China White Paper Copyright Building

WHITE PAPERS
06/WINNING WORK IN CHINA

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WHITE PAPERS
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1/CONTENTS ?
?/EXECUTIVE SUMMARY 3
3/ OVERVIEW OF CHINAS CONSTRUCTION MARKET 5
3.I Economic context
3.z Spending on construction
3.3 Drivers for investment in construction
3.3.I Population growth
3.3.z Urbanisation
3.3.3 Energy targets
3.3.4 Government stimulus
3.3.o Foreign direct investment
3.4 Tender price and construction cost trends
4 /MARKET OPPORTUNITIES AND CHALLENGES BY SECTOR 1
4.I Residential
4.I.I Private housing
4.I.z Aordable housing
4.z Commercial
4.z.I Commercial oces
4.z.z Retail
4.3 Hotels, leisure and tourism
4.4 Industrial
4.o Healthcare
4.6 Education
4.6.I State funded education work
4.6.z Privately funded education work and international schools
4./ Transport infrastructure
4./.I Urban transit and transport oriented development
4./.z Aviation
4./.3 Rail
4./.4 Highways
4./.o Waterways
4.o Outward investment
5/ MARKET OPPORTUNITIES AND CHALLENGES IN KEY REGIONS 13
o.I Key rst tier cities
o.I.I Beijing
o.I.z Shanghai
o.I.3 Guangzhou
o.z Key second tier cities
o.z.I Nanjing
o.z.z Chongqing
o.z.3 Chengdu
o.3 Interview with Professor Li Shirong, Chongqing Foreign Trade and Economic
Relations Commission and CIOB China ambassador

b/HOW CHINAS CONSTRUCTION MARKET OPERATES ?1
6.I Procurement routes
6.I.I Private sector clients
6.I.z Public sector clients
6.z Planning system
6.3 Chinese experience
6.4 Opportunities and challenges for western rms
6.4.I Architects
6.4.z Engineers
6.4.3 Consultants
6.4.4 Contractors
6.4.o Specialists and manufacturers
6.o Case studies and interviews:
6.o.I TFP Farrells and Ryder Architecture
6.o.z Interview: Sun Jinke, executive director, Shanghai Jianke Project Management
/DOING BUSINESS IN CHINA ?5
/.I Geography
/.z Licensing
/.z.I Arup case study
/.3 Language
/.4 Recruiting and retaining sta
/.o Corruption
/SUSTAINABILITY ?
o.I The rise of the sustainability agenda
o.z Key sustainability policies and initiatives
o.z.I Eco cities and community scale developments
o.z.z Legislation and incentives
o.3 Ratings systems
o.3.I Three Star
o.3.z LEED
o.3.3 BREEAM
o.3.4 Alternative rating systems
o.4 Demand for sustainability: key trends
o.4.I New construction
o.4.z Retrotting
o.4.3 Technologies
o.4.4 Design
o.o Leading companies in China for sustainability
o.o.I Consultants
o.o.z Developers/investors
o.o.3 Provinces
o.6 Challenges to achieving a more sustainable built environment
3/RULES AND REGULATIONS 33
'.I Completion
'.z Building regulations
'.3 Health and safety
1/KEY CONTACTS 34
11/METHODOLOGY AND ACKNOWLEDGEMENTS 35

1/CONTENTS
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China has been the worlds largest
construction market since zI, when it
overtook the US with about Io of global
work. Construction spend reached 1obn
in zII; the latest step in a dramatic upward
trajectory which has seen the market increase
in value by Io since z/. A report by
Global Construction Perspectives, published
in zII, forecast that Chinas share of the
global construction market will rise to zI by
zz, 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 /.6 growth rate in the second
quarter of zIz its slowest in three years.
This is likely to impact on some areas of
construction in the short term. However,
this eect 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 o
million people since I'/, and despite the
slowing eect of Chinas one child policy,
introduced in I'/' to limit population
growth, it is expected to expand for at
least another ve 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
Izth Five Year Plan, which outlines its
political and economic priorities for the
period zII-Io, 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
z6 cities in the next z 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 oering 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 the
central 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 oce 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 oer lower
cost bases than Shanghai and Beijing.
Another signicant driver of construction
demand is an increasing consciousness of
sustainability within China. This is being
led partly by the government, which since
the mid zs has come under increasing
international pressure to address Chinas
escalating contribution to global energy use
and carbon emissions. In z', the Chinese
government agreed to reduce the countrys
carbon intensity a measure of carbon
emissions as a proportion of GDP by
4-4o by zz.
To achieve this, Chinas Izth 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
z of its z6 proposed new cities should
be eco cities although it has not dened
this term in detail. Finally, and perhaps
most signicantly, 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 z' and zI.
The government is strongly pushing
the adoption of Three Star; however,
international commercial clients in particular
are also often demanding buildings that meet
the 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 I every ve 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
edgling stock market. The government
has now limited the number of homes
families can purchase in about 4 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 signicant proportion of work.
For western construction rms, the
scale and projected growth of the Chinese
construction market represents an obvious
opportunity, particularly in a time when
many other markets including the UK, US,
Europe and Middle East continue to be
adversely aected by the global downturn.
2/EXECUTIVE SUMMARY
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Since I'/o, 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 in
architecture, where western aesthetics have
carried considerable prestige. This process
has been particularly evident since the
I''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 zI.
As a consequence, there has over the
last z years been a steady ow 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
rms 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 z years,
and western rms are now under greater
pressure to demonstrate specialist technical
expertise in order to win contracts ahead of
Chinese counterparts, as well as oer greater
competition on fees. Areas where western
rms are still perceived to have clear
market advantage are in multidisciplinary
oerings, 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
signicant barriers to entry for western
construction rms which limit both the scale
of opportunity on oer, and potentially, the
protability of contracts. The most powerful
of these is government attitude towards
foreign-owned construction rms 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 signicant
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
dicult for foreign owned enterprises to
obtain full design licences, which means that
many rms 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 rms: 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
exible 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
eect 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 signicant 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
oer sucient concessions on the amount
of government procured work it will open up
to overseas companies and as such, its entry,
for which it has been bidding since z/, has
been delayed amid continuing negotiations.
Its last oer was rejected in late zII; there is
little expectation of a swift resolution.
Western rms operating in China have also
encountered signicant business risks, with
those most frequently cited during interviews
for this White Paper including diculty in
securing payment and the lack of a developed
legal system for resolving disputes. Other
downward pressures on protability include
rapid salary ination: salaries for consultancy
roles in China are rising by an average of
I-Io a year, and experienced sta are
requesting rises of as much as 3 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 rms
oering services in architecture, consultancy,
engineering, and contracting. It also outlines
current practice and trends aecting
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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3.1 ECONOMIC CONTEXT
Over the last 3 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 rapid
growth, with GDP increasing from RMB
36z.4bn in I'/o to RMB 4/.z trillion in zII
(US 5/.z6 trillion). In zI it became the
second largest economy in the world after
the United States, and in April zII, the
International Monetary Fund predicted that
Chinas GDP would overtake that of the US
in zI6. China was the fastest growing major
economy in zII according to the CIA World
Fact Book, with a growth rate of '.o.
Growth has been driven partly by private
sector expansion since the government
began economic reform in I'/o 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 rst 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 Izth Five Year Plan its
policy outline for the period zII-Io is a
policy 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 signicant
slowdown at the end of zo and early
z' as the result of the impact on its
exports, which accounted for roughly 3
of GDP at the time the crisis hit. To
counteract the impact, the Chinese
government introduced a RMB 4
trillion stimulus package at the end of
zo, involving an extensive two-year
infrastructure spending programme across
I areas including aordable housing, rural
infrastructure, transport and rebuilding
following disasters including the zo
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 3 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 unprotable, which would
create a burden for the banking system.
To attempt to cool the market, the
government in zII 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 4.I]. This has led to a demonstrable
slowdown in the market: between February
and March zIz, 46 out of / major cities
monitored by the government experienced
a drop in new house prices.
The eect 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 QI zIz, GDP expanded
by I.o over the previous quarter,
compared with a recent average growth
rate of z.Io. Year-on-year growth was
o.I. In Qz the growth rate was /.6 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 ne tuning rather
than a major stimulus package such as that
of zo. 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
zII, 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 z of deposits
instead of z.o. However, as of May zIz,
the government was insisting that it will not
relax its policies on the housing market in
the short term.
The Chinese government has an ocial
zIz growth target of /.o, the lowest since
z4. However, the latest Reuters consensus
estimate, taken from a poll of private sector
economists, forecasts /.' growth in Q3 and
full year growth of o.z.
3.? SPENDING ON CONSTRUCTION
Chinas annual construction market has
increased from 1zbn in z/ to around
1obn in zII, according to research by
Global Construction Perspectives. In zI
it overtook the US as the worlds largest
construction market with Io of global
work, despite having less than I of the
global market in the early I''s. Global
Construction Perspectives predicts that
3/OVERVIEW OF CHINAS CONSTRUCTION MARKET
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7
gure will rise to zI by zz [Fig I].
Chinas recent construction growth has
been fuelled by the housing sector, which
accounted for o/ of construction
spend in zI. 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 4.I]
Total investment in real estate
development including residential and
commercial in January-March zIz was
RMB I,'z./bn, a year-on-year growth of
z3.o. This was I.6 percentage points
lower than that in the same period of last
year. Over the rst four months, the overall
rise was even slower at Io./.
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 '.4 annually through to
zIo, with non-building (i.e. infrastructure)
construction growing I.I annually.
3.3 DRIVERS FOR INVESTMENT IN
CONSTRUCTION
3.3.1 POPULATION GROWTH
The population of mainland China at the
end of zII was I.3 billion people, close to
z of the population of the world, and a rise
of o million people since I'/. The zII
gure represented an increase of 6.44 million
on zI, despite a at birthrate, controlled
by Chinas continuing one child policy. This
was introduced in I'/' 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 zz, with its population continuing
to expand for a further o-I years, reaching
around I.4 billion at its peak [Fig z]. By zz
Indias population is expected to overtake
that of China.
The rapid growth of Chinas population
over the last 4 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.
3.3.? 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 zII, for the rst time, more than half
of Chinas population oI.z/ - 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
z6 cities in the next z years. Its Izth Five
Year Plan for zII-Io 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 z.3 between now
and zIo, according to the US Central
Intelligence Agency.
