By Hew Kian Heong and Helen Chang
Pinsent Masons
On
September 27, 2002, China's Ministry of Construction and
Ministry of Foreign Trade and Economic Cooperation jointly
issued Regulations on Administration of Foreign Investment
Construction Enterprises ("Construction Regulations")
and Regulations on Administration of Foreign Investment
Construction and Engineering Design Enterprises ("Design
Regulations") that came into force on December 1, 2002.
For
the first time, wholly foreign owned construction enterprises
and wholly foreign owned construction and engineering design
enterprises can be legally established in China (although
there are restrictions on the works that construction enterprises
can undertake).
Sino-foreign
equity or cooperative joint ventures continue to be a vehicle
for foreign contractors and designers to work on projects
in China, but existing construction joint ventures are required
to go through a re-registration process to determine their
classifications.
Both
regulations also set out the licensing, skill qualifications,
skill categories and classification requirements, as well
as formal application procedures and documents, to establish
a foreign investment construction or design enterprise.
According
to the Construction Regulations, the existing system allowing
registered foreign contractors to undertake projects in
China with project specific skill qualifications, permits
and/or licenses will be repealed as of October 1, 2003.
The
Design Regulations impose minimum China residence requirements
on foreign design professionals as well as a minimum number
of such professionals per qualifying organization. These
requirements may cause difficulties for some design enterprises
establishing in China.
Options for Foreign Construction Companies
With
the current system due to be repealed as of October 1, 2003,
foreign companies wishing to work in China must set up a
"foreign investment construction enterprise" as
provided under the Construction Regulations.
The
Construction Regulations expressly provide the two options:
- Wholly
Foreign Owned Construction Enterprises (WFOCE): Foreign
companies are permitted as from December 1, 2002, to establish
WFOCEs in China. However, there still are restrictions
on the types of work that a WFOCE can undertake. These
are similar to the restrictions on types of work that
a registered foreign contractor can undertake under the
current system. In view of these restrictions, the participation
of WFOCEs in domestically funded projects is likely to
be limited.
-
Sino-Foreign Equity or Cooperative Construction Joint
Ventures (ECJV or CCJV): Foreign companies may establish
joint ventures with Chinese companies. Unlike a WFOCE,
there is no restriction in the Construction Regulations
on the types of work that may be undertaken by either
an ECJV or a CCJV. A CCJV, however, must be established
as a legal entity (as opposed to a non-legal entity joint
venture) because the construction enterprise skill qualification
will not be issued to a non-legal entity.
Apart
from the options mentioned above, we understand that some
foreign companies are planning to acquire equity interests
in existing domestic construction enterprises. This approach
may enable a foreign company to obtain the benefit of the
domestic construction enterprise's existing skill qualification.
Some foreign companies also are considering using their
existing ECJV or CCJV to invest in a new WFOCE, ECJV or
CCJV.
When
assessing the feasibility of the above options and deciding
how best to restructure an existing presence in China, it
is important for a foreign company to remember that the
Construction Regulations must be read in conjunction with
other applicable laws and regulations. These include the
general company and foreign investment laws and laws that
apply specifically to the construction industry, such as
the skill qualification regulations. Careful consideration
of the totality of the laws and regulations and the ongoing
effect of China's World Trade Organization entry will enable
each foreign company to make the appropriate decisions for
their business.
There
are a number of issues in the Construction Regulations that
require expansion or clarification. The Ministry of Construction
intends to issue implementation rules to be read with the
Construction Regulations. At a seminar held on November
15, 2002, in Beijing, speakers from the ministry indicated
that the implementation rules are being drafted. The ministry
wishes to allow the Construction Regulations to operate
for a period of time to see what specific issues may arise
during operation so that these issues may be addressed in
the implementation rules when they are issued.
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For more information about the issues covered in this report, please contact Hew Kian Heong at Pinsent Masons' Shanghai office at 86 21 6321 1166 or at hew.kheong@pinsentmasons.com or Helen Chang at Masons' Shanghai office at 86 21 6321 1166 or at helen.chang@pinsentmasons.com.
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