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Practical Guide on the Construction Market in China

China is the world’s largest construction market, with a size of US$ 4.6 trillion in 2022. The industry is projected to achieve an average annual growth rate (AAGR) of more than 4% during 2024-2027, supported by investment in infrastructure projects as part of the 14th Five-Year Plan (FYP) (2021–2025).

While construction is a cyclical market and therefore the construction sectors of all countries experience ups and downs, the Chinese market has been in a league of its own. Considerable highs have often preceded deep lows.

The COVID-19 pandemic deeply affected most world economies, including the construction sector. However, China experienced high sales in 2020 and 2021, thanks to government stimulus spending, followed by a drop in 2022 due to less financing and the Chinese authorities’ zero tolerance approach to the virus, which severely impacted businesses.

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According to Global Data, as the country benefits economically from the lifting of the zero-COVID policy, the Chinese economy is predicted to grow by 5.4% in 2023, following modest growth of 3% in 2022.

In August 2022, the Chinese government announced approximately US$1 trillion of investment in infrastructure megaprojects, providing a boost to construction and related activities.

China’s 14th Five-Year Plan emphasizes new infrastructure projects in transportation, energy, water systems, and new urbanization.

According to estimates, overall investment in new infrastructure during the 14th Five-Year Plan period (2021-2025) will reach roughly 27 trillion yuan (US$ 4.2 trillion).

The new plan emphasized 9 key items for energy efficiency and green building development; it also calls for retrofitting of over 350 million square meters of buildings and the construction of over 50 million square meters of net zero energy consumption buildings.

Since the second half of 2021, China’s real estate market has been rocked by a series of developer defaults, as the combination of housing oversupply, a tightened regulatory environment, and subdued demand squeezed property developers’ balance sheets.

Developer defaults have triggered a series of mortgage payment boycotts as homebuyers refuse to pay for unfinished homes (pre-sales of property before construction has been completed are common in China).

This has resulted in a 7.8% year-on-year decline in property investment during the first 8 months of 2022 and a 23% year-on-year drop in total floor space sold during the same period. The downturn is especially severe in Tier 2 and Tier 3 cities that have seen overbuilding during the last decade, while demand for real estate in Tier 1 cities such as Beijing, Shanghai, and Shenzhen remain relatively strong.

The property developer Evergrande recently released its restructuring plan, highlighting doubts about the company’s prospects of recovery. Evergrande was at the center of a crisis in the Chinese property sector after it defaulted in 2021 with liabilities of around US$ 300 billion, including offshore debt of US$ 22.7 billion.

Meanwhile, logistics-related construction has become an increasingly important subsector as the growth of China’s e-commerce industry and export boom have driven demand for new warehouses and other logistics infrastructure.

Despite the drop in new construction, foreign companies focusing on retrofitting old buildings could benefit from potential opportunities. Historically, green building has made up a small percentage of China’s construction market, but with growing government backing, green building is set to grow significantly, presenting opportunities for architecture, construction, and engineering service firms.

According to the China Business Review, new regulations require that 70% of new urban buildings be certified green buildings by 2022. Major municipalities, including Shanghai, Beijing, and Shenzhen, plan to exceed that goal, requiring all new commercial buildings to be green buildings.

This also includes plans to renovate schools, hospitals, and public buildings to be more energy efficient. The ongoing State Council Green Building Action Plan, launched in 2014, mandates that public facilities such as schools, hospitals, museums, stadiums, and any single building area over 20,000 square meters, such as airports, railway stations, hotels, restaurants, shopping malls, and offices, must meet the green building standards of China’s 3-Star Rating System GBEL (The Green Building Evaluation Label).

Additionally, many international health and wellness rankings systems such as LEED, WELL, RESET, and GRESB have also gained traction in the market.

On Feb. 9, 2022, the U.S. Green Building Council (USGBC) announced that China ranks first in the world on its annual list of Top 10 Countries and Territories for Leadership in Energy and Environmental Design (LEED) in 2021.

It took the top spot for certifying the most LEED projects in 2021, with 1,077 certified projects representing more than 14 million square meters (GSM) of certified LEED space. As China develops a greener economy, there will be increased opportunities in low-carbon construction, including green buildings, renewable energy, water conservation, etc.

China’s urbanization rate is among the highest in the world. Data from the American Institute of Architects (AIA) Shanghai reports that by 2025 China will have constructed the equivalent of 10 New York-sized cities.