3.3.3 ENERGY TARGETS
Chinas industrial development has led to
a dramatic increase in its contribution to
25UU
2UUU
15UU
1UUU
5UU
U
Year Population
197U 82U,4U3,282
1975 917,898,537
198U 984,736,46U
1985 1,U54,727,45U
199U 1,148,364,47U
1995 1,216,378,444
2UUU 1,263,637,531
2UU5 1,297,765,318
2U1U 1,33U,141,295
2U15 1,361,512,535
2U2U 1,384,545,22U
2U25 1,394,638,699
2U3U 1,391,49U,898
2U35 1,378,254,779
2U4U 1,358,518,748
2U45 1,333,892,477
2U5U 1,3U3,723,332
2UUU U2 U3 U4 U5 U6 U7 U8 U9 1U 11 12 13 14 15 16 17 18 19 2U
Forecast
FIG 1. CONSTRUCTION OUTPUT FORECAST ($BN AT ?1 PRICES AND
EXCHANGE RATES) (SOURCE: GLOBAL CONSTRUCTION PERSPECTIVES, OXFORD ECONOMICS, ?11)
FIG ?. CHINA POPULATION 13-?5 (SOURCE: CIA WORLD FACT BOOK)
China US Japan India Sbn
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global energy use. It overtook the US as the
worlds largest energy consumer in zI, 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 I over the year.
Following international pressure
the Chinese government agreed at the
Copenhagen Climate Change conference in
December z' to reduce its carbon intensity
a measure of a countrys carbon emissions
compared with its GDP by 4-4o by
zz. In zII it backed up this commitment
by agreeing to allow international authorities
to audit its calculation process for carbon
reduction for the rst 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 Izth Five
Year Plan (zII-Io). Targets to be reached by
zIo, compared with zI levels, include:
o/ increase in installed capacity of
hydropower, from zIIGW to 33IGW
z increase in installed capacity of
wind power, from 3oGW to IoGW (oshore
to account for IoGW of new capacity)
/33 increase in installed solar capacity,
from .6GW to oGW.
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 eciency of individual buildings
residential, commercial and industrial
through retrotting. Thirdly, it is continuing
a programme of projects begun during
its IIth Five Year Plan to address specic
environmental problems that have resulted
from pollution in areas that have experienced
rapid industrialisation.
3.3.4 GOVERNMENT STIMULUS
The Chinese government has over the past
four years been fast to react to protect its
economy from the eects of international
recession through stimulus measures that
have centred on improving the countrys
infrastructure development. Programmes
funded by an RMB 4 trillion stimulus
package introduced in zo designed as
a two-year programme have largely been
completed. In May zIz 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 conrmation 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 ocials as ne tuning and there is no
short term expectation of another major
stimulus package.
3.3.5 FOREIGN DIRECT INVESTMENT
Since I'/', 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 zII, the number of newly
approved foreign-funded enterprises in China
was z/,/Iz, an increase of I.Iz year on year,
according to statistics compiled by Foreign
Investment Bulletin. Actually used foreign
investment was up './z at US 5II6.IIbn.
Levels during the rst four months of
zIz 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 z6 down year on year at I,63/, while
actually utilised foreign investment was down
./4 at US5o.4bn. However, the Chinese
government is continuing to pursue a strategy
of attracting foreign direct investment, and
is attempting to encourage multinational
businesses to enter the central and western
regions in particular.
In zII the main countries of origin of
actually used foreign capital in China were:
1. Hong Kong (US 5//.IIbn),
2. Taiwan (US 56./z/bn),
3. Japan (US 56.34obn),
4. Singapore (US 56.3zobn),
5. USA (US 5z.''obn),
6. Republic of Korea (US 5z.ooIbn)
7. UK (US 5I.6I billion),
8. Germany (US 5I.I36bn),
9. France (US 5ozm),
1U. Netherlands (US 5/6/m).
3.4 TENDER PRICES AND
CONSTRUCTION COSTS
Construction in China has been aected by
increasing materials prices as demand for
development has grown. The main drivers
for rises are increasing labour costs, which
increased I6./ during zI-II according
to research by EC Harris, and rising cost of
cement, which rose oz.o in the same period.
China price rises -
Material
Increase
Reinforcement steel I6./
Portland cement oz.o
Pre-mixed concrete I4.'
Skilled labour I/.6
Source: EC Harris research, November zII
Cement price rises are likely to slow as new
production capacity comes online throughout
zIz and zI3; however, demand continues
to outstrip supply and EC Harris reported in
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November zII that some plants were two
years or more away from operation. [Fig 3,
Fig 4, Fig o].
In the short term, however, cost consultants
are not forecasting dramatic overall cost rises.
Rider Levett Bucknall reported in its QI zIz
outlook: It is anticipated construction costs
in major cities will remain rather stable in
the coming months. [See Fig 6 and Fig / for
detailed cost breakdowns by sector].
FIG 3. PRICE RISES OF REBAR (SOURCE: EC HARRIS)
FIG 4. PRICE RISES OF PORTLAND CEMENT (SOURCE: EC HARRIS)
FIG 5. PRICE RISES OF PREMIXED CONCRETE (SOURCE: EC HARRIS)
Rebar RMB/t Annual increase
z/ 3,o
zo o, 4z.'
z' 3,o -z4.
zI 4,z I.o
zII 4,' I6./
Portland RMB/t Annual
cement increase
z/ 3
zo 3o I6./
z' 3zo -/.I
zI 36 I.o
zII oo oz.o
Premixed RMB/t Annual
concrete increase
z/ z/o
zo 3zo Io.z
z' 3o -/./
zI 3/ o./
zII 4zo I4.'
55UU
5UUU
45UU
4UUU
35UU
3UUU
25UU
2UUU
15UU
1UUU
5UU
U
7UU
6UU
5UU
4UU
3UU
2UU
1UU
U
5UU
45U
4UU
35U
3UU
25U
2UU
15U
1UU
5U
U
2UU6 2UU7 2UU8 2UU9 2U1U 1st half yr
2U11
2U11
2U11
grade I 6mm grade I omm
grade I Imm grade II Iomm
grade II zomm grade II 3zmm
grade III Iomm grade III zomm
grade III 3zmm
grade 3z.o (bagged)
grade 4z.6 (bagged)
grade 4z.o (bulk)
C3, Do-4
C4, Do-4
Co, Do-zo
C4, Do-zo
RMB/tonne
inc VAT
RMB/tonne
inc VAT
RMB/tonne
inc VAT
WHITE PAPERS
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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 specication, market conditions etc.
Range of cost per m
2
of gross oor area
Oces Retail
Premium Grade A Mall Strip Shopping
Location Low High Low High Low High Low High

Beijing RMB /,z II,' 6,/ I,z o, Iz,z 6,'o I,'
Guangzhou RMB 6,' I,'o 6,3 ',o /,o II,z 6,o I,Io
Shanghai RMB /,3o II,oo 6,/o I,z o,o Iz,4 /, II,Io
Shenzhen RMB 6,/ I,'o 6,3 ',o /,3 I,oo 6,4 ',/o
Rates are per m
z
of construction oor area, measured to outer face of external walls.
All hotel rates are inclusive of furniture ttings and equipment (FF&E).
Range of cost per m
2
of gross oor area
Hotels Industrial Residential
5 Star 3 Star Warehouse Multi-storey
Low High Low High Low High Low Hi g h
Beijing RMB Iz,3 I6,z ', II,/ 4,I o,z 3,o o,6
Guangzhou RMB Iz,z Io,6 ',I II,z 3,' 4,' 3,6 o, z
Shanghai RMB Iz,4 I6,3 ',Io II,/ 4,I o,z 3,/ o, 3
Shenzhen RMB II,o Io,3 o,o II,o 3,o 4,o 3,o o, I o
FIG b. BUILDING COSTS BY SECTOR (SOURCE: RIDER LEVETT BUCKNALL, JANUARY ?1?)
FIG . BUILDING COSTS BY SECTOR (SOURCE: RIDER LEVETT BUCKNALL, JANUARY ?1?)
WHITE PAPERS
10
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11
4.1 RESIDENTIAL
Demand for residential property in China
has an underlying basis in the countrys
growing population, which stood at I.3
billion at the end of zII and has a current
estimated annual growth rate of .o.
The demand for the construction of
residential property has been increased
further by the trend towards urbanisation.
For the rst time, by the end of zII, more
than half of Chinas population oI.z/ 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 z6 cities in the coming z 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 edgling
stock market has led to many families
buying homes years in advance for their
childrens use.
4.1.1 PRIVATE HOUSING
Chinas private residential market was
only established around z years ago, and
has experienced dramatic growth during
that time.
When China became the Peoples Republic
in I'4', 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 I''s
when the government began discouraging
state owned organisations from giving free
or subsidised housing to employees, instead
encouraging these enterprises to give housing
benets 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
I every ve years over the last decade,
according to the International Monetary
Fund. This price growth has been mainly
concentrated in larger cities, and particularly
on the eastern coastal region with the
biggest eects in cities including Beijing,
Shanghai, Shenzhen, Tianjin and Hangzhou.
In an eort 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 4 cities, and
introduced property taxes for the rst
time in Shanghai and Chongqing.
This has led to a clear slowdown in the
market. House prices fell in oz of / major
cities monitored by the government between
November and December zII, and in 4o
between December zII and January zIz.
The trend continued throughout the rst
half of zIz, with prices falling in 46 cities
in March and 43 in May. Prices in some
cities have dropped by almost z, 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 zI cities experiencing a drop.
There were rises in zo cities over the month,
including Beijing, Shanghai and Guangzhou.
Several city level governments,
concerned about the slowdown, relaxed the
governments rules in the rst quarter of
zIz 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 has
said 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 eort 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
WHITE PAPERS
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 zIz 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 descend
into a crash. Daneo Shen, associate director
at consultant Sweett, interviewed in
February zIz 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 zII, people over the age
of 6 accounted for I3.3 of the population, a
rise of almost 3 since z, according to the
latest national census [Fig o].
4.1.? AFFORDABLE HOUSING
The Chinese governments Izth Five Year
Plan for zII-Io set a target for completing
36 million units of aordable housing during
the period. These projects are designed to
help citizens who cannot aord 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
I million units started in zII being
only at very early stages of site preparation,
according to the housing ministry. Deputy
housing minister Qi Ji said at the end of zII
that the government would aim for fewer
than the I million further starts originally
envisaged for zIz, 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 aordable housing. The impact of this is
signicant because the aordable housing
programme, which covers ve 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)
5U
4U
3U
2U
1U
U
Annual " change
Housing investment - left scale
House prices - right scale
Annual " change
16
14
12
1U
8
6
4
2
U
-2
2UU6 2U11 2UU8 2UU9 2U1U 2U11
WHITE PAPERS
12
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13
central government. The Ministry of Finance
said in its zIz budget that it planned to
spend RMB I/I.3bn on the construction of
aordable housing, which is up zo from
last years actual expenditure, but is less
than I 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 procuring
aordable 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 rms.
4.? COMMERCIAL
Chinas commercial sector has seen
signicant 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 oce
buildings, retail and hotel space and also
of large-scale oce and retail developments
built by developers more traditionally active
in the residential sector.
