Despite recent challenges, including obvious
political tensions, economic cooling in the PRC, and increased local
competition, the Chinese market remains an attractive destination for U.S.
design and architecture firms. For instance, PEI Architects has maintained its
success in China through long-standing relationships with key clients and is
currently involved in two major projects for the Bank of China: a 1.9
million-square-foot complex in Shanghai and a financial center in Haikou.
[i]
Similarly, NBBJ is playing a critical role in the development of Tencent’s Net
City in Shenzhen, a 2-million-square-meter smart city project that aligns with
China's goals of sustainable and tech-driven urbanization.
[ii]
These examples show that while the Chinese market presents challenges, it
continues to offer significant opportunities, particularly in sectors where
innovative and cutting-edge architectural solutions are in high demand. At the
same time, U.S. firms should exercise care: proper advance planning and
strategic alliances are crucial for profitable forays into the Chinese market.
JR Design Project: A Cautionary Tale
When operating in China, U.S. design firms
often encounter regulatory challenges, particularly with respect to China’s
strict qualification requirements for architectural design services. Failure to
meet these requirements can result in serious legal issues, including the
potential invalidation of design contracts, as demonstrated in a leading case
decided by the Supreme People’s Court of PRC (the nation’s highest court).
In the case JR Design Project Consultant
(HK) Co., Ltd. v. Hechang (Shiyan) Real Estate Development Co., Ltd. (2017)
最高法民申1610号, a Hong Kong-based design firm entered into a contract with an
owner in mainland China to provide design services for a hotel project. (For
the purposes of architectural design qualifications, Hong Kong is considered “foreign”
in the PRC.) The contract covered various phases of the works, including
conceptual design, rendering services, the production of construction drawings,
and construction consultancy. When a dispute arose over payment, the validity
of the contract itself became a central issue in the case.
The court ruled that under China's Construction
Law[iii]
and the Provisional Regulations on the Administration of Foreign-Invested
Firms Engaging in Construction Engineering Design Activities (Decree 78),[iv]
foreign firms that do not hold the necessary Chinese qualifications are
prohibited from providing detailed design services, such as the production of construction
drawings. In this instance, the court found that the firm had gone beyond
conceptual design and engaged in more detailed work, which required
qualifications that the firm did not hold. As a result, the court declared the
contract invalid.
A key takeaway from this case is that foreign
firms that lack the required qualifications are generally limited to offering
conceptual design (alternatively referred to as "schematic design"),
and, for any work beyond that point (such as “basic design”, “detailed design”
and/or “construction drawings”), foreign firms must collaborate with a
qualified Local Design Institute (LDI) to provide the full range of design
services.
Paths to Success
To ensure compliance with the PRC’s
qualification regime, U.S. design firms typically follow one of three pathways
when operating in China:
- Establish a local entity in China and obtain the necessary
design qualifications.
- Establish a local entity to provide design consultancy without
obtaining qualifications and collaborate with an LDI to complete the
design services.
- Operate from offshore and partner with an LDI to provide full design
services.
The following sections outline these three routes
in greater detail.
Pathway I:
Establishing Local Entities to Obtain Qualifications in China
In China, architectural design services are
regulated by a strict qualification system, meaning firms must obtain specific
qualification grades to provide design services for different types and scales
of projects. Without a local entity that can apply for and obtain these
qualifications, a U.S. firm’s ability to operate in China will be significantly
restricted (as further explained below).
a. Regulatory Changes Post-2018
Historically, foreign-invested design firms
had to comply with the Regulation on the Administration of Foreign-Invested
Construction Engineering Design Firms (Decree 114) and its implementation
rules, issued in 2002. However, these regulations were repealed in October
2018, and no replacements were introduced. Therefore, foreign-invested design
firms now follow the same application process for obtaining design
qualifications as domestic firms under the Regulations on the Management of
Construction Engineering Survey and Design Qualifications. This positive
shift in the regulatory landscape remains in effect notwithstanding the current
challenges in the U.S.-China relationship.
