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The PRC Ministry of Construction ("MOC") and Ministry of Foreign Trade and Economic Cooperation ("MOFTEC") jointly promulgated two administrative regulations in relation to foreign investment in construction design enterprises and urban planning service enterprises, respectively, in September 2002 and February 2003. As large sections of China's cities and suburban areas are being wholly redeveloped or rebuilt at an increasingly rapid pace, these regulations address an economically and socially important part of China's developing economy and establish a relatively transparent path for foreigners to participate. These regulations are entitled:

1. Foreign Investment Construction Engineering Designing Enterprises Administrative Regulations () (the "Construction Design Regulations"), effective as of December 1, 2002; and
   
   
2.  Foreign Investment Urban Planning Service Enterprises Administrative Regulations the "Urban Planning Regulations"), effective as of May 1, 2003.

The two regulations are part of China's implementation of its WTO commitments, which currently mandate that foreign investors be allowed to participate in these kinds of enterprises through an equity joint venture with the foreign investor able to hold a majority equity interest if it so desires. The regulations are, however, only an interim step as they do not allow wholly foreign-owned construction design or urban planning service enterprises (referred to as a "WFOE"), which must be authorized within five?years after China's accession into the WTO (i.e., by December 11, 2006).

Joint Venture or WFOE?

Under the Construction Design Regulations, foreign investment in construction design enterprises can take the form of an equity joint venture, cooperative joint venture or WFOE. The regulations provide, however, that an application for setting up a WFOE will not be accepted at the current stage. Rather, the timing for accepting a WFOE application will be determined by MOC and MOFTEC and may track China's WTO commitments mentioned above.

Similarly, the Urban Planning Regulations also allow foreign investors to form equity joint ventures, cooperative joint ventures or WFOEs to provide urban planning services. Yet, these regulations are silent as to when applications for WFOEs will be accepted, and it is not clear whether an application for a WFOE will be considered once the Urban Planning Regulations come into effect in May of this year.

Requirement for Equity Interests in a Joint Venture

In a construction design enterprise which is established as an equity or cooperative joint venture, the Chinese partner's equity interest may not be less than 25%. There is no minimum requirement for a Chinese party's equity interest in an urban planning service enterprise joint venture.

Qualification Certificates

Just like other foreign invested enterprises, both foreign invested construction design and urban planning service enterprises need to obtain an approval certificate issued by MOFTEC or its local agencies at the provincial level, as well as a business license issued by the state or local administration bureau of industry or commerce.

In addition to the approval certificate and business license, a construction design enterprise needs to obtain a qualification certificate of construction engineering design ("CED Certificate"), while an urban planning service enterprise needs to obtain a qualification certificate of urban planning service ("UPS Certificate"). Both qualification certificates are issued by MOC or its local agencies at the provincial levels.

A CED Certificate is granted according to several grades classified by MOC. According to MOFTEC's informal interpretation, a landscape design enterprise will be deemed a construction design enterprise and, therefore, will be governed by the Construction Design Regulations.

Under the Urban Planning Regulations, urban planning service refers to urban planning formulation and consultation activities which do not rise to the level of comprehensive urban planning. The regulations do not define with further specificity the exact nature of such permissible small-scale urban planning, but in any case, it seems clear that the Chinese government is still not comfortable with foreigners conducting urban planning for whole cities and would rather limit their participation to smaller projects. An urban planning service enterprise is also strictly prohibited from assigning any urban planning service work to a foreign invested enterprise that does not have a UPS Certificate or from assigning any overall urban planning services to a foreign invested enterprise. This restriction is designed to prevent foreign urban planners from establishing an uncertificated consultancy company (the government approval for which is relatively easy to obtain) and actually performing the urban planning work pursuant to sub-contracting arrangements with parties who are authorized to perform it.

After an urban planning service enterprise obtains the UPS Certificate, it must make a filing with the local city planning administrative authority at the place where the enterprise is registered. If it wishes to engage in a business outside the place where it is registered, it must make a filing with the city planning administrative authority at the location where the task is to be undertaken.

General Requirements for Foreign Invested Construction Design Enterprises

• The foreign investor must be a construction design enterprise, a registered architectural firm or a registered engineer in its domicile country.
• In the case of a WFOE (once applications are accepted for WFOEs; see above), the number of foreign engineers and architects registered in China must not represent less than 25% of the total number of registered architects and engineers fixed according to the standards of each qualification grade. Further, at least 25% of the technology team must be foreign party employees with professional design experience.
• In the case of a joint venture, the ratios in the preceding bullet point are set at 1/8, rather than 25%.
• The Chinese-registered professionals of the foreign investor must live in China for at least six months every year.

General Requirements for Foreign Invested Urban Planning Service Enterprises

• The foreign investor must be an urban planning service provider or professional in its domicile country.
• The enterprise must have at least 20 professionals specializing in urban planning, construction, road and transportation, horticulture and related engineering. Foreign professionals may not represent less than 25% of all professionals in the enterprise. In addition, at least one foreign professional must specialize in each of urban planning, construction, road and transportation and horticulture.
• The foreign professionals employed by the enterprise must live in China for at least six months of every year.

Conclusion

While these new regulations are helpful in that they establish a reasonably clear process for entering the Chinese construction design and urban planning markets, the numerous qualification requirements they impose are not entirely consistent with China's WTO commitments, and the qualifications may sharply limit the number of foreign designers and planners which are able to take advantage of these regulations. This approach by the Chinese government is not unexpected, however, as it often uses minimum quantitative and qualitative criteria to limit the utility of new regulations that create opportunities for foreigners in particular industries. It remains to be seen whether the government will lower or eliminate these qualifications over time as it becomes more comfortable with foreign participation in this area.