Investment in commercial property
exceeded RMB I trillion in zII, up from
RMB /4bn in zI. This trend is
continuing, and is being fuelled further
by the expectation of sizeable investment
demand from Chinas insurance companies,
which in late zI were given government
approval to invest up to I 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 Pacic, have about
assets worth about RMB o trillion in total,
creating the potential to invest up to RMB
obn in property. So far, only a small
fraction of this sum has been invested, and
there is signicant potential for future growth
as insurance company assets are growing at
a rate of around zo a year.
However, there are fears of a bubble
forming in Chinas commercial property
market, even before signicant investment
from insurance companies, as the prices of
oce 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 where
there are doubts over future demand.
Despite these fears, the sector continues
to oer signicant opportunity, which is
enhanced for international construction rms
by the growing presence of multinational
businesses in China, acting as both clients
and tenants. This increases opportunities for
construction rms 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 signicant barriers
to competitiveness for foreign rms, which
are often not aorded the same operational
business licences as Chinese competitors,
which may serve to deter some rms from
entering or expanding in the market. An
annual survey by the American Chamber
of Commerce in China, published in March
zIz, found that of I/o members surveyed,
34 said foreign businesses could not be
awarded the same licences in their eld as
Chinese companies an increase from z'
in zII. The percentage saying Chinese and
foreign companies were treated equally fell
to zz from z'.
4.?.1 COMMERCIAL OFFICES
There is still high demand for quality
oce space in Chinas rst tier cities, with
prices and rents continuing to rise in cities
including Shanghai and Beijing.
These insurance companies,
including China Life and China
Pacic, have about assets worth
about RMB o trillion in total,
creating the potential to invest up
to RMB obn in property
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13
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According to research by Knight Frank,
the rent and prices of Grade A oces in
Shanghai are expected to grow by Io and
I respectively this year. In its latest market
outlook, Knight Frank forecasted price and
rent rises in Shanghai and Beijing in
Qz zIz, with prices rising in Guangzhou
but rents remaining stable.
There is also increasing demand for
commercial oce space in second tier
cities, as businesses look to reduce
operation 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 oce space is coming from
both multinational corporates and Chinese
businesses. The demand from multinational
corporates in particular oers opportunities
for western rms 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.
4.?.? RETAIL
Retail rents have been rising in China at
the same time as rents for commercial
oces, and according to Knight Frank are
expected to continue this upward trend in
zIz. 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 I'bn in
China between zII-zIo with supermarkets
often incorporated into major shopping
developments that house other retail space,
food centres and cinemas.
Signicant opportunities exist for
western rms with multinational retail
clients 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 rms has been limited by
the continuing international downturn, with
some US companies in particular lacking
funds to invest.
4.3 HOTELS AND LEISURE
AND TOURISM
Hotel development is a major growth market
in China, being fuelled primarily by business
and international travel. According to
the March zIz STR Global Construction
Pipeline report, the Asia/Pacic hotel
development pipeline includes I,6z hotels,
including 366,//o rooms of which z3,zI6
are in China. This pipeline represents a Io
growth in the number of rooms in China,
which currently total I.3/ 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 oers a signicant 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 ve-star brands.
Marriott, for example, counts China as its
fourth largest market, and as of 3I December
zII had o/ properties in the country covering
zz,o3I rooms. The chain has a Io share
in rooms under construction in China,
according to chief executive Arne Sorenson.
Hilton, which has 3 properties open in
China, has a pipeline of more than ' hotels
in the country and expects to have a portfolio
of more than I hotels open within the
next ve 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 64,o rooms in China.
Chinas hotel market is prevalent both in
cities that are targeting business travellers
and 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 I'bn in China between
zII-zIo with supermarkets
often incorporated into major
shopping developments
WHITE PAPERS
14
A PRODUCT
15
focused schemes, including dedicated
regions, such as Hainan Island, and major
schemes such as Disneyland in Shanghai.
4.4 INDUSTRIAL
Chinas industry traditionally focused
on heavy industry and low-cost
manufacturing has grown by around
II annually over the last ve years,
according to government gures.
Chinas current ve-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 zII 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 /o industry segments
that will be encouraged, 4z6 that will be
phased out and zz3 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
rms with clients carrying out research
or operation in more technologically
advanced areas.
As well as energy ecient technologies,
these include the pharmaceuticals sector,
where the presence of multinational
clients makes it a particularly approachable
market for western rms. The Chinese
government has been trying to encourage
multinational companies to build research
facilities in China.
Another signicant driver of opportunity
in the industrial sector is that the government
is applying pressure to industry to vastly
improve its energy eciency, which is leading
to the creation of more advanced facilities
and a edgling retrot programme.
Energy consumption in industrial
production currently accounts for around
/ of the national total. In April zIz the
government issued an annual industrial
energy-saving target of o, up from a 4
level in zII. This is driving investment in
retrotting, which oers openings for western
rms 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 rms
seeking work in this area may need to oer
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 dierent regions,
to reduce the impact on local environments
which have been polluted by the rapid growth
of industrial facilities.
4.5 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 caloric 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 I'os, western style
medical practitioners in China outnumbered
practitioners of traditional Chinese
techniques, yet the vast majority of these
were located in urban areas.
In z', 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
WHITE PAPERS
15
A PRODUCT
establishing a basic healthcare system for all.
Since then, according to the China National
Health Development Research Center,
RMB oobn has been committed to ve
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 services
Pilot test hospital reforms.
Since then, some progress has been
made in the construction of facilities: the
percentage of rural households residing
within Io minutes of a health facility
increased from /o.6 in zo to o.o in
zII, 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 Izth Five
Year Plan, launched in zII, the government
outlined investment to develop z,
healthcare facilities across the country,
including z, 3A hospitals acute facilities
with more than I, 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 rms
because contracts will be let by private clients
rather than by Chinese governmental clients,
which tend to award individual schemes,
in particular, to local rms. In a new policy
introduced in zI, the Chinese state council
said it would sell o some publicly owned
healthcare facilities to private rms to
facilitate the acceleration of this market.
In November zI 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 private
healthcare 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 rms, and rms 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, an
increased emphasis on private healthcare
provision and the increase in the amount
of international investment in healthcare
facilities should create opportunity for those
western rms 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.
4.b 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 I'o6. 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. Primary
typically covers pupils aged 6-II, junior
middle aged Iz-Io, and middle school or
vocational school Io-Io.
4.b.1 STATE-FUNDED EDUCATION WORK
The central Chinese governments spending
on education will reach 4 of GDP for the
rst time in zIz, according to a statement
made by prime minister Wen Jiabao to the
National Peoples Congress in March. The 4
target was set by the government in I''3, 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 /.o for this year, education
spending could reach more than RMB z
trillion. Spending was 3.66 of GDP in zI.
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 4 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 at
building 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
WHITE PAPERS
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17
existing schools, prompted by the zo
Sichuan earthquake, which destroyed an
estimated /, school buildings. A three-
year programme to rebuild or renew existing
school buildings, launched in z', has
led to renovation projects being started in
about I3, primary and middle schools,
equating to 'o of the schools scheduled
for inclusion in the programme as of March
zIz, according to Ministry of Education
data. Central and local government spending
on the programme has reached RMB zzobn,
according to the Ministry of Education.
However, although investment in the state
funded schools market is increasing, the
market is extremely challenging for western
rms to enter as work is usually carried out
at a local level by Chinese rms hired by
local government.
4.b.? PRIVATELY FUNDED EDUCATION WORK AND
INTERNATIONAL SCHOOLS
A far greater area of opportunity for western
rms 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 z3 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 signicant development has
been Chinas zI entry to the World Trade
Organization, which entailed the Chinese
governments 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 3Io, compared with 36 in the
UAE and 3o4 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.
4. TRANSPORT INFRASTRUCTURE
4..1 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 trac 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 4 cities
in China meet government requirements for
transit planning a further zo have central
government approval for their proposals,
and as of February zIz another eight were
awaiting approval. The remainder of Chinas
cities are engaged in developing proposals,
oering a stable pipeline of work. The Izth
Five Year Plan lists as priorities the urban rail
trac work in the following cities: Beijing,
Shanghai, Guangzhou, Shenzhen, Tianjin,
Chongqing, Shenyang, Changchun,
Wuhan, Xian, Hangzhou, Fuzhou,
Nanchang and Kunming.
The urban transit sector oers
opportunities for western rms. The fact
that the sector is relatively young means
that Local Design Institutes (LDIs) tend to
lack 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 rms will not be able
to provide a full service oering. The major
opportunities for international rms 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 and
commercial 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 rms.
Openings for western rms 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 rms are
urban masterplanning, concept design, and
project and technical consultancy.
4..? AVIATION
China is undergoing a rapid expansion of
aviation facilities in order to meet demand
for both international and domestic travel.
In its latest ve year masterplan, the Civil
Aviation Administration of China (CAAC)
said that it expects Chinese airlines to carry
4o million passengers in zIo, compared
with z6o million in zI, with passenger
trac growing at an annual rate of II
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 I3
annually from zI- zIo. In addition,
cargo volumes are expected to increase by
I annually to ' million tonnes in zIo
from o.6 million tonnes in zI.
To meet this demand, the CAAC is aiming
to build around 6 airports during the current
Five Year Plan period, increasing the number
of airports in China to at least z3 by zIo.
WHITE PAPERS
17
A PRODUCT
The CAAC believes this will help serve o3
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 Izth Five Year Plan lists
as priority projects the construction of a
new airport in Beijing and the expansion of
airports 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 rms, 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
3 completed in zo although as with other
architectural work, detailed design work will
be carried out by a Local Design Institute.
Airport terminals also oer 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.
4..3 RAIL
The pace of Chinas investment in rail
has slowed over the last two years, but it
nonetheless remains an area of signicant
spending. The rail ministry is spending
RMB 4bn on railway infrastructure in zIz,
compared with RMB 46'bn in zII and more
than RMB /bn in zI.
The slowdown can be attributed largely to
a slowing of the high speed rail programme,
prompted by safety concerns following a
fatal crash in Zheijiang province in zII,
in which 4 people were killed. However,
despite speculation that the programme
would be halted, work is continuing. There
are currently z6 high speed railways under
construction and a further z3 planned,
adding to I3 already in operation. The high
speed rail network is projected to grow to
I, miles of track by zz from 3/
miles in zII.
Although Chinese expertise in high speed
rail work has increased as the programme
has developed, western rms 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 rms.
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, rms working in rail need to
be aware of the signicant problems with
corruption in the sector, particularly given
the UK governments introduction of the
Bribery Act zI, which allows prosecutions
within the UK of bribery committed abroad.
The former minister of railways, Liu Zhijun,
left his position in February zII 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 ocials who keep
some of the money allocated for construction,
leading to contractors taking short cuts on
materials in order to make a prot.