- Removal of Credentials Requirements (for First-Time Applicants): Previously, foreign-invested firms had to submit credentials
for projects they designed outside of China when applying for design
qualifications for the first time. With the repeal of the Decree and its
implementation rules, both foreign-invested and domestic applicants now
apply for their first qualification at the lowest level (Grade B) without the
need to submit project credentials from other jurisdictions.
- Changes in Personnel Requirements:
Previously, foreign-invested firms had to meet strict requirements for
employing certified professionals. Wholly foreign-owned firms needed 25%
of their practitioners to hold Chinese qualifications, while joint
ventures required 12.5%. These requirements, including residency
stipulations, were abolished with the repeal of the 2018 regulation.
- Investment Restrictions:
Foreign-invested firms in the form of joint ventures were once required to
have a Chinese partner holding at least 25% of the entity’s registered
capital. This requirement was officially removed after the 2018 regulatory
repeal, allowing more flexibility in investment structures.
b. Acquiring Local Design Firms
A shortcut for U.S. firms entering the
Chinese market is to acquire a local design firm that already holds high-grade
qualifications and employs certified professionals. This strategy helps U.S.
design and architecture firms to bypass the restriction of starting with only
Grade B qualification and the lengthy process of upgrading their qualification
grade, enabling them to quickly begin operations and provide design services
for projects of any scale in China.[v]
Pathway II:
Establishing a Consulting Wholly Foreign-Owned Enterprise (Consulting WFOE)
Some foreign design and architecture firms
establish Consulting WFOEs in China to provide consulting services for
design-related activities. The design consultancy services do not require
design qualifications, and this approach allows Consulting WFOEs to contribute
value without navigating the complexities of obtaining design qualifications.
For this approach to work, however, U.S.
firms must ensure that their contracts clearly define their roles and the roles
played by their LDI partners to avoid regulatory compliance issues. As
mentioned earlier, only entities with the proper qualifications (the LDIs) are
allowed to enter into direct construction design with the client and execute direct
design work in China. Practically, while a Consulting WFOE can contribute
during the initial stages of a project—by providing conceptual drawings, design
management, and advisory services—it cannot independently perform detailed
design work. To offer a complete range of design and architectural services,
Consulting WFOEs must collaborate with an LDI that holds the required
qualifications. And, as part of their
initial diligence in determining which LDI to partner with, Consulting WFOEs
should carefully review the LDI’s qualification status.
Another advantage of establishing a
Consulting WFOE is the flexibility to hire both local and foreign staff
directly, which offers more freedom in resource allocation for design projects.
Pathway III:
Providing Design Services Without Establishing a Local Entity
U.S. design and architecture firms that
wish to provide services in China without establishing a local entity face
distinct regulatory challenges. Nevertheless, it is possible for U.S. firms to
participate in China’s design projects through offshore services and strategic
partnerships.
The primary distinction between Pathway II
and Pathway III lies in whether the U.S. firm establishes a local entity in
China. Pathway II, establishing a Consulting WFOE, allows for greater
flexibility in resource management, including the ability to directly hire both
local and foreign staff. The tax and payment processes are more straightforward
if a U.S. firm has a local presence. Additionally, a Consulting WFOE can serve
as a stepping stone toward obtaining design qualifications in the future if the
firm decides to expand its service offerings. In contrast, Pathway
III—operating without a local entity—minimizes upfront investment and the risks
associated with establishing a local presence. However, without a local entity,
U.S. firms face more challenges in managing cross-border contracts, payments,
and regulatory compliance. Moreover, certain tenders may require a local entity
to participate, and offshore firms may not be eligible to bid. Ultimately, the
decision primarily depends on whether
the work involves detailed design stages that necessitate LDI involvement
pursuant to Chinese laws, and, potentially, the specific requirements of the
tender that may mandate the establishment of a local entity and/or the
involvement of an LDI.
a. Limitations on Direct Participation
Without a Local Entity
U.S. firms that choose not to establish a
Chinese entity are subject to significant limitations under Chinese
regulations. As discussed above, only qualified entities are permitted to
engage in design work beyond the conceptual stage (including "basic
design" and "detailed design"). U.S. firms operating solely from
abroad do not have access to the necessary qualifications, which restricts the
scope of services they can provide.
b. Collaborating with LDIs
For U.S. firms to participate in the full
scope of a design project, from concept through detailed design and
construction drawings, a key, and often necessary, strategy for U.S. firms operating
in China without establishing a local entity is to collaborate with a qualified
LDI.