Under China’s 14th Five-Year Plan, the Ministry of Housing and Urban-Rural Development (MOHURD) issued a notice for the Implementation of Urban Renewal Actions in 2020. While China’s urbanization rate reached 64.7% in 2022, this urban renewal policy aims to develop greener and more efficient cities as the government seeks to improve China’s urban living conditions.

Recent trends in China’s design and construction sector focus on local communities, younger residents, and culture-related projects.

In October 2021 MOHURD issued a new restriction on high-rise building limiting the height of buildings in cities with populations of less than 3 million to 150 meters and cities with a population of more than 3 million to 250 meters. Additional new super high-rise buildings cannot exceed 500 meters in height.

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Technologies such as Building Information Modeling (BIM), green building and smart city solutions, and artificial intelligence applications also play an important role in increasing buildings’ quality and safety.

Except in rare exceptions, foreign architectural design companies need to partner with local firms on projects in China because of the difficulty in obtaining full architectural license. Only a few multinational companies have obtained the “Class A” license by acquiring local companies.

According to article 4 of the Interim Provisions on the Administration of Foreign Enterprises Engaged in Construction Engineering Design Activities in China, there is no need for a foreign designer to be licensed but it shall operate jointly with a domestic designer and the scope of the qualification is limited to that of the domestic designer.

A foreign contractor must be licensed to work in China.

According to article 65 of the Construction Law and article 60 of the Regulations on Quality Management of Construction Projects, if the contractor is not qualified for construction, it will be prohibited in the market, a fine of 2 to 4% of the contract price will be imposed and its illegal income will be confiscated.

If a foreign contractor has already entered China’s market, Chinese laws do not provide any advantage to domestic contractors in competition with foreign contractors.

Other challenges facing foreign architecture and design firms in China include increasing domestic competition and a shortage of senior professionals.

Construction Market Segmentation by Sectors

The key sectors in the construction market in China are commercial construction, industrial construction, infrastructure construction, energy and utilities construction, institutional construction, and residential construction.

Commercial construction: The project types in this sector include leisure and hospitality buildings, office buildings, outdoor leisure facilities, retail buildings, and other commercial construction. The commercial construction sector is expected to record marginal growth of less than 1% this year, owing to a sharp decline in office construction.

Over the forecast period, the commercial sector’s output will be supported by an increase in domestic tourism and robust retail activity, coupled with investment as part of the 14th FYP.

Industrial construction: This sector includes project types such as chemical and pharmaceutical plants, manufacturing plants, metal and material production and processing plants, and waste processing plants.

The industrial construction sector is expected to grow by more than 7% this year, aided by robust industrial and manufacturing production. The sector’s output in the forecast period will be aided by the development of high-tech and lithium battery manufacturing projects.

Infrastructure construction: This sector includes rail infrastructure, road infrastructure, and other infrastructure projects. Increased transport investment, combined with an acceleration of project development by regional and national governments, is expected to see infrastructure construction output rise by more than 17% this year.

Energy and utilities construction: The project types in this sector include electricity and power, oil and gas, telecommunications, sewage infrastructure, and water infrastructure. The energy and utilities sectors are expected to grow in 2023 and record an AAGR of more than 5% between 2024 and 2027, supported by the government’s target to increase energy generation and energy storage capacity.

Institutional construction: This sector includes educational buildings, healthcare buildings, institutional buildings, research facilities, and religious buildings. Forecast-period growth in the institutional construction sector will be driven by investment in healthcare, scientific research, and educational buildings, as part of the 14th FYP.

Residential construction: The project types include single-family housing and multi-family housing. The residential construction sector is expected to remain weak this year, owing to tighter government controls aimed at reducing debt levels among real estate developers and a sharp drop in new residential investment. Rising household incomes, combined with the government’s efforts to renovate aging urban residential areas across the country will support the sector in the latter part of the forecast period.

The competitive landscape in the construction industry in China is dominated by the following leading contractors: China Railway Engineering Group Company Ltd, China Railway Construction Corporation Group, State Council of the People’s Republic of China, China Communications Construction Group Ltd, China State Construction Engineering Corp Ltd, Power Construction Corporation of China, Sichuan Road and Bridge Construction Group Co Ltd, China Energy Engineering Group Co Ltd, China National Nuclear Corp, and Shanghai Urban Construction (Group) Corp.