4..4 HIGHWAYS
Construction of highways in China is
directed by the Ministry of Transport. This
sector is virtually closed to western rms,
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 rms can oer that is not
provided by Chinese rms. 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 I years.
4..5 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
oer 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 conguration.
4. 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 rms
in western markets, giving companies that
work in China a potential advantage on major
schemes in their native markets in future.
Chinese annual investment overseas has
increased by 4oo since zo, from 5Iz.3bn
to 5/z.4bn, according to statistics from the
WHITE PAPERS
18
A PRODUCT
19
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 5'bn.
The regional breakdown of foreign
investment for zII is shown in Fig I (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 zII,
estimated that the investable wealth of
Chinese individuals was RMB 6z trillion.
Wealthy Chinese have doubled the proportion
of their portfolios invested abroad from I
in z' to z in zII, 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 zIz.
Region Sbn
US 534./
EUROPE S52.1
Britain 5'
France 5o.I
Switzerland 5/.3
WEST ASIA S55.8
Iran 5I/.'
Kazakhstan 5Iz.3
Russian Federation 5I.'
EAST ASIA S59
Indonesia 5I'.'
Vietnam 5o.3
Singapore 5/.6
AUSTRALIA S42.5
WESTERN HEMISPHERE S87.8
Brazil 5z4.6
Canada 5I4.6
Argentina 5II./
SUB-SAHARAN AFRICA S67.3
Nigeria 5Io.I
South Africa 5o.z
Democratic Republic of Congo 5/.o
ARAB WORLD S44.1
Saudi Arabia 5II.o
Algeria 5'.z
Iraq 5o.o
FIG 1. FOREIGN INVESTMENT FOR ?11 (SOURCE: THE HERITAGE FOUNDATION)
FIG 3. ANNUAL INVESTMENT OVERSEAS: TWO VIEWS (SOURCE: MINISTRY OF COMMERCE AND THE HERITAGE FOUNDATION)
S8Ubn
S7Ubn
S6Ubn
S5Ubn
S4Ubn
S3Ubn
S2Ubn
S1Ubn
SUbn
2UU5 2UU6 2UU7 2UU8 2UU9 2U1U 2U11
Ministry of Commerce (total: S314bn) The Heritage Foundation (Total: S3U9bn)
2UU5 2UU6 2UU7 2UU8 2UU9 2U1U 2U11
5Iz.3
5zI.z
5z6.o
5oo.' 5o6.o
56o.o
5/z.4
5I.z
5zI.4
533.I
5o3.o
5oz.z
56o.o
5/z./
WHITE PAPERS
19
A PRODUCT
5.1 KEY FIRST TIER CITIES
5.1.1 BEIJING
The pace of construction in Chinas capital
Beijing has slowed since the zo Olympics,
but despite the large amount of development
work 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 rst
tier cities, including Beijing, has led to a
signicant cooling of the residential market:
new house prices in Beijing fell .o between
January and April, but were at in May and
picked up .3 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 zIz.
Several commentators have said that they
expect this trend to continue, and RLB says
it is likely that the eect of property market
control policies should last until at least mid
zIz 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 z' that it intended to double the size
of the 3 km
z
CBD in the hope of attracting
more multinational corporations and creating
I, jobs. Projects already under way
include what will become Beijings tallest
tower the om Zhongguo Zun project,
which includes oce space, apartments
and hotels which began construction
last September.
In addition to opportunities in the
commercial and hotel sectors, the
local government is carrying out an
ongoing programme of infrastructure
improvement works.
5.1.? SHANGHAI
Despite its maturity, the construction market
in Chinas largest city Shanghai is continuing
to grow steadily. Between January and
October zII, investment in the property
market reached RMB I/4./bn, according to
analysis by Rider Levett Bucknall, which was
an increase of '.' over the same period in
zI. The consultant reports that the total
area under construction in the city reached
IzI,'3/,m
z
, an increase of I6.I compared
with the same period in zI.
During this period, the residential
market was the main driver of investment;
however, in the rst half of zIz 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 .o between
January and May, experiencing falls each
month, but picked up .z in June.
As investors and developers look to
commercial property in the wake of
the slowdown in residential, there exist
signicant opportunities in commercial
oces, retail and hotels.
A total of RMB Io.ozbn was invested in
oce buildings between January to October
zII, according to RLB, a /.z rise on the
same period in the previous year.
Shanghais hotel market will also be
boosted by the construction of a RMB
z'bn (13bn) Disneyland resort, due to
open in zIo.
5.1.3 GUANGZHOU
In common with Chinas other maturing
rst 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 residential
construction towards commercial.
The local government also has an extensive
programme of planned infrastructure and
low energy industrial developments. Key
projects over the period to zIo include a
major extension to the regions metro system,
earmarked at RMB z.3bn between zII and
zIo, including RMB 4I.4bn in zIz.
5.? KEY SECOND TIER CITIES
5.?.1 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 ow
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
I, scheduled to be launched in zI4, will
incorporate I4 stations over a length of
about zIkm.
5.?.? CHONGQING
Chongqing, one of four directly controlled
municipal cities in China alongside Beijing,
Shanghai, and Tianjin, is identied in the
Chinese governments Izth Five Year plan as
a priority for investment and development.
This state backing for development means
that signicant investment in the region is
likely to continue despite recent turmoil over
its leadership, with the citys former leading
ocial, Bo Xilai, being replaced by vice
premier 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
WHITE PAPERS
20
A PRODUCT
21
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 I6.o in zII, making it
Chinas fastest growing economy over the
period. GDP for QI zIz increased by I4.4
compared with QI zII, up to RMB zoz.3'bn,
according to the regions statistics bureau.
The growth rate was 6.3 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 trac 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 o in QI, 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.
5.?.3 CHENGDU
Chengdu, capital of Sichuan province and
one of the central Chinese second tier
cities, is one of the regions identied by the
governments Izth 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 zI to z3. The
Chengdu Tianfu New Area includes about
6o km
z
of land earmarked for construction,
within a planning area of I,o/o km
z
.
The aim of the programme is to
create a district which focuses on high-
end manufacturing, within a balanced
development that incorporates a modern
industrial base, towns and villages. The
population of the area is targeted at between
o.o million and 6.3 million people.
As part of the development, construction
is planned on four major transport projects:
New Tianfu Railway Station, Longquanyi
Station, and two major highway schemes. The
government is also examining the feasibility
of constructing a new airport.
Thirty years ago, the majority of
development in China happened on the
coast, in regions such as Shanghai and
Guangzhou. But now that trend is coming
to inland and western China. Coastal areas
are facing challenges in respect of land
and cost, so developers and businesses are
looking at new locations with lower cost
and greater resources. And Chongqing
has become a priority.
Central government policy is to
speed up urbanisation: after years of
development in the east, the divide
between that region and the west has
become greater, and that needs to change.
This urbanisation is creating opportunities
in buildings and urban infrastructure.
The vision is that Chongqing will
become a regional world trading centre.
We have a river, and now a railway link
to Europe, which leads from Chongqing
to Germany. In the past, the region has
never been as competitive as coastal areas
for foreign trade, but now the railway
goods can reach Europe in I3 days. Its
like Chinas new silk road some call
it the iron route. Foreign investment in
Chongqing has increased tenfold between
z/ and zII.
In the last ve years we have been
building a lot of infrastructure, including
railways and roads. We are still developing
our port, which will become the biggest
inland port, and expanding the airport to
include an additional runway. Aside from
infrastructure, the biggest activity is in
industrial work: manufacturing, IT and
pharmaceutical facilities. There is also real
demand for commercial and for residential
properties. Government policies to control
the residential market have meant the
sectors growth has slowed a bit, but in
general they have had a relatively small
impact.
There are lots of opportunities for
consultants, including in architecture,
planning and project management. There
are not so many for contractors, but those
with expertise in private nance could nd
opportunities.
Chongqing is very keen on sustainable
development. In zo Chongqing signed
a memorandum of understanding
with the UK government to promote
working together on sustainable cities,
and Chongqing is setting up targets for
reaching higher environmental standards.
We would like to see more emphasis on
building materials Chongqing could
become a manufacturing centre for
sustainable building materials. China is
facing challenges on sustainability but
we are looking for foreign expertise in
particular to help us nd solutions.
5.3 INTERVIEW WITH PROFESSOR LI SHIRONG, DEPUTY DIRECTOR
GENERAL OF CHONGQING FOREIGN TRADE AND ECONOMIC RELATIONS
COMMISSION AND CIOB CHINA AMBASSADOR
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21
A PRODUCT
b.1 PROCUREMENT ROUTES
b.1.1 PRIVATE SECTOR CLIENTS
Overseas and Hong Kong private sector
clients developing schemes in China
generally use selected rather than open
tendering to procure construction services,
and operate using an international tendering
system. Tenders are followed by an interview
stage, with price being the major factor in
deciding a winning bidder. Repeat clients,
such as major hotel chains, often have a
pool of approved rms for consultancy
services, and will pick between three and
ve from this pool to tender for a project
rather than negotiate with a single rm.
Similarly, projects where the majority stake
is from foreign investment are free to follow
international tendering rules.
However, Chinese clients, or those projects
that are funded by more than o of Chinese
investment, must abide by mandatory
tendering processes governed by a tendering
institute. These clients will either use open or
selected tendering, with contract award based
on a panel decision.
b.1.? PUBLIC SECTOR CLIENTS
There are two sets of laws covering public
tendering in China: the Government
Procurement Law (GPL) and the Tender
and Bidding Law (BL).
The GPL essentially applies on all projects
that are required for the government to
operate so includes the construction and
maintenance of ministry buildings. The GPL
is administered by the Ministry of Finance,
and strongly favours domestic products and
services foreign imported goods or services
may only be purchased in exceptional
circumstances. Domestic products and
services are dened as those with more than
o of value added in China. Under the
GPL, companies have z days from a tender
announcement to submit their bid.
The BL is by far the more commonly
used tendering system for construction
projects. The BL covers all tenders run by
state owned enterprises (SOEs) which
include the vehicles set up by government
bodies to deliver large scale construction and
infrastructure projects. Special purpose
SOEs set up by government usually at
a municipal or provincial level are
responsible for carrying out almost all
public construction work.
It also applies to large-scale projects with
private investment, mainly in the form of
joint ventures where one partner is an SOE,
which are being constructed in the public
interest. All of the zo Olympic construction
projects, for example, were covered by the BL.
The BL does not disadvantage foreign
providers as explicitly as the GPL. There is
no formal denition of a domestic product,
with this left to the discretion of individual
ministries. However, some have reportedly
stipulated up to / local content.