Such collaborations can take different
forms based on the project's requirements, including without limitation:
- Subcontracting Model: In this setup,
the LDI serves as the primary contractor to undertake the design project
from the client, while subcontracting early design work—like conceptual or
schematic design—to the foreign firm. This allows the foreign firm to provide
input in the early stages while the LDI takes charge of detailed design
and prepares final construction drawings to ensure regulatory compliance.
- Consortium Model: In this model,
the foreign firm and the LDI form a consortium to submit a joint bid. This
shared responsibility allows the LDI to manage local compliance and
execution while the foreign firm contributes its architectural vision and creativity.
In practice, early involvement of the LDI
is crucial to avoid delays and expensive design revisions. The sooner the LDI
is involved, the smoother the transition from conceptual to detailed design. Delayed
LDI involvement can result in significant revisions to meet local standards, causing
project delays and increased costs.
c. Managing Cross-Border Contracts and
Compliance
There are specialized foreign direct
investment complications that U.S. firms may need to carefully manage, including
payments, tax obligations, and service import procedures to comply with both
U.S. and Chinese regulations. We have observed that some foreign design firms
operating in China use “third-party payment agents” to streamline the payment
process. These intermediaries simplify the administrative burden and help ensure
that all regulatory requirements are met.
Conclusion
While China remains a complex market for U.S. design and architecture firms,
strategic planning, regulatory compliance, and collaboration with local
partners can safeguard their interests while unlocking significant
opportunities. By understanding the qualification requirements and choosing the
right pathway, firms can effectively navigate challenges and leverage China's
emerging architectural landscape.
Author Chengdong
("C.D.") Xing is an international construction lawyer at Rajah
& Tann Singapore LLP, based in Shanghai and Shenzhen, China. Qualified
in New York, C.D. specializes in advising and representing multinational
corporations and state-owned enterprises in complex cross-border construction
disputes, with a particular focus on international arbitration and
China-related matters.
Editor Marcus Quintanilla is an experienced arbitrator and mediator with over 20 years of experience in international arbitration and cross-border litigation. Marcus maintains arbitration chambers in San Francisco, Houston, and Miami.
Disclaimer: This article is for reference purposes only and does
not constitute legal advice and should not be relied upon as such. Specific
legal advice about your specific circumstances should always be sought
separately before taking any action.
[i] See https://pei-architects.com/projects/bank-of-china-financial-center.
[ii] See https://www.nbbj.com/news/cnn-tencent-is-building-a-monaco-sized-city-of-the-future-in-shenzhen.
[iii] Article 13 requires architectural design firms to obtain specific
qualifications in order to legally carry out design work, with their scope of
activities limited to the extent permitted by their qualification grade. See https://www.lawinfochina.com/display.aspx?id=30311&lib=law.
[iv] Article 4: Foreign-invested design firms that undertake
construction design activities within the territory of the People's Republic of
China shall select at least one Chinese design firm with construction design
qualification issued by construction to carry out Sino-foreign cooperative
design activities, and undertake their design activities within the scope of
the qualification of the aforesaid Chinese design firm(s). Article 5: Construction design
contracts of cooperative design projects shall be concluded by Chinese design firms
for cooperative design or jointly concluded by both Chinese and foreign design firms
and construction entities. The contracts shall specify the rights and
obligations of each party. Construction design contracts shall be in Chinese
version. See http://www1.shanghaiinvest.com/cn/viewfile.php?id=2336.
[v] See, e.g., a news article
mentioning this practice at
https://www.dacare-group.com/a/china-foreign-architecture-firms-doing-design-activities-in-china.