When it comes to infrastructure projects, transport has received a large part of government funding. China has, by some distance, the longest high-speed railway network in the world at approximately 40,000km with reports suggesting that the country plans to build another 2,500km in 2023.

Many transport projects in China require the use of tunnel boring machines (TBMs); recently the largest slurry TBM in China’s Hunan Province broke through, marking the completion of the right line tunneling of the Xiangya Road river-crossing tunnel in Changsha City. The 15.01m slurry TBM ‘Xingsheng’ is manufactured by China Railway Construction Heavy Industry Corporation Limited (CRCHI).

As the largest river-crossing tunnel in Hunan Province the Xiangya Road river-crossing tunnel is considered a key infrastructure project of Hunan Province, as well as a major livelihood project of Changsha City, the provincial capital. The total length of the tunnel is 4,180m. The left line TBM tunnel is 1,429 meters long, and the right line TBM tunnel is 1,425 meters long. It is said to be the first two-way six-lane river-crossing tunnel in Changsha and is scheduled to open to traffic this year.

Another TBM, the 15.01m super-large diameter slurry TBM ‘Zhenxing’ recently broke through the left line of Hengqin Mangzhou Tunnel in Zhuhai City, which is 800km away from Changsha. The TBM is also manufactured by CRCHI.

Hengqin Mangzhou Tunnel is located in Guangdong-Macao Deep Cooperation Zone. The tunnel is about 3km long and is planned to open to traffic in 2024.

According to the South China Morning Post, a project that hasn’t broken ground yet but is being considered is a hyperloop train line between Shanghai and Hangzhou. The 150km-long in-vacuum tunnel maglev system will allow trains to travel up to 1,000km/h.

The Chinese Academy of Engineering and rail authorities are reported to have commissioned a “comprehensive assessment on the candidate construction sites for ultra-high speed pipeline maglev system demonstration line”, and the two wealthiest cities on the east coast emerged as winners, according to a report published in the Chinese-language journal Railway Standard Design.

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The economic potential of each line was evaluated according to factors such as population density, economic activity, and existing transport infrastructure. Several candidate lines competed for the hyperloop project in China, including the lines of: Beijing-Shijiazhuang, Guangzhou-Shenzhen, and Chengdu-Chongqing.

If plans go ahead, then the line is expected to be operational by 2035. Travel time between the cities of Shanghai and Hangzhou will be cut to 15 minutes, compared with three hours by road or one hour by high-speed rail.

The World Bank (WB) pointed in a study that China emits 27% of global carbon dioxide and a

third of the world’s greenhouse gases but added that the country was “well positioned to meet its climate commitments and transition to a greener economy.”

China has embraced alternative power and by 2030, 40% of all vehicles will be electric. This change may not be happening as quickly in construction, but there is no doubt that it is occurring.

For example, SDLG has produced electric excavators and wheeled loaders, such as the E660HEV electric excavator. The OEM says it has a high-capacity lithium iron phosphate battery, characterized by battery life of up to six hours and fast charging, and installed with a permanent magnet synchronous motor with a small volume and a high-power density.

Construction Market Trends

Demographics are expected to continue spurring growth in residential construction in China. Rising household income rates, along with population migration from rural to urban areas, are expected to continue to drive demand for residential construction in the country. Increased emphasis on both public and private sector affordable housing would fuel development in the residential construction sector.

Non-residential infrastructure is also projected to expand dramatically in the coming years. The ageing population in China is increasing the demand for the construction of healthcare facilities and new hospitals. Rising wages are also expected to boost consumer spending. This will create demand for various services including education and entertainment, and later for plant construction in the country.

In contrast, infrastructure projects have maintained double-digit growth since June 2022, offsetting a decline in demand for construction work from developers. Investment in Power & Utilities and Hydraulics & Environment projects increased by 17.8% and 12.8% year-on-year in September 2022 respectively. As a result, overall construction activity expanded in 2022, reflected in the strength of the construction PMI.

Building new real estate is essential to the country in many ways. For example, when people migrate to urban areas to work, the demand for housing in big cities increases. Additionally, many with investment opportunities see real estate as an attractive option to drive demand.

For local governments, the sale of land use rights is an important source of income. This means that municipalities often rely on continuous property development independent of demand. In such cases, the contracts automatically increase boosting the construction market simultaneously.

The construction market plays a significant role in China’s economic development and urbanization. With its massive population and ambitious infrastructure plans, the industry will continue to experience considerable growth, expansion, and modernization in the future.


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