Although the construction industry in China was deeply affected by the pandemic, government support as part of the 14th Five-Year Plan is expected to help the world’s largest construction market to new heights, writes Kristina Koehler-Coluccia, Head of Business Advisory at Woodburn Global
China’s construction industry was valued at USD 4.6 trillion in 2022. The industry is projected to achieve an average annual growth rate of more than 4% between 2024 and 2027, supported by investment in infrastructure projects in transportation, energy, water systems and new urbanisation as part of the 14th Five-Year Plan (2021–2025).
While construction is a cyclical market, and the construction sectors of all countries experience ups and downs, the Chinese market is 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-Covid approach, which severely impacted businesses.
In August 2022, the Chinese government announced approximately USD 1 trillion of investment in infrastructure megaprojects, providing a boost to construction and related activities.
China’s construction market by segment
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 and retail buildings. 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, commercial sector output will be supported by an increase in domestic tourism and robust retail activity, coupled with investment as part of the 14th Five-Year Plan.
Industrial construction
This sector includes 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% in 2023, 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 and transport construction
This sector includes rail and road infrastructure. 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.
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.
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 Five-Year Plan.
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 ageing urban residential areas across the country, will support the sector in the latter part of the forecast period.
Brief overview of construction industry 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 could 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 and utilities and hydraulics and 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.
How real estate is affecting China’s construction industry
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.
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 remains relatively strong.
The property developer Evergrande recently released its restructuring plan, highlighting doubts about the company’s prospects of recovery. Evergrande was at the centre of a crisis in the Chinese property sector after it defaulted in 2021 with liabilities of around USD 300 billion, including offshore debt of USD 22.7 billion.
Could ‘green building’ provide a boost to the construction industry?
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 as 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 for 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 sqm (including s airports, railway stations, hotels, and shopping malls) must meet the green building standards of China’s 3-Star Rating System GBEL (The Green Building Evaluation Label). Additionally, many international ranking systems, such as LEED, WELL, RESET, and GRESB, have gained traction in the market.
Progress has certainly been made. On 9 February 2022, the US 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.
China took the top spot for certifying the most LEED projects in 2021, with 1,077 certified projects representing more than 14 million sqm (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 and water conservation.
Can foreign companies work in China’s construction sector?
With some rare exceptions, foreign architectural design companies need to partner with local firms on projects in China because of the difficulty in obtaining a 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.
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 2-4% 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.
In sum, the construction market plays a significant role in China’s economic development and urbanisation. With its massive population and ambitious infrastructure plans, the industry will continue to experience considerable growth, expansion, and modernisation in the future.