However, foreign invested companies
have frequently complained that they are
disadvantaged in procurement by a lack
of access to information. Under the BL,
procuring bodies will often engage a bidding
agency to administer the tendering process,
but the initial bid announcements produced
by these companies are often lacking in
detail and are not comprehensively listed on
any single platform. This has a tendency to
advantage rms with a closer relationship
with the procuring authority and also
increases the potential for corruption.
Tenders under the BL are usually (but not
comprehensively) posted on chinabidding.
com.cn, one of the ocial media for
announcing government and public
sector tendering notices, and in selected
other industry and national publications.
Companies technically have z days to
submit their bid under the BL; however in
practice this timeframe is often condensed
to around I4 days.
Under the BL, bidders must purchase
tendering documents in order to obtain
necessary information for bidding including
detail on any prequalication required.
Another diculty with bidding for
contracts under both the GPL and the BL
is that procuring authorities rarely publish
full evaluation or scoring criteria. Under the
GPL, some information including criteria
for bid evaluation is required, but there is
no information on the level of detail required.
The BL does not specify what information
should be included in bid documents.
Many organisations responsible for
procuring construction work through both
the GPL and BL also have prequalication
requirements, including certications issued
by particular ministries. These include
the Ministry of Housing and Urban Rural
Development (MOHURD). The requirements
that must be met to obtain these certications
often make it more dicult for foreign
companies to gain prequalication than their
Chinese counterparts.
b.? PLANNING SYSTEM
Planning decisions in China are approved
by various levels of government depending
on their degree of importance. The overall
urban planning of municipalities, provincial
capitals and key cities is agreed by municipal
and provincial governments and then
submitted to the State Council for approval.
The overall urban planning of other cities
is agreed by the Peoples Congress of the
city and then approved by the provincial or
municipal government. City governments are
responsible for approving detailed planning
of individual cities.
Planning decisions are taken by planning
bureaux at the relevant governmental
level. These are advised by urban planning
committees.
Because the planning system is so
intrinsically linked to local political outlook
and decision-making, major projects, likely
to continue for more than one political cycle,
can be at risk of disruption or cancellation if
they do not meet the vision of a new mayor.
However, in general the planning system
operates more quickly than in the west.
6/HOW CHINAS CONSTRUCTION MARKET OPERATES
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22
A PRODUCT
23
b.3 CHINESE EXPERTISE
China-based contractors reported a combined
total global revenue of US 5I43obn in zI,
according to research published by
Shanghai-based Construction Times in
partnership with Engineering News Record
in December zII. The revenue of the top
6 Chinese contractors accounted for US
54o.3bn, and was up z'.o from z'.
The same research reported that the
revenue of the top 6 Chinese design
rms in zI was US 5I3.3bn, an annual
increase of '.
The majority of Chinese construction
rms are part or fully owned by the state a
legacy of the command economy when the
enterprises were created to deliver to state
development requirements.
Consequently, the majority of income
for both contractors and designers is from
domestic projects, boosted in particular by
public sector work. However, as the Chinese
industry is developing, its contractors in
particular are seeking to expand overseas,
in a move that is set to enhance growth and
also increase their levels of expertise. Firms
following this strategy include cladding
specialists Yuanda, which was last year
appointed on the Cheesegrater tower in
London by main contractor Laing ORourke,
and Far East Global.
b.4 OPPORTUNITIES AND
CHALLENGES FOR WESTERN FIRMS
b.4.1 ARCHITECTS
Public and private sector clients in China
have employed western signature architects
for the majority of landmark developments
over the past z years, demonstrating a
strong appetite for the prestige associated
with western rms. Shanghais landmark
Pudong business district, for example,
features projects designed by Richard Rogers,
TFP Farrells, SOM and KPF. This trend is
continuing despite the gradual upskilling
of Local Design Institutes, partly because
clients are increasingly recognising the
contribution western expertise can make to
the design quality of a building, for example
in terms of sustainable design.
Signicant opportunities exist for western
architects with overseas clients operating
in China, private Chinese clients and
government clients on large projects such
as masterplanning or signature cultural
schemes, and encompass all major sectors,
including commercial, leisure and tourism,
transport infrastructure and education.
Work on these projects will usually be oered
through an international design competition.
Smaller, local projects for example housing
developments tend to be unviable for
international practices: the low level of
complexity means that these will be procured
locally and undertaken by an LDI.
However, this opportunity is
counterbalanced by the burden of heavy
regulation which limits the amount of
services that western practices can provide.
Architectural services in China are governed
by design licences, which are tailored to
dierent types of project and graded A
(highest) to C. Lower class licences mean that
practices can carry out concept designs, but a
Class A licence is needed to produce detailed
design and construction drawings. To be
granted each level of licence, practices must
meet stringent criteria on areas including:
Minimum level of registered capital
in China
Stang numbers and qualications
Previous project experience in China (for
grade A).
Class A licences are usually only held by
LDIs, as they are extremely dicult for
overseas rms to obtain because of the
increased amount of capital that must be
registered in China and the demand for
previous project experience in China
projects must have been undertaken within
the last two years and must match criteria set
by the government.
Local regions and major government
spending departments such as the rail
ministry all have their own LDIs, and there
are also some LDIs which are privately held
a trend which began in the I''s. Western
rms that do not have a full design licence
need to partner with an LDI on projects. In
some cases, a western rm will carry out the
initial design and then pass the project over
to an LDI for completion; in others, the LDI
will work alongside the western rm from
the outset.
Despite the need to involve an LDI at
detailed design stage, some international
practices will be retained in a reviewing
capacity in the later stages of development,
increasing fee earning potential. Practices
operating in China have reported a growing
shift towards this type of retainer, as clients
move away from a desire to minimise cost by
curtailing a western practices involvement
and towards a greater appreciation of the
value of western expertise in the later stages
of a buildings design. Although the quality
of work from the LDIs has increased as
Chinas construction industry has developed,
in general services remain far below the
standards oered by major international
practices, particularly on design detail and
nishing, including on the specication of
materials. For example, a director at one
western architectural practice interviewed for
this White Paper reported that when carrying
out an inspection on a project that had been
handed over to an LDI, he found that light
bulbs had been tted to interior columns with
no scope to change the bulbs without cutting
open the structure. This trend to retain
western practices in a reviewing capacity has
also been aided by increased competitiveness
on fees between international practices and
LDIs, whose rates have increased as they
become more experienced.
For the majority of western practices
that operate in China without a full design
licence, forming a close relationship with
LDIs is crucial both to preserving the
integrity of their design and to securing
public recognition for their work. Western
rms frequently report instances where LDIs
have taken a design at concept stage and
subsequently refused to acknowledge the
overseas practices involvement in the design,
at which point the western architect has had
to consider whether the fee levels associated
with the project justify their pursuit of
recognition particularly given the lack of a
robust legal framework in China for dealing
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23
A PRODUCT
with such issues. One architect said: As a
company we have not yet run into a legal
situation, but we have been close we had
one hotel project which the LDI refused to
put our name to. Sometimes you need to
be cautious. Building a relationship with
the LDI is critical, and you need to treat
them as a partner.
b.4.? ENGINEERS
Chinese Local Design Institutes oer
structural engineering and mechanical,
electrical and plumbing (MEP) services,
and it is commonplace for a client to take
these services from the LDI to save on
cost. However, the prevalence of high rise
buildings in China, in particular, oers
openings for overseas structural engineers, as
the LDIs, particularly in second and third tier
cities which do not have a history of high rise
development, often lack specialist experience.
International engineer Arup, for example,
has worked on around half of all buildings
in China taller than 4m. International
expertise is also sought in tall buildings in the
mitigation of the eects of seismic activity
and wind damage, as Chinese clients seek
to continually improve in these areas, often
beyond the limit of statutory codes. Similarly
to architects, engineers can work up to
preliminary design stage without a full design
licence, but must hand over detailed design
to an LDI.
Most opportunity for engineers lies in
buildings as opposed to infrastructure,
where the government-funded nature of the
projects, together with the lower demand for
specialist skills, means the majority of work is
carried out by LDIs. The main opportunities
for engineers in infrastructure lie in
masterplanning or consultancy or specialist
work on individual schemes, rather than on
the central engineering role although should
the edgling Public Private Partnership
(PPP) market develop further, lessening
the state control on projects, opportunities
will increase.
b.4.3 CONSULTANTS
Project management is a relatively new
discipline in China, with the rst wave
of project management companies being
established during the internet boom.
The fallout from project disasters such as
the collapse of a half built subway tunnel
in Hangzhou in November zo, which
involved the collapse of a /om section of
road and caused the provincial government
to suspend subway construction, has
also led to political backing for enhanced
project management.
Demand is still not widespread, but is
growing steadily as projects become more
complex and as repeat clients seek to avoid
repeats of problems that have arisen on
previous contracts. Multinational and
Chinese clients are both requesting project
management services, although the service is
still commoditised and as such fee levels can
be suppressed. One western project manager
working in the region said that his rm had
recent experience of a large Asia-based client
approaching the business in recognition of
the need for project management services,
but saying that it could not justify the
expense. The project management rm
negotiated fee and service levels down in
expectation of future work. This is typical
of the approach to project management
in China, with services requested varying
from full programme management to solely
administrative services.
Cost consultancy is also an area of growing
demand in China, where value is still often
determined by lowest price but where the
lack of project and cost management controls
have led to spiralling costs on schemes.
Other services particularly sought after are
pre-planning and pre-tendering advice.
Because these services are relatively new to
the Chinese market, there is a clear market
for western expertise.
b.4.4 CONTRACTORS
Very few western contractors have established
themselves in China, with Lend Lease one
of the few to have made inroads into the
market. China has a very strong contracting
sector that is virtually impossible for overseas
rms to compete with. Its contractors
were historically state owned enterprises,
and even though around half of them are
now listed on Chinas stock exchange the
government retains a stake in the companies,
meaning that they have an inherent hold
on the market. Those overseas contractors
that have entered the market have tended
to operate more as programme managers,
subcontracting actual construction to local
Chinese companies.
b.4.5 SPECIALISTS AND MANUFACTURERS
The increasing technical demands of
construction in China have led to a growth
in demand for new products and specialist
contracting services, particularly in areas
such as sustainability.
However, the low cost of manufacturing
in China makes it highly dicult for
western companies to compete, given
their higher overheads. Even if companies
establish a manufacturing base in China,
the rapid development of products by native
manufacturers means it is dicult to secure
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A PRODUCT
25
a foothold in the market any advances are
likely to be swiftly replicated by cheaper
Chinese companies.
b.5.1 TFP FARRELLS AND RYDER ARCHITECTURE
CASE STUDY
Architecture practice TFP Farrells
established an oce in Hong Kong following
a project win on the Hong Kong Peak Tower
in the early I''s. The practice then went on
to work on projects in China and Korea from
its Hong Kong oce, before opening its rst
oce in mainland China in December zII
Joey Wong, project director at TFP Farrells
in Asia, says that the decision to open a
mainland oce was taken because clients
require us to service them more quickly
than we can by ying in from Hong Kong.
