China Thriving Construction Industry by alicejenny

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									Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)


China's Thriving Construction Industry
LU Youjie
Department of Construction Management, Tsinghua University, Beijing, China
WANG ShouQing
Department of Building, National University of Singapore, Singapore

China is one of the oldest civilisations in the world and covers a land of 9,600,000 sq km. The population at
the end of 2000 reached 1,265.83 million, accounting for more than one fifth of the world population. Of
the population only about 458.44 million are urban residents at the end of 2000.

The country is divided into 23 provinces, 5 autonomous regions, 4 municipalities and two special
administration regions (Hong Kong and Macao). A province is further divided into various prefectures or
autonomous prefectures that in turn are subdivided into various counties. A county consists of townships
that are in turn divided into villages.

Table 1.1 Basic data on China
          GDP     GDP Per Capita Total Population Urban Population Population Natural             Number
Year
       (108 Yuan)    (Yuan)            (104)            (104)         Growth (%)                  of Cities
1978     3624.1       379             96259            17245              1.2
1980     4517.8       460             98705            19140             1.187
1985     8989.1       853            105851            25094             1.426
1990    18598.4       1634           114333            30191             1.439
1995    57494.9       4854           121121            35174             1.055
2000    88189.5       7078           126583            45844                -                        659
2001    95933.0*     7554*
Sources: A Statistical Survey of China 2000, 2001, China Statistical Publishing House, Beijing, 2000,
         2001; *Government Work Report by Zhu Rongji, 5 March 2002

Cities in China can be under either central or provincial administration. Shanghai, Beijing, Tianjin and
Chongqing directly report to the central government. The cities that are under provincial administration and
report directly to provincial governments are referred to as provincial cities. The other cities under
provincial administration are known as county level cities. There are now 659 cities of various sizes in
Mainland China, compared with the previous 378 cities at the end of 1987.

The Government

The governance power of China has three branches, the legislative, the judicial, and the executive. The
three branches at central are the National People's Congress (NPC), the Supreme People's Court and the
Supreme People's Procuratorate and the State Council, respectively. All of the three branches are repeated
at provincial, city and county levels. The State Council has under its supervision ministries, commissions
and bureaus that share the central executive functions of the government.

The Economy

China’s economy is based upon public ownership of factors of production. Urban land is owned by the state,
while rural land, except the parts of the state ownership, is of collective ownership. The state is empowered
to condemn any plot of rural land.

The economy used to be centrally planned and now is becoming more and more market-driven. The state
owned enterprises account for about one-third of the total output and employ nearly two-thirds of urban
workers although many of them are still losing money and must be subsidised by the government, mainly
through state banks. On the other hand the private sector has been growing rapidly since 1980, especially
after 1992.

The economy has remained relatively stable during of the global financial crisis that occurred in 1997,
compared to the economies of most East Asian countries for a variety of reasons. Its currency, Renminbi, is
not fully convertible; it maintains over US$145 billion in foreign exchange reserves; its foreign debt is


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Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

relatively small compared to other Asian nations; its financial institutions are tightly controlled by the
central government; and most foreign investment in China is direct, rather than portfolio investment.

China’s government took a number of steps in response to the global financial crisis. First, Chinese officials
have publicly declared on a number of occasions that China will not devalue its currency. Second, the
government has expanded export financing and has expanded export tax rebates for several industries
adversely affected by the Asian financial crisis, such as textiles. Third, the government has placed tighter
controls over foreign exchange to halt currency smuggling. Finally, the government has issued several
hundreds of billions of Yuan worth of new bonds to finance infrastructure development to stimulate
domestic spending. These efforts have enabled the economy to maintain relatively healthy growth.

Foreign investment in China

China's trade and investment reforms and the rapid economic and social development as a whole have led to
a surge in foreign direct investment (FDI), as indicated in Table 1.2. Annual utilised FDI in China grew
from US$ 636 million in 1983 to US$ 40.7 billion in 2000, making China, in recent years, the second largest
destination of FDI in the world.

Attraction

There are a number of reasons that can explain China’s attractiveness to foreign investment. Relatively
cheaper human resources, especially the labour is available in China. Governments at all levels in all
provinces are eager for funding their local economic growth and have become increasingly friendly to
foreign investors.

