China: Cultural Design Collision—China’s Ministry Of Construction Investigates Foreign Companies Involved In China’s Construction Industry

Last Updated: 2 October 2006
Article by Ashley M. Howlett

The world is becoming a smaller place, and when global meets local, conflicts and collisions are often the result. We can see just such a global vs. local collision in a notice issued by the Chinese Ministry of Construction ("MOC") on September 6, 2006.

The MOC notice, entitled "Notice on Full Investigation on the Qualification Status of Foreign-Invested Enterprises in China," states that the MOC is seeking to "fully and accurately understand the qualification status" of foreign-invested enterprises ("FIEs") in China by conducting a full investigation of all such enterprises. The MOC has also decided to "analyze and evaluate the project contracting status" of FIEs in the Chinese market in a "scientific and rational manner, and to properly carry out the research and formulation of the opening-up policies of the construction industry."

With China’s accession to the WTO, it was agreed that the design and construction industry would be opened and the formation of wholly foreign-owned enterprises ("WFOEs") would be permitted. WFOEs would be allowed within five years in the design field, which includes architecture, engineering, and integrated engineering, and within three years in the construction field. While the construction market has allowed WFOEs since December 2002, two years ahead of schedule, the design market still remains effectively closed.

However, the five-year period for the opening of the design market will come to an end this December, and many foreign design firms are preparing to formally enter the China design market in 2007. Accordingly, the MOC notice is a timely "shot across the bows" of foreign firms involved in providing design and construction services in China.

Design Services in China—The Current Position for Foreign Firms

As a result of MOC Decrees 114 and 78, foreign design firms are required to incorporate local entities in China and to obtain relevant qualification certificates from the MOC if they are to undertake design works inside China beyond the conceptual/schematic design stage. The qualification requirements for a design FIE (i.e., a design WFOE or a design JV) are essentially the same as those needed by local design institutes, but there are some additional requirements for foreign architectural and engineering staff.

The MOC has not yet issued any implementation regulations for Decree 114 that explain how the application process will operate in practice. This can be contrasted with Decree 113, where the relevant implementation regulations were issued four months after Decree 113 came into effect. Accordingly, the application process under Decree 114 remains somewhat uncertain.

Implementation regulations, however, have been issued for design FIEs established by Hong Kong and Macau investors, and these regulations provide preferential treatment for such FIEs. For example, the six-month residency requirement under Decree 114 will be satisfied for Hong Kong- or Macau-invested design FIEs if their key technical personnel reside in Hong Kong or Macau, not just Mainland China.

As far as we are aware, to date the MOC has "rejected," or at least not approved, any applications by foreign design firms to establish design WFOEs. However, post-December 2006, the MOC will find it difficult to sustain this position.

With respect to offshore services (i.e., design services performed outside China for projects in China), Decree 78 requires foreign design firms to work in cooperation with locally qualified design institutes if the offshore services involve design beyond the basic initial conceptual/schematic design stage.

Backlash Against Foreign Design Firms

There has been some publicity in the local Chinese press recently regarding the involvement of foreign design firms in prestigious projects in China. Concerns have been expressed that foreign design firms have been circumventing the qualification regulations and have been involved beyond the basic initial conceptual/schematic design stage. Criticism has also been aimed at the supposed high fees paid to foreign design firms compared with the fees earned by local design institutes.

The Twenty-First Century Economic Report (produced by the Nanfang Daily Newspaper Group), for example, claims that foreign design firms have secured 30 percent of the market for the design of high-end projects in China. This report quotes Mr. Zhu Boshan, a member of the WTO research group for the MOC and the deputy secretary-general of the Shanghai Consultation Trade Association, as saying it is unfair that "the foreign designers do 10 percent of the work, but take away 90 percent of the money; while the Chinese designers do 90 percent of the work, but only get 10 percent of the money." Various examples of this alleged unfairness are cited, including the Shanghai Jin Mao Tower and the National Theatre in Beijing, where it is stated that the foreign designer collected more than 10 percent of the total investment as a design fee, while the Chinese codesigner received only RMB 18 million.

This is not a new complaint: in 1998 more than 100 senior academics at the Chinese Academy of Sciences submitted a petition to the State Council in an attempt to veto Paul Andreu’s design of the National Theatre. Similarly, in 2003 another petition was circulated to stop the construction of the Herzog & de Meuron-designed Olympic Stadium. In both cases, concern was expressed that China was becoming a laboratory for experiments by foreign designers. In both cases the petitions were unsuccessful. 

The Perception That Foreign Design Firms Dominate the Market

According to a report by the Research & Development Center ("RDC") of the State Council, the top five enterprises in each industry that has been opened up in China have almost all been controlled by foreign capital. The RDC report states that foreign companies hold majority control of 21 of the 28 main industries in China.

Largely on the basis of this report, the MOC has concluded that it should investigate the construction market to determine whether design and construction FIEs dominate the market as has been alleged. On the construction side, construction FIEs have a tiny share of the market, and other than in niche or high-technology areas such as oil and gas, nuclear, and petrochemical projects, construction FIEs are minor players. The story is different when it comes to design, and it seems to us that the MOC’s underlying concern is whether the local design institutes will be able to compete with foreign design firms and design FIEs once the market is opened next year.

Presently there are many foreign design firms operating in China, predominantly as consulting WFOEs, where they cooperate with local design institutes to jointly produce designs for Chinese projects. Whether they undertake design services beyond the conceptual/schematic design stage is a moot point and one that the MOC would obviously like to investigate further.

At first glance, the notice appears to be a protectionist reaction from the MOC, and in line with recent regulations governing foreign investment in connection with mergers and acquisitions, property development and investment, and media distribution services. Regardless of whether or not the MOC harbors any protectionist sentiment, this is the view that is being advanced in the Chinese press as is evidenced by the Twenty-First Century Economic Report article.

The Effect of the MOC’s Investigation

The MOC notice stated that the competent departments for construction of all provinces and municipalities must investigate the actual situation of FIEs that have registered in their local area and obtained qualifications as of the end of July 2006. The reports were to have been submitted to the MOC before September 20, 2006. What the MOC is looking for is not clear, but it is undoubtedly taking this seriously, as the MOC notice stresses that the provinces and municipalities must attach great importance to this investigation and must appoint special persons to be in charge of it.

At this stage, it appears that the MOC is focusing on FIEs that have obtained design, construction, supervision, or bidding qualifications and not those FIEs operating as "unregulated" design, construction, or project management consultants. That is not to say that the investigation will not, at some stage, move in this direction, and the concern is that the investigation has the potential to be a fishing expedition for the MOC.

Whether this investigation is the start of a protectionist backlash or simply a way for the MOC to better understand how design and construction FIEs operate, it is nonetheless probably an unwelcome intrusion for design and construction FIEs and could herald the start of further regulation aimed at foreign firms and FIEs in the Chinese design and construction market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.