She adds that having an operating base in
mainland China will also help the practice
to deal eectively with any legal diculties it
encounters on projects.
TFPs China experience has so far been
focused on commercial, transport and
masterplanning work. However, the practice
has recently begun a collaboration with
Ryder, which has particular expertise in
healthcare in the UK, European and central
American markets, to target opportunities in
healthcare in China.
The relationship, which arose from Ryder
director Paul Bell having previously worked
for TFP in Hong Kong, will see the practices
team up to target healthcare opportunities
in China, Hong Kong and wider South-east
Asia. The collaboration gives Ryder access
to the Chinese market, while enabling
TFP to demonstrate greater strength in
healthcare work.
b.5.? INTERVIEW: SUN JINKE, EXECUTIVE
DIRECTOR, SHANGHAI JIANKE PROJECT
MANAGEMENT
Shanghai Jianke Project Management
is the largest project management
company in Shanghai, oering project
management, construction supervision,
cost consultancy and tendering agency
work. The company employs more than
, people, and is currently working
on the Shanghai Disney resort. In ,
it formed a joint venture company with
US consultant Hill International, called
Hill Jianke Project Management, to
combine Chinese market knowledge
with global resource on key schemes.
Western rms are attractive to
clients, but their problem is that Chinese
companies are often a lot cheaper. Most
building work is carried out by local
contractors, and most equipment and
materials used are local. Theoretically,
the Chinese building market is open,
but price is a problem, particularly if
western rms have the costs of ights
and accommodation.
We provide a lot of services for western
clients, because we understand both
international standards and local. This
is our advantage.
Where British companies, in
particular, have an advantage is on green
building. Developers want to make their
buildings green with new technology,
such as solar energy and energy
eciency measures.
Commercial clients usually want high,
three star buildings [under the Chinese
Three Star ratings system]. Residential
clients usually want to achieve one
or two star. The client doesnt always
want to pay more money, but they are
starting to want a higher level. Five years
ago, people couldnt see what a green
building was, but the government is
trying to get people to know more and
people are learning.
b.5 CASE STUDIES AND INTERVIEWS
As Chinas development market
increasingly shifts towards its
second and third tier cities, rms
who are already established
in Shanghai and Bejing are
establishing bases elsewhere in
China, in rapidly developing areas
such as Chongqing
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25
A PRODUCT
.1 GEOGRAPHY
It is possible to work in the Chinese market
from a base outside the country, for example
Hong Kong. However, increasingly rms are
nding that they cannot maximise workloads
without a Chinese base. This is because of the
importance placed on personal relationships
with Chinese client representatives for
cultural and practical reasons, which include
encouraging prompt payment and swift
resolution to any project diculties in a
market that lacks a prominent legal structure.
TFP Farrells, for example, has operated
from Hong Kong since I''z, winning major
infrastructure schemes in China such as
Guangzhou South Station and KK I Tower
in Shenzhen. The rm last year opened an
oce in Shanghai as part of a strategy to
increase its workload in mainland China (see
case study, section 6.o.I).
As Chinas development market
increasingly shifts towards its second and
third tier cities, rms who are already
established in Shanghai and Beijing are
establishing bases elsewhere in China, in
rapidly developing areas such as Chongqing
in the south-west of the country, to improve
access to markets in the central region.
.? LICENSING
For architects and engineers, the most
common route is to partner with Local
Design Institutes to advance a project,
rather than to obtain a full design licence
themselves, because of the high level of
bureaucracy involved in obtaining a licence.
For rms which do seek a full licence, the
fastest route to doing so is by purchasing an
LDI.
However, although this strategy gives the
western rm fast access to a licence, it is
highly risky because of the less developed
standard of the LDIs compared with western
rms. One architect working in the region
interviewed for this White Paper said that he
had seen one rms reputation suer after
following this strategy: The company was a
fantastic practice, but after buying the LDI it
led to some bad outputs. Its for that reason
that we do not want to become an LDI.
Another Shanghai-based professional said:
There is risk in buying an LDI. It is hard to
merge them into your organisation.
A more bureaucratic, but perhaps more
stable, route to gaining a licence is to apply
directly, which requires rms to meet a series
of stringent criteria on areas including:
Minimum level of registered capital
in China
Stang numbers and qualications
Previous project experience in China (for
grade A licences).
International engineer Arup is among those
currently pursuing this route (see case study
below).
Arup has been working in China for z/
years, with its rst project in the region
being a Hilton hotel. It has now carried
out almost o projects, and has seven
oces in mainland China. Its three biggest
are Shanghai (z4 people), Beijing (Io
people) and Shenzhen.
The majority of its work in China is
building engineering consultancy and
specialist engineering, although it is
also growing its infrastructure presence
and carrying out planning consultancy,
particularly high level and strategic
planning.
Arup does not currently have a full
design licence, so has to pass the nal
stages of work to a Local Design Institute.
Michael Kwok, director, says: We have
developed trust with LDIs. We are aware
we need to get them involved earlier
[than the point of handover], and we are
involved in reviewing the construction
drawing work to make
sure that designs are carried through.
He says that the engineering aspects
of projects are more or less xed before
handover, which combined with the fact
that in Arup usually takes a review role
on projects means that the consultant
has generally been satised with the way
its projects have progressed under these
arrangements.
However, Arup is now in the process of
applying for a full design licence. Kwok
says: From a business point of view, its
not urgent, but we dont know whether
policy may change in the longer run. He
says that the decision to apply now has
been particularly driven by a belief that it
will help with sta retention. He says: It
will give engineers condence that Arup is
here for the long term, which is important
as their professional qualication is
attached to the company.
He adds that should the rm be
successful in its application, it will
consider whether to use its licence on a
project by project basis.
In Kwoks view, the other route to
obtaining a licence buying a Chinese
rm would carry a high risk. Its hard to
merge them into your organisation. Weve
never done it at the end, we decided it
was not what we wanted to do.
7/DOING BUSINESS IN CHINA
.?.1 ARUP CASE STUDY
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26
A PRODUCT
27
.3 LANGUAGE
Business meetings in China may be
conducted in either Mandarin, Chinas
ocial language, or English. However,
although the vast majority of clients and
rms involved in construction projects will
employ English speakers, western businesses
seeking to work in China are advised to
employ at least some Mandarin speaking sta
of Chinese origin. This is particularly the
case given the importance placed on personal
connections both in winning work and in
resolving any disputes that may arise, in the
absence of a stringent legal framework. The
relative importance of Mandarin to business
negotiations, compared with other languages,
was reected in research by Bloomberg in
zII, which ranked Mandarin as the
highest language other than English for
business usefulness. French was second
and Arabic third.
.4 RECRUITING AND RETAINING
STAFF
Recruitment and retention of sta,
particularly local Chinese, is a major
challenge for western rms operating
in China.
It is seen as necessary for cultural reasons
for western rms to have some Chinese
sta involved with projects; these sta also
bring an understanding of how to work
with government and Chinese contractors,
through an appreciation of the collaborative,
rather than contractual, nature of the Chinese
market. Having Chinese sta can also be
necessary from a language perspective,
as business may be conducted
in either Mandarin or English.
The sta in highest demand are skilled
native Chinese or localised foreigners, who
may have worked in the market for up to z
years and have an ability in the language
and strong understanding of business
culture. However, salaries for consultancy
roles in China are rising by an average of
I-Io a year, and experienced sta can ask
for 3 rises to move companies. This is
partly due to the rapid rise of consumerism
in China, and partly to the rapid expansion
of the development sector, which has vastly
outpaced the training of sta, leading to a
skills shortage.
The director of one consultant interviewed
said: There arent enough people in the
market. A recruitment rm we employed
recently said that people didnt exist to match
the job descriptions we wanted, as these
people who are likely to be in their early
forties are too well embedded and
are handcued to their rms.
Salary is a strong motivation in attracting
local Chinese sta; however, increasingly, as
these people become more wealthy, career
progression is becoming a stronger attraction.
Firms that can oer candidates a career
structure and clear route to progression, for
example through professional grades, report
more success in attracting sta than those
who cannot. The negative consequence of
this, however, is that salary levels have begun
to outweigh ability in both consultancy
and design, adding further heat to the
employment market.
In many cases, overseas sta are now
cheaper to employ than local Chinese, and
rms are increasingly using western sta
to ll particular skills gaps and as second
row sta that have limited or no direct
contact with the client. Another popular
solution to skills shortages is to attempt to
attract returning Chinese sta from overseas
markets, such as the US, UK and Middle
East, that have seen a reduction in workload
due to recession.
.5 CORRUPTION
China was ranked /oth on the zII
Transparency International Corruption
Perceptions Index (out of Ioz countries, where
I is the least corrupt). By way of comparison,
this ranks it more at risk of corruption than
Brazil (/3rd) but far less than Russia (I43rd).
The UK ranked I6th and the US z4th.
The index is based on surveys and data
from independent institutions, covering
issues including bribery of public ocials,
kickbacks in public procurement, access
to information and the enforcement of
anti-corruption laws. China had a score
of 3.o out of I on the index; scores of less
than o mean that a country is considered
to be signicantly corrupt.
The Chinese construction industry
has been implicated in some high prole
corruption cases in recent years, with
Chinese news agency Xinhua reporting
that Io,I' ocials were punished for
construction related corruption or dereliction
of duty between July z' and November
zII. One senior industry gure interviewed
for this White Paper said he was aware
of three or four recent scandals within
the sector in Shanghai, which had gone
unreported, that involved individuals taking
personal payments on contracts. However,
construction managers interviewed for this
White Paper tended to agree that there was a
growing trend for local government ocials
to look unfavourably on companies with a
reputation for giving inducements.
Part of the diculty for UK rms operating
in China is navigating the requirements of
the Bribery Act zI, and internal corporate
compliance procedures, while retaining
strong relationships with Chinese clients. For
example, the Chinese tradition of gift giving
at New Year can cause diculties if a rm
does not have clear guidelines in place for
sta. Similarly, the Chinese have a custom of
gift giving at important meetings, which may
not conform with policies of international
companies in terms of compliance with
anti-bribery legislation. Those working in
the region also emphasize the importance
of dealing with any approaches that cause
concern sensitively and politely, given the
importance placed by the Chinese on not
losing face.
WHITE PAPERS
27
A PRODUCT
.1 THE RISE OF THE SUSTAINABILITY
AGENDA
Awareness of sustainability in China has
increased dramatically since the mid zs,
as the Chinese government has come under
international pressure to address the impact
the countrys rapidly escalating contribution
to global energy use is having on the
environment and on international carbon
emissions. In zI, China overtook the US as
the worlds largest energy consumer. In the
same year, Chinese CO
z
emissions rose by
more than I, with China accounting for
a quarter of global emissions, according to
research from energy company BP.