A number of major international events have shown that China is safer oasis of investment. The economic
and social infrastructure that used to be considered as bottlenecks has been significantly improved in recent
years. Governments at various levels have been making investment in infrastructure development to keep
pace with the local and the national economic growth. China's economy has shown remarkable growth over
the past two decades at an average annual rate of about 9 percent. It is expected that China's GDP will grow
at an average annual rate of about 7 percent in year 2002.

China became a member of the World Trade Organization (WTO), enabling it to play a major role in the
development of new international rules on trade in the WTO. It also gives China access to the dispute
resolution process in the WTO, and makes it easier for reformers in China to push liberalisation policies.

According to Ministry of Foreign Trade and Economic Cooperation (MOFTEC), 396,197 foreign firms
have been licensed in China and US$ 763.15 billion and US$ 405.33 billion have been committed and
utilised to the foreign investment, respectively, in China up to the end of March 2002. MOFTEC has also
disclosed that 6,172 foreign firms were approved during the first quarter of 2002, 16.3 percent more than
the first quarter of 2001 [Zhang, 2002].

Uncertainties

In spite of the accelerated flow of the international money into China there are also some uncertainties that
deter foreign investment in China.

Some of the major challenges facing foreign investment include language and culture barriers; the
backward infrastructure and other facilities in the remote areas; ignorant local officials; and lack of and
difficult access to statistics data. The lack of the rule of law in China has led to widespread government
corruption, financial speculation, and misallocation of investment funds.

In many cases, government 'connections,' not market forces, are the main determinant of successful firms in
China. Many foreign firms find it difficult to do business in China because rules and regulations are
generally not consistent or transparent, contracts are not easily enforced, and intellectual property rights are
not protected (due to the lack of an independent judicial system).

The Chinese government does not accept the concept of private ownership of land and assets in China. High
trade barriers are maintained by the government in large part to protect domestic firms from foreign
competition. Such policies have two main negative effects. Firstly, they give domestic firms less incentive
to improve productivity and efficiency. Second, restricting competition raises prices of both domestic and
imported goods and limits product choices for Chinese consumers.


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Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

CONSTRUCTION INDUSTRY IN CHINA

The construction industry in China accounts for up to 7 percent of gross domestic product (GDP) in China
in 2000 (Table 2.1). The employment in construction accounts for 7 percent of the total urban permanent
employment in China (Table 2.2).

Table 2.1 Contribution of major sectors to GDP
Year     GDP (108 Yuan)      Agriculture     Manufacture      Construction     Transportation     Commerce
1978        3624.1              28.1            44.3              3.8               4.8              7.3
1980        4517.8              30.1            44.2              4.3               4.5              4.7
1985        8964.4              28.4            38.5              4.7               4.5              9.8
1990       18547.9              27.1            37.0              4.6               6.2              7.6
1995       58478.1              20.5            42.3              6.5               5.2              8.4
1999       82067.4              17.6            42.8              6.7               5.4              8.4
2000       89403.5              15.9            44.3              6.6               5.5              8.2
Sources: A Statistical Survey of China 2000, 2001, China Statistical Publishing House, Beijing, 2000, 2001

Table 2.2 Permanent employment in construction industry
Year     National urban permanent employment (104)          Construction employment (104)       Share in total
1995                       14,908                                       1,053                       7.1
1996                       14,845                                       1,035                       7.0
1997                       14,668                                       1,004                       6.8
1998                       12,337                                        846                        6.9
1999                       11,773                                        778                        6.6
2000                       11,259                                        744                        6.6
Sources: A Statistical Survey of China 2000, 2001, China Statistical Publishing House, Beijing, 2000, 2001

In 1979 Chinese construction enterprises expanded their operations outward. Since then Chinese
companies have also been increasingly involved in international construction projects and other businesses.

Construction workforce

China has the biggest rural population in the world. The increasing agricultural productivity and decreasing
arable land are releasing and pushing to the urban centres the rural population and, therefore, there is plenty
of labour available to the construction industry. The construction labour force in China is characterised by
“Cradles of building craftsmen” and “Construction Labour Bases”.

