construction sector, as one of the pillar industries of the country, remains labor intensive and lags behind international competitors in terms of technology, innovation and project management. At the same time, governing laws are far from sufficient or complete, so the industry is managed mainly through administrative mandate and approval. Therefore, the construction industry is not as liberal as other industries.

The real estate sector, a capital-intensive property sector, requires huge investments in the market. However, as the sector got started later, it’s much more liberal than the construction sector and the Government has imposed no restriction on this sector.

I. Brief Accounts of Relevant WTO Commitments

For construction and relevant engineering services, China promises to permit foreign enterprises to be established three years after the WTO accession, but the foreign enterprises may undertake construction projects of only four kinds. No timetable has been made regarding the total liberalization.

For construction services, including architectural design, engineering, intensive engineering and urban planning services, restriction still remains but promise has been made to liberalize such services within five years.

For real estate services, basically no restriction exists.

II. Operation of the Industry within the Three Years after the Accession and the Impacts of the WTO Commitments

1. The construction sector. As investment in urban capital assets continues to increase and the market size keeps expanding, it is urgent for the sector to improve its management and technology and for the Government to formulate and adopt relevant policies and administrative measures.

As the national economy maintains rapid growth, investment in urban infrastructure construction has been rising, the urbanization process keeps accelerating, and investment in capital assets has also gained momentum. Therefore, the construction market is growing steadily and has attained a huge size.

Chart 17.1

Source: Shanghai Statistics Gazzet

Players in the construction sector in shanghai are mainly domestic owned enterprises, while enterprises with overseas investment including investment from Hong Kong, Macao and Taiwan account for only 10% or even below 10% in terms of actual number or their market share. However, the per capita production value of the enterprises with overseas investment is much higher than the average of domestic enterprises, so they are much more competitive. In 2003, for example, the domestic enterprises employed among them 490,700 workers, and their per capita production value was RMB 233,600. On the other hand, the overseas enterprises employed 14,500 workers, and their per capita production value reached RMB 341,700, indicating that their operation efficiency is much higher than that of domestic enterprises.

Table 17.2: Categories and Production Value of Construction Enterprises in Shanghai

Year	Enterprise Number	Total Production Value（Million RMB）	Number of Domestic Enterprises	Production Value （Million RMB）	Number of Enterprises with Investment from HK, Macao, and Taiwan	Production Value （Million RMB）	Number of Enterprises with Foreign Investment	Production Value （Million RMB）
2002	1,679	82,227	1,26	784.6	101	2,40	52	1,727
2003	2,009	119,580	1,59	1146.25	105	3,25	45	1,530

Source: Website of Shanghai Statistics Bureau

Although foreign enterprises may not get directly involved in project planning and have to cooperate with domestic design businesses due to some policy restrictions, the huge size of the construction market in China has attracted a lot of foreign design businesses. At the same time, the domestic construction market requires advanced design and planning concepts from abroad. According to incomplete statistics, about

120 foreign architecture design businesses have entered China, and about 140 of the top 200 engineering and design businesses in the world have set up their representative offices in China. Thanks to its huge potential, Shanghai is a natural magnet for foreign businesses.

2. The real estate sector. This sector is growing with sound and solid momentum and has a huge growth potential. Market information in this sector is transparent, the requirement for market entry is stiffer, and the market competition is ever more intense.

a. Investment has increased steadily, the market size has expanded, and the growth is rapid.

The three years after China’s accession to the WTO witnessed a rapid development in the real estate sector in the country. The real estate sector in Shanghai, most notably, has maintained an annual growth of about 20% in total investment, and the total investment made from January to October 2004 has exceeded the total investment of the previous year. As investment keeps increasing, the market is strong in both supply and demand, and a supply-demand balance has been maintained on a high plane ever since 2001. At the same time, the secondary market matures and market transaction gets more and more active, so the total transaction volume is expected to exceed additional supply. That shows the comprehensive and sufficient development of the sector that features consumption at different levels and sound operation.