At the Copenhagen Climate Change
conference in December z' the Chinese
government agreed to reduce its carbon
intensity a measure of carbon emissions
as a proportion of GDP by at least 4 by
zz. In zI, at the UN Climate Change
Conference in Durban, it agreed to allow
international authorities to audit its
calculation process for carbon reduction for
the rst time.
These two developments are major
milestones in the Chinese governments
attitudes towards sustainability, and are
already increasing a trend towards a greater
emphasis on sustainability in policy making
that has been evident since the mid zs.
In its IIth Five Year Plan, covering
the period z6-zI, the government
announced a series of major projects aimed
at addressing environmental problems
that had resulted from the countrys
rapid urbanisation, including large-scale
environmental clean-up projects and the
development of renewable energy sources
including wind power and solar power.
The Izth Five Year Plan, covering zII-
zIo, continues this trend, most prominently
through increasing renewable energy use
and through adopting a more sustainable
approach to Chinas extensive development
programme. This centres around improving
the sustainability both of large areas, through
a programme of eco city developments (see
section o.z.I) and individual buildings,
particularly through increasing the use of the
Chinese governments environmental rating
system for buildings, the Three Star system
launched in z6 (see section o.3.I). The Izth
Five Year Plan includes a specic target to
reduce carbon intensity by I/ by the end
of zIo.
The sustainability agenda in the
Chinese built environment is also being
promoted by the increasingly large number
of multinational companies investing in
operations in China. These international
clients are increasing the demand for
buildings that conform to internationally
recognised standards in sustainability, such
as the LEED system (see section o.3.z) and
in doing so are increasing the demand for
sustainable technologies and design practices
in China.
.? KEY SUSTAINABILITY POLICIES
AND INITIATIVES
.?.1 ECO CITIES AND COMMUNITY SCALE
DEVELOPMENTS
The Chinese government has said that it
wants z of the z6 cities it is planning to
construct over the next z years to be eco
cities, with an emphasis on sustainable
development and sustainable living. The
largest of these developments is likely to
be around z km
z
. This builds on work
announced by Chinas National Development
and Reform Commission in zI, which
selected ve provinces and eight cities to be
pilot areas for low-carbon development. The
provinces were: Guandong, Liaoning,
Hubei, Shaanxi, and Yunnan. The cities
were Tianjin, Chongqing, Shenzhen,
Xiamen, Huangzhou, Nanchang, Guiyang,
and Baoding.
.?.? LEGISLATION AND INCENTIVES
China has a series of mandatory energy
eciency codes for buildings that have been
developed and implemented sequentially
since I'o6. Some standards are national
and some are regional, and separate codes
exist for building types including tourist
hotels, residential buildings and public
buildings. The codes cover envelope thermal
requirements, the eciency of heating and
cooling systems and lighting in commercial
buildings. In the residential sector,
codes only cover urban areas, not the
rural housing market.
Enforcement of the codes, which are
typically set by MOHURD but implemented
by local governments except in some cities
such as Beijing which have set their own,
more stringent codes has historically been
dicult, but has improved signicantly as
a result of greater government intervention
over recent years. To monitor compliance
with the codes, Chinese government ocials
now carry out an annual national inspection
of building energy eciency across four
megacities, the majority of 3 provincial
capitals, and a selection of randomly chosen
cities in each province.
The government is currently analysing
the possibility of enforcing a cap on energy
use in order to slow emissions growth
by setting targets for local governments.
Measures under consideration include a
mandatory energy saving assessment before
projects can be approved for construction
although under proposals being examined
by the National Development and Reform
Commission the cap would still enable a z6
increase in energy use by zIo.
In August zII the Chinese government
introduced feed-in taris for solar power,
enabling developers to sell solar powered
electricity to utility companies for about 5.Io
per KW hour (the exact price varies with the
location of projects). This is intended to drive
uptake of solar power both to meet energy
targets and to improve job creation in solar
technology industries.
8/SUSTAINABILITY
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A PRODUCT
29
.3 RATINGS SYSTEMS
.3.1 THREE STAR
In z6 the Chinese Ministry of Construction
(now MOHURD) launched a voluntary
green building standard, called the Three
Star system, designed to promote green
construction amid Chinas increasingly
expanding development programme. In
introducing the system, the ministry said:
Our country is now in the phase of rapid
economic development [] with signicantly
growing consumption of resources year by
year. Therefore [] the concept of sustainable
development must be adhered to, to strongly
develop green buildings [] The purpose
of formulating this standard is to regulate
evaluation on green buildings and promote
the development of green buildings.
Under the system, buildings are graded as
either one-star (the lowest rating), two-star or
three-star. The system contains two dierent
standards: one for residential buildings and
one for public buildings, which refers to the
public nature of the buildings (for example
large commercial buildings) rather than the
funding mechanism.
The guidance to the Three Star system
states:
Considering the current construction
market in our country, this standard will
mainly evaluate residential buildings that
are huge in quantities and public buildings
that consume much energy and resources,
like oce buildings, mall buildings and hotel
buildings. For evaluation on other buildings,
this standard can serve as reference.
The system contains a list of prerequisites,
called control items, which must be met for
a building to be rated under the system, and
a separate list of credits, known as general
items, allowing developers to choose
which credits to pursue to achieve their
desired score. Both control items and
general items cover six categories:
I. Land savings and outdoor environment
z. Energy savings
3. Water savings
4. Materials savings
o. Indoor environmental quality
6. Operations and management
There is also an additional category called
Preference Items which aords extra scores
for strategies that are regarded to be at the
leading edge of sustainable development
or are the most dicult to implement, for
example browneld redevelopment or more
than I onsite renewable power generation.
The charts below [Figs II & Iz] show the
dierent ratings for residential and public
buildings.
The popularity of Three Star has increased
steadily since its introduction. According
to research by consultant Faithful+Gould,
by June zII there were I/o buildings in
China certied under the Three Star system,
although the majority of these had only been
certied at design stage I4 had operational
certication. The number of buildings
accredited under the system increased three-
fold between z' and zI [Fig I3].
There has been some criticism that the
Three Star system allows developers to claim
a building is sustainable when it meets only
minimum standards, given the relatively
low demands which must be met to achieve
a one-star rating. However, research shows
that the majority of buildings rated under
the system are designed to achieve higher
standards, perhaps partly as a result of this
perception. Of the I/o buildings accredited as
of June zII, /' achieved a three-star rating,
6o a two-star rating and 3I a one-star rating,
according to Faithful+Goulds research.
FIG 11. ITEMS REQUIRED FOR GRADE CLASSIFICATION OF GREEN BUILDINGS: RESIDENTIAL
BUILDINGS (SOURCE: FAITHFUL+GOULD ?11)
FIG 1?. ITEMS REQUIRED FOR GRADE CLASSIFICATION OF GREEN BUILDINGS: PUBLIC
BUILDINGS(SOURCE: FAITHFUL+GOULD ?11)
Land saving
& outdoor
environment
(total: 8
items)
Land saving
& outdoor
environment
(total: 6
items)
Energy
saving
& energy
utilisation
(tot tal: 6
items)
Energy
saving
& energy
utilisation
(tot tal: 1U
items)
Water
saving
& water
utilisation
(tot tal: 6
items)
Water
saving
& water
utilisation
(tot tal: 6
items)
Material
saving
& material
utilisation
(tot tal: 7
items)
Material
saving
& material
utilisation
(tot tal: 8
items)
Indoor
environment
quality
(total:
6 items)
Indoor
environment
quality
(total:
6 items)
Operating
management
(total:
7 items)
Operating
management
(total:
7 items)
Preference
items
(total:
9 items)
Preference
items
(total:
14 items)
Grade
Grade
General items (total: 4U items)
General items (total: 43 items)
4 2 3 3 2 4 -
5 3 4 4 3 5 3
6 4 5 5 4 6 5
3 4 3 5 3 4 -
4 6 4 6 4 5 6
5 8 5 7 5 6 1U
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29
A PRODUCT
The majority of buildings which have been
rated under the three star system so far are
in the residential sector: the residential and
hotel sectors accounted for oo of schemes
accredited under the system by June zII.
This is a largely a result of government
pressure: the Chinese government is keen to
push its Three Star system forward, and has
so far been most eectively able to do this in
the residential sector, where state owned or
part state owned developers, contractors and
architects are responsible for the majority of
work. The commercial sector accounts for the
second largest share of Three Star registered
buildings (zI), but many of these buildings
will also have achieved LEED accreditation
(see section o.3.z). This is largely due to the
demand from international clients, as the
Three Star system is not widely recognised
internationally. This double rating is a
growing trend in China, as developers seek
to achieve recognition of their achievements
in sustainability from both the Chinese
government and international occupiers.
.3.? LEED
The US environmental rating system LEED
was introduced in China in z. It has so
far been the most popular rating system in
the Chinese market, although indications
are that the Chinese Three Star system is
beginning to challenge its dominance.
As of June zII, 633 schemes in China had
applied for LEED ratings; 4'4 of these were
registered with the scheme, and I3' had been
certied. Although take up of both systems
has increased over the past three years, the
pace of the increase under Three Star has
been faster between z' and zI, for
example, the number of buildings certied
under LEED increased by II6 from 3 to 6o;
under Three Star the number rose 33o, from
z to o/, according to Faithful+Gould.
The rise in popularity of LEED in China
has been driven by international clients,
particularly in the commercial sector. Fifty-
eight per cent of schemes certied under
LEED so far are in the oce sector, with a
further II being mixed use. In the rst seven
years of LEEDs use in China, /o of its
buildings were for multinational clients.
However, over the past three years there
has been rising demand for LEED ratings
from local clients, which has led to a more
even split: by June zII, o3 of LEED
certied projects had been developed for
multinational clients and 4I for Chinese
clients, with the ownership of the remainder
condential [Fig I4].
As with Three Star, the greatest demand
for LEED buildings is at the higher end of the
ratings scale. Of the I3' buildings certied by
June zII, I were rated platinum, // gold, 3/
silver and Io were certied.
Like Three Star, the LEED system is made
up of prerequisites and credit opportunities.
The number of prerequisites is far lower
under LEED than under Three Star, however.
There are many similarities between the
systems, as both award points in similar
areas, including water savings and minimum
energy performance.
However, there are also some criteria which
score points under LEED but not Three Star
(for example, bicycle storage), and other
areas which will actually score points under
LEED and lose them under Three Star for
example fresh air intake and heat storage
boilers, partly because the LEED system
was not designed with the specics of the
Chinese environment in mind. This can lead
to conict when clients demand that schemes
are double rated.