Since 1989, in order to raise the skills of the labour force from rural areas to meet certain standards, the
sending of rural labour to urban areas has become formalised between the respective local governments.
The labour-sending governments and the labour-receiving governments in the major cities that need a great
deal of construction labour have entered into agreements on training and employment of the rural labour.
The cradles of building craftsmen under this arrangement have been designated as “Construction Labour
Bases”. The Construction Labour Bases have already become major sources of the workforce needed for
construction activities in major urban centres in China, such as Beijing, Shanghai, Tianjin, Chongqing,
Guangzhou, Shenzhen, Wuhan, Chengdu and other coastal cities.

BUSINESS ENVIRONMENT

The business environment of the industry consists of systems that regulate the relations, actions and
interactions of all the participants. The regulatory environment of the industry includes procurement
policies and procedures, licensing requirements, codes and practices, safety legislation, contract laws and
other requirements.

The administrative framework regulating the construction industry in China is a hierarchical system with
roughly four levels: central, provincial, municipal and county. The Ministry of Construction (MOC) shares
the duties of regulating construction activities throughout the country with the State Development Planning
Commission.




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Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

The cities at various levels have set up their agencies guiding and regulating construction activities within
their jurisdictions. They are called “Urban and Rural Development Commission”, “Construction
      Central government                Provincial and local governments




         State Council

                                           Provincial, Autonomous regions,
         Ministry of                       Municipalities immediately under the
         Construction                      central government



                                                          Cities under provincial,
              Construction Commission                     autonomous region, municipal
                                                          governments



                           Construction Bureau                     Counties and cities at
                                                                   county level




                              Construction section               Townships & districts


                                                                   Construction Units
Engineering Bureau”, or “Construction Industry Administration Bureau” etc. All of them can be called
“Construction Commission” for short. A number of central ministries such as the Ministry of Railways
have departments performing the same functions.

The provincial, city and county construction commissions report to both the people's governments at the
same local level and the MOC through the vertical administrative structure. Each construction commission
has under it an office to monitor works for compliance with the codes and standards.

Legal frameworks

In order to keep in control the construction activities, China has enacted the Construction Law, Contract
Law and Tendering Law. In addition, the central, provincial and local governments have made a number of
detailed regulations and procedures subjects of which can be classified into three broad categories: the
construction market, participants in the construction industry and quality and safety.

REFORM PROGRAMMES

The construction enterprises had been under the direct supervision of the central ministries or local
governments before 1984. The system hindered the healthy development of the construction industry.
Having realised this the central government launched a series of reform programs. The reform programs are
intended to:
1.   introduce market mechanism;
2.   diversify ownership of construction enterprises;
3.   allow the construction enterprises to obtain workforce and other inputs on their own;
4.   diversify the business scope of construction enterprises;
5.   separate field operation from management to downsize the enterprises and increase flexibility in
     employment of workforce.


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Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

CONSTRUCTION PROCUREMENT SYSTEMS

The tendering practice in China dates back to the late 19th century, but was abolished during the period of
the planned economy when the soil investigation, design, construction and installation were assigned to the
state owned enterprises by the governments according to the annual fixed investment plans. In the early
1980s when China resumed its membership of the World Bank competitive bidding was used for
procurement of works financed by the World Bank. Convinced by the success of competitive tendering the
MOC, in June 1983, issued "The provisional bidding procedure for construction and installation works" to
all the local governments, encouraging construction enterprises to compete for their construction and
installation works through competitive bidding.

The MOC and the State Administration for Industry and Commerce jointly prepared and issued a standard
form of contract for works of building construction in November 1991, that is, Model conditions of
contract for works of building construction (GF-91-0201).

On the other hand, FIDIC conditions of contract have been widely used in China for the construction works
financed by the World Bank and Asian Development Bank.

After eight years in use the GF-91-0201 was revised, with FIDIC conditions of contract as one of the
references, and renamed as Conditions of contract for works of building construction (GF-1999-0201) in
December 1999.

In addition to GF-1999-0201, the other central ministries have also issued the standard conditions of
contract suitable for the works of civil engineering construction under their supervision. For example, the
Ministry of Water Conservancy, the Ministry of Electricity and the State Industrial and Commercial
Administration Bureau jointly issued the Conditions of contract for works of hydraulic and water
conservancy engineering construction in September 1997.

The contractual arrangements in China fall into three broad categories depending upon the means of
arriving at the contract sum, which are lump sum contract, measurement contract and cost reimbursement
contract.