At the same time, as the urbanization of Shanghai accelerates, the market liberalizes to a greater extent, and per capita disposable income increases, the market demand will continue to grow and the prospect is exciting.

Chart 17.3

Chart 17.4

Chart 17.5

Source: Shanghai Statistics Gazette

b. The policies governing this sector are more normalized and liberalized, while the current macro control poses a higher requirement for this sector.

Unlike other industries and sectors, the real estate sector is a capital and property sector with obvious local features. Foreign enterprises to enter the real estate market in Shanghai have to develop a clear understanding of the market background and policies in the first place. The domestic real estate market has always been infested with problems related to sub-normal development and ambiguous policies. Most notably, the acquisition of land, the key resource in real estate development, often goes beyond the control of real estate enterprises. So foreign capital has been reserved in their concern with and investment in the real estate sector in China. With the robust development in the real estate market in the city, however, the Shanghai Municipal Government has drawn up and put into effect necessary policies to make the market information more transparent and at the same time established explicit land bidding rules and process to increase the efficiency of the government approval mechanism. All this has played a significant role in attracting foreign capital to the sector in the city.

b. Foreign capital has penetrated the whole sector, and more international capital is swarming into the real estate market.

Ever since 2001, the real estate market in Shanghai has remained on the steady and sustained rise. With an outburst of suppressed energy, both the prices and the transaction volume have increased dramatically, and the high returns on investment have attracted extensive attention from foreign players. At the same time, the Shanghai Municipal Government has stepped up its efforts to normalize and regulate the market, raising the market entry standard through control over loans for real estate purposes, enforcing the open land bidding policy, and trying to increase trade transparency. As a result, foreign capital stops waiting and rushes into the real estate market in Shanghai in huge amounts.

III. Future Development of the Industry

The construction sector. As urbanization progresses, the market potential is immense. Once the commitments to liberalizing the market are fulfilled and a normal market entry mechanism is established, foreign capital will rush in and try to share the opportunities in the market, and will therefore spur reforms and innovations in this sector, gradually eliminating the inefficient modes of operation. At the same time, drawing on its advantage in human resources and price competitiveness, the Chinese construction sector will also enter the international market.

As the market continues to open up, the need for urbanization and the start of major infrastructure projects, such as that for Expo 2010, will maintain a steady growth in capital asset investment. The accelerated development of national economy will make it inevitable for the construction market to attain a larger size in the future and the sector will enjoy further rapid growth.

According to relevant WTO commitments of China, the influx of foreign construction businesses is inevitable. They will bring into the country advanced technology and management expertise, and therefore push forward a new round of reform among domestic construction enterprises which may then perform better in the market competition.

China’s accession to the WTO has opened up the channel for domestic construction businesses to undertake international projects. As they may benefit from the most-favored-nation clauses in WTO member states and export barriers decrease, more Chinese construction enterprises will export construction products, materials and services with comparative advantages, and therefore create mutually beneficial international interactions.

As well as domestic enterprises, the Chinese Government will also normalize its supervision and administration of the construction sector, substituting adequate and complete laws and regulations for administrative control. The traditional approval-based management system will give way to a registration and record-keeping system, the approval process will be simplified, and items requiring administrative approval will be reduced. Thanks to the development of the market, enterprises have come under market-initiated supervision and selection, while the Government has shifted the focus of its work to industrial information collection and disclosure and macro control over the sector.

The real estate sector. The sector boasts a huge development potential and is developing on a sound and solid basis. The market environment is getting normalized and apparent, and foreign enterprises have begun to enter the market in greater numbers, bringing along more capital, and advanced technology and management expertise. The market has entered a phase of perfect competition, and therefore enterprises with sufficient capital and professional advantages in the sector will continue to enlarge their market shares and the establish their brands nationwide. In this way, the sector will come to maturity.