FIG 13. THE SPEED CHART (SOURCE: FAITHFUL+GOULD ?11)
TREND FOR CERTIFIED GREEN BUILDINGS BREAKDOWN BY LEVEL
FIG 14. LEED CERTIFIED PROJECTS, CHINA (SOURCE: FAITHFUL+GOULD ?11)
Domestic developer 6
Oversea developer o
Domestic corporate /
State owned company Io
Government 3
Oversea corporate 4o
Condential I6
Pre- 2UU8 2UU9 2U1U July total
2UU8 2U11
LEED 3-star
Among 175 3-star certied projects,only 14
are Operation Stag certied
LEED 3-star Platinum Silver 3 star 1 star
gold certied 2 star
314
139
1U
77
79
37
65
15
31
175
29
59
65
87
3U
2U 8
9
7
U
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31
.3.3 BREEAM
So far, adoption of the UK green ratings
standard, BREEAM, in China has been
very limited. Fewer than I projects to date
have used the system in China; however,
like LEED it has traction with international
clients. Some commentators predict that the
use of BREEAM will increase over coming
years as it places more emphasis on carbon
emissions than other systems, which would
complement the Chinese governments
carbon reduction targets. However, this would
require much more intensive marketing of the
system to the Chinese market than has been
the case to date, and it is dicult to see it
overtaking the popularity of either LEED
or Three Star. It is more likely that
the increasing demand for schemes to
have multiple ratings will see it used
alongside these systems on schemes for
clients who place a high importance on
international recognition for a buildings
sustainability credentials.
.3.4 ALTERNATIVE RATINGS SYSTEMS
Other ratings systems recognised in
China include:
Japanese CASBEE
DGNB
HK-BEAM
Greenmark
.4 DEMAND FOR SUSTAINABILITY:
KEY TRENDS
.4.1 NEW CONSTRUCTION
The governments Izth Five Year Plan
included ambitious targets for new buildings,
requesting a 6o reduction in energy
consumption compared with I'o building
stock. It also targeted increased uptake of the
Three Star system, implying that it sees rating
systems as a major contributor to achieving
the overall target.
Demand for a sustainable approach to
individual new buildings has been, even
before this directive, led by clients desire
to meet the criteria attached to the various
rating systems in operation in China
including, in particular, the US system
LEED, and, since its z6 introduction,
the Chinese Three Star system.
Historically, the main demand for
sustainable buildings has come from
international developers or Chinese
developers building for international clients,
particularly in the commercial oce sector
which has seen the most demand. However,
there is evidence of increasing demand from
Chinese clients, with 4I of LEED rated
buildings being developed for Chinese
clients as of June zII, according to
research by Faithful + Gould.
As discussed elsewhere in this White Paper,
there is also growing demand for city-wide
sustainable developments, led by regional
governments, under pressure to respond to
the central governments drive to reduce its
carbon emissions. A World Bank report on
sustainability in China, published in May
this year, found that, based on data from
Beijing, Shanghai and Tianjin, about 4
of city carbon emissions are the result of
power generation, 4 is from industrial
activity, and z is from transport, buildings
and waste. The report warned that Overall,
carbon emissions are likely to continue to
grow quickly across all key sources power,
industry, buildings, transport and waste
unless decisive measures are implemented to
lower carbon intensity.
.4.? RETROFITTING
The green retrotting market in China is
in its infancy; however, there is evidence
of steadily growing demand from clients in
this area. Demand is particularly being led
by the industrial sector, which is under dual
pressure to reduce its energy consumption as
a result of rising energy costs, and political
pressure from the government to reduce
carbon emissions. This sector oers the
most potential for savings, however, and
therefore for fee levels. There is also some
interest from the commercial sector, although
at present this is limited to a handful of
clients. In addition, the Izth Five Year Plan
requested secondary energy audits for large
The lack of experience of
retrotting among the majority of
clients in China means that rms
oering this service tend to do so
on a basis which allows clients
to pay for the service out of their
energy savings
WHITE PAPERS
31
A PRODUCT
urban public buildings, which could lead
to future pressure for retrotting. The lack
of experience of retrotting among the
majority of clients in China means that rms
oering this service tend to do so on a basis
which allows clients to pay for the service
out of their energy savings. One consultant
interviewed said: Its about nding a model
which makes it easy on the client. The local
market in particular is reluctant to spend
money upfront.
.4.3 TECHNOLOGIES
Clients in China continue to place far greater
emphasis on visible technologies than on
sustainable elements to design, although
increasing awareness of the cost involved
in doing so means that this is gradually
changing among the most enlightened
clients. Demand for particular technologies
varies by region according to local geography
and climate.
In Shanghai, for example, which has
high levels of both rainfall and sunlight,
photovoltaic panels and rainwater harvesting
are sought after technologies. Inland areas
tend to favour ground source heat pumps,
and clients in areas where there is a natural
water supply such as Chongqing have
expressed interest in water source heat
pumps. The prevalence of tall buildings in
China means there is also signicant demand
for harnessing the energy from high speed
lifts for use elsewhere in buildings.
.4.4 DESIGN
The vast majority of clients in China
currently place little value on passive design
elements in improving the sustainability of
buildings. However, consultants operating in
the region are increasingly trying to promote
the value of design in improving a buildings
sustainability, and as both the cost of
construction and the cost of energy increase
it is to be anticipated that greater demand for
such services could be created.
.5 LEADING COMPANIES IN CHINA
IN SUSTAINABILITY
The data in this section was provided by
Chinas Green Building Map. Scores were
calculated by asking companies to submit
information on the number of green
buildings accredited under dierent systems
and weighted according to ratings given.
.5.1 LEADING CONSULTANTS

Company Score
China Academy of zI.o
Building Research (Shanghai)
EMSI '4.o
Shanghai Research 4'
Institute
Shenzhen Green Building 3'
Technology Co
Shenzhen Building 34.o
Research Institute
China Academy of Building zo
Research (Tianjin)
Faithful + Gould zz./o
QiDi Daring Energy zz.zo
Technology
Beijing Tsinghua zI.o
Design Institute
BIM China Engineering Io.o
Consulting
Source: China Green Building Map

.5.? DEVELOPERS / INVESTORS

Company Score
Vanke IzI
Greenland Group oz.zo
WANDA 44
Shui On Land 3'
China Merchants Property 36.o
GE 3.zo
LANDSEA z4
Coca-Cola II.zo
Franshion Properties I.zo

.5.3 PROVINCES

Province Score
Jiangsu 3zo.o
Shanghai zo3.zo
Guangdong zI/.o
Beijing Io'.zo
Tianjin Io./o
Zhejiang /4.zo
Hubei 6I.o
Sichuan 4/
Shandong 4o
Hebei 3'./o
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33
.b CHALLENGES TO ACHIEVING
A MORE SUSTAINABLE BUILT
ENVIRONMENT
Critics of the sustainability movement in
China have highlighted the absence of
detailed policies to support the governments
carbon intensity reduction targets,
particularly the I/ reduction by zIo. For
this reason, if the Chinese government is
to drive the wide ranging programme of
sustainable development necessary to meet
its overall targets, it may be necessary for it
to introduce a wider system of incentives,
similar to those for the solar energy
industry, in order to promote the use of
green technology, as well as to require local
governments to hit specic energy reduction
targets. With both options, however, the
introduction of new policies is likely to
be hampered by the convoluted system of
introducing regulation in China, which
tends to involve lengthy pilot schemes in
selected regions before broader legislation
is introduced.
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A PRODUCT
3.1 COMPLETION
Under Chinese law, a building can only
be occupied by an owner or tenant once a
certicate of nal acceptance has been
issued by the Ministry of Housing and
Urban-Rural Development. The issuing of
this certicate follows approvals from ocials
involved in urban and rural planning, re
safety and environment and waste.
3.? BUILDING REGULATIONS
China has a national system of building
codes covering key areas including energy
(see section o.z.z), earthquake resistance,
tall structures and re-proong codes.
However, due to the rapid nature of Chinas
urbanisation, it is not unusual for proposed
tall buildings in particular to exceed the scope
of the codes. In these cases, a project has to be
reviewed by an expert panel, demonstrating
aspects including the extent of seismic and
wind resistance testing. These expert panels
are usually formed from local professionals
and are hired by the client.
3.3 HEALTH AND SAFETY
Health and safety is governed by the Work
Safety Law. The law outlines general safety
requirements for particular industries,
including construction.
Safety in construction continues to be
a major concern in China, despite eorts
by the Ministry of Housing and Urban-
Rural Development to improve standards.
According to MOHURD statistics, /34
construction workers were killed in zI,
the latest full year for which gures were
available. The governments initiatives to
improve standards include increased site
inspections with particular focuses in zII
including lifting machinery and scaolding
and a requirement for all major projects to
have a licensed ocial supervisor on site.
Construction professionals interviewed for
this White Paper generally felt that awareness
of health and safety on construction sites
was improving. However, there was concern
that pressure from clients to nish projects
quickly, particularly by incentivising
payments for hitting nish dates, is leading
construction rms to take risks on workers
safety. This is exacerbating a general problem
of large numbers of low-skilled workers and
of managers who lack expertise in safe
working practices.
9/RULES AND REGULATIONS
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35
10/KEY CONTACTS
China-Britain Business Council
(UKTIs ocial service provider for China),
3rd Floor, Portland House,
Bressenden Place, London,
SWIE oBH
Tel: +44 ()z /oz z
Email: enquiries@cbbc.org
The British Chamber of Commerce in China,
Room II,
The British Centre,
China Life Tower I6 Chaoyangmenwai Dajie,
Iz,
Beijing,
PRC Tel: (o6I) oozo IIII
Email: enquiries@britishchamber.cn
Chartered Institute of Building,
China branch
Chartered Institute of Building (CIOB)
Room I4Iz Jinjiang Ziangyang Tower
''3 West Nanijing Road
Shanghai PR China Tel: +o6 zI zzII Ioo6
Fax: +o 6 zI 6z/z '3oo
E-mail: ezhang@ciob.org.cn
WHITE PAPERS
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A PRODUCT
11/METHODOLOGY AND ACKNOWLEDGEMENTS
This White Paper was informed by interviews
with 3 senior construction professionals
working in China. Interviews were conducted
during spring zIz, including during a
research visit to China.
In particular, Building would like to thank
the following organisations Chinese and
UK branches for their input into this White
Paper:
Aecom
Arup
Atkins
Chartered Institute of Building
EC Harris
Faithful+Gould
Gleeds
TFP Farrells
Rider Levett Bucknall
RTKL
Ryder Architecture
Shanghai Green Building Council
Shanghai Jianke Project Management
Sweett Group.
This White Paper was
published in August 2U12

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