The Tendering Law issued on 30 August1999 requires that the employers of certain types of building/civil
engineering works procure services such as soil investigation, design and construction supervision through
competitive bidding.

CONSTRUCTION TRANSACTION CENTRES

A construction marketplace is a place where the tendering can be brought under the exclusive
administration of the government. The place is called construction transaction centre as well. The MOC
requires all major cities to set up this kind of centre to ensure that the competitive bidding is carried out as
required by the laws and regulations.

CONSTRUCTION ENTERPRISES

The construction enterprises in China can be classified in a number of ways, by ownership, size, trade,
qualification, sector and contractual relationship.

Types of construction company by ownership

There are eight types of ownership, that is, state owned enterprises, urban and rural collectives, private
firms, joint venture, Hong Kong, Macao and Taiwan contractors. The numbers of each type of company are
shown in Table 7.1.

Table 7.1 Number of construction companies by ownership in China
       Type of ownership                1996            1997           1998            1999            2000
         State owned                    9109            9650           9458            9394            9030
        Urban collective                29044           29872          26970           25443          22770
        Rural collective                67191           51939          45292           49414
         Private firms                   535             810           2416             n.a.           4872
         Joint venture                   187             231            425             n.a.            374


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Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

Shareholders owned companies                     1601              2245               5741               n.a.             9736
     Foreign companies                            388               454                337               341               319
 Companies from Hong Kong                         417               491                629               664              635
       Other categories                           83                264                50                n.a.              45
            Total                               41364             44017              45634               n.a.              n.a.
Sources :
1. State Statistics Bureau, Construction Statistical Yearbook of China 1996, 1997, 1998, 1999, 2001, China Statistics Press, Beijing,
   1996, 1997, 1998, 1999, 2001
2. State Statistics Bureau, China Statistical Yearbook 2000, China Statistics Press, Beijing, 2000


Table 7.2 and 7.3 give a rough picture of the financial performance of the state owned and collective
construction companies in China.

Table 7.2 Profitability of state owned construction companies in China
  Year       Total profit      Number of         Number of            Share of          Per capita productivity (Yuan)
             (108 Yuan)          units          losing units         losers (%)       By gross output    By added value
  1990          16.6             4275                                                     14509                4514
  1995          30.9             7531                                                     44525               13414
  1996          20.7             9109               2352               22.3               48604               15186
  1997          16.7             9650               2625               27.2               54627               15897
  1998           6.6             9458               2639               28.6               59731               17032
  1999          24.1             9394                                                     66052               18440
  2000          21.6             9030               2402               27.4               73302               20173
Sources:
1. State Statistics Bureau, Construction Statistical Yearbook of China 1996, 1997, 1998, 1999, 2001, China Statistics Press, Beijing,
   1996, 1997,1998, 1999, 2001
2. State Statistics Bureau, China Statistical Yearbook 2000, China Statistics Press, Beijing, 2000


Table 7.3 Profitability of urban collective construction companies in China
 Year Total profit Number   Number of      Number of Share of Per capita Productivity (Yuan)
      (108 Yuan) of Units employees (104) losing units losers (%) By gross output By added value
 1990    16.6        9052      389.7                                  10743            3164
 1995    36.6       15348      631.9                                  30060            7985
 1996    77.7       29044     1171.4          4715        16.2        31549            8458
 1997    75.6       29872     1148.2          5293        17.7        34190            9094
 1998    67.8       26970     1008.9          4772        17.8        37310           10133
 1999    73.3       25443      934.6                                  40662           10923
 2000    75.0       22770      828.2          3706        16.3        44046           11882
Sources:
1. State Statistics Bureau, Construction Statistical Yearbook of China 1996, 1997, 1998, 1999, 2001, China Statistics Press, Beijing,
   1996, 1997,1998, 1999, 2001
2. State Statistics Bureau, China Statistical Yearbook 2000, China Statistics Press, Beijing, 2000


Types of construction company by size

In China, a large sized construction enterprise usually employs at least 4,000 permanent staff and workers
and completes a floor area of over 400,000 square meters annually. A construction enterprise that employs
less than 2,000 permanent employees and completes less than 200,000 square meters of floor area annually
counts as a small sized construction enterprise. Those other than large sized or small sized construction
enterprises fall into the category of medium sized ones. The top ten construction companies in China are
shown in Table 7.4.

