As Chinese companies increasingly undertake overseas construction projects, the Chinese government is regulating such activities. The State Council recently enacted the Administrative Regulations on Contracting Overseas Projects (State Council Order No. 527, the Regulations) which took effect on September 1, 2008.

Under the Regulations, the Chinese government encourages Chinese entities to explore opportunities to act as contractors overseas, as well as to improve the quality of their work. The contractors must safeguard China’s national and public interest in their overseas contracting activities, and must abide by the local laws, protect the environment, and promote the growth of local economies.

Market Access for Overseas Project Contractors

The Regulations only allow qualified Chinese companies or other Chinese entities to undertake overseas projects. In order to qualify, a company must: (1) be a legal entity (and if the applicant engages primarily in construction, it must also have a premium or first class [class A] qualification certificate issued by the authorities); (2) have sufficient funding and qualified technical personnel, at least two of whom are management personnel with more than two years of overseas project contracting experience; (3) be able to ensure personnel and property safety; (4) be able to ensure project quality and workplace safety, specifically that there are no significant problems with project quality and that there have been no substantial workplace accidents in the past two years; and (5) have a good business reputation and no record of substantial breach of contract or illegal operation during the past three years.

To qualify, central-level or centrally-supervised companies must apply with the Ministry of Commerce (MOFCOM), and all other companies must file with provincial-level commerce authorities. MOFCOM or provincial-level commerce authorities, together with the construction authority at the same level, will review the application and render a decision within 30 days after all required materials have been duly submitted.

Project Quality and Workplace Safety

To ensure the quality of overseas projects and workplace safety and therefore build a good international image, the Regulations impose a significant amount of duties on overseas project contractors.

Under the Regulations, any overseas project contractor must establish complete and effective internal rules and regulations in terms of project and workplace quality and ensure strict enforcement of these rules and regulations. Also, an overseas project contractor must allocate duties and obligations with respect to project and workplace quality between itself and its subcontactors (if any) in the sub-contracting agreement or in a special agreement. Moreover, the overseas project contractor must explicitly prohibit any sub-contractor from subcontracting to any second-layer sub-contractors. The project contractor must stipulate this in the sub-contracting agreement, and must supervise the sub-contractor in this regard.

Personnel and Property Safety

According to the Regulations, the overseas project contractor must protect its personnel and property. Generally, the contractor must designate a special internal department and staff to protect its personnel and property, formulate relevant scenarios and emergency plans for personnel and property protection, educate and train its personnel on safety and emergency issues, and collaborate with the Chinese embassy and consulates to deal with emergencies. The Regulations also require that MOFCOM establish a risk assessment mechanism for overseas project safety and sound early warnings if necessary.

Labor Issues

The Regulations try to strengthen the protection of labor rights for overseas contractors, given the poor labor rights protection that employees of overseas contractors usually receive. Under the Regulations, employment placement agencies must obtain approval from MOFCOM before engaging in employment placement services to overseas project contractors, and must conform to relevant rules set forth by MOFCOM. Additionally, overseas project contractors must sign a labor contract with each employee, provide certain working conditions, pay agreed upon salaries, and buy accident insurance for all employees working overseas. Furthermore, all overseas project contractors must set up a reserve fund in accordance with the rules of MOFCOM and the Ministry of Finance and deposit money into the fund on time. The reserve fund is used to cover the salary for employees working overseas that the overseas project contractor refuses or is unable to pay, the expenses for employees working overseas to return home in case of emergency, and the damages that employees working overseas suffer.