Table 7.4 Top 10 Construction Companies in China
                                                             Annual Completed Number of Number of       Paid
                    Company title                             output  floor area employees subordinate capital
                                                            (106Yuan) (104m2)      (104)    companies (106yuan)
   China State Construction Engineering
                                                             22,561.1         917.3          16.94              69         1,931.32
               Corporation
China Metallurgical Engineering Corporation                  11,158.1         146.0          12.09              12         2,394.64


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Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

   China Non-ferrous Metal Engineering
                                            3,695.9                106.8      5.06           11        734.11
                Corporation
China Petroleum and Natural Gas Corporation 8,715.5                79.0       7.29           40       2,376.20
    China Power Enterprises Federation      26,119.8               119.3      20.29          86       5,683.72
     China Petro-chemical Engineering
                                            2,638.7                 9.5       2.74           5         815.61
                Corporation
    China Water Conservancy and Power
                                            8,798.5                42.7       8.97           15       1,707.48
          Engineering Corporation
  China Chemical Engineering Corporation     3,506.0               28.4       5.86           14        712.60
  China Railway Construction Corporation    70,438.6               558.9      66.93          82       1,148.96
   China Harbor Engineering Corporation      8,549.4                3.0       4.90            7       2,544.61
Source: State Statistics Bureau, Construction Statistical Yearbook of China 2001, China Statistics Press,
        Beijing, 2001

Types of construction company by trade

By work undertaken, the construction enterprises can be classified into construction, installation, fitting out
and finishing, rehabilitation and maintenance as well as non-standard equipment manufacture. A more
detailed analysis divides the enterprises into 34 trades.

Types of construction company by qualification

The construction enterprises are divided in 4 classes for construction works, 3 classes for installation works,
3 classes for mechanised construction works and 3 classes for fitting out and finishing works, respectively,
as shown in Table 7.5.

Table 7.5 Construction enterprises by class in China
                              1996                         1997                 1998                2000
First-class                   1,862                        1,971                2,302               2,421
Second-class                  5,964                        6,445                7,191               8,307
Third-class                  16,153                       17,277               17,909              19,228
Fourth-class                 17,385                       18,324               18,232              17,562
Total                        41,364                       44,017               45,634              47,518
Source: State Statistics Bureau, Construction Statistical Yearbook of China 1996, 1997, 1998, 1999,
        China Statistics Press, Beijing, 1996, 1997,1998, 1999,2001

The MOC issued new Provisions on administration of qualifications of enterprises in construction industry
on 18 April 2001 and put it in force on 1 July 2001, aiming at raising the barrier of entry into construction
market.

Foreign contractors

More and more overseas contractors have entered China’s construction market since the early 1980s. The
foreign contractors who have opened offices in China are shown in Table 7.1. There are two of the laws
governing the foreign contractors.

According to The Tentative Provisions on Certification of Foreign Contractors for Construction Works in
China that was issued in March 1994, foreign contractors are allowed to form joint ventures with Chinese
construction companies and are eligible for bidding for the works entirely financed by foreign entities and
for those that the local Chinese construction companies are unable to accomplish.

And according to The Provisions On Forming Construction Enterprises By Foreigners In China issued
jointly by the MOC and the Ministry of Foreign Trade and Economic Cooperation in September 1995, the
foreign firms are not permitted to undertake design, construction and consulting on their own. Only joint
ventures with local Chinese construction companies are permitted.

Table 7.6 shows the overall performance of foreign contractors in China.




                                                      7
Lu, You Jie and Wang, Shou Qing, China's Thriving Construction Industry (兴旺的中国建筑业) (特约封面故事文章), Southeast
Asia Construction, Issue Sept/Oct 2002, pp. 96, 98, 100-105 (Chinese Edition), pp. 106-113 (English Edition)

Table 7.6 Performance of foreign contractors in China
                                                           1996          1997           1998         2000
Number of foreign contractors                               388           454            337          319
Number of losing contractors                                147           179            144          142
Number of employees (104 persons)                          8.62          9.56           7.48          6.71
Construction output (108 Yuan)                             46.9          70.5           62.5          67.5
Number of individual works undertaken                      4,165        4,539          2,127         1,766
Floor space undertaken (104 m2)                           352.1         406.3          407.5         429.4
Total profit (108 Yuan)                                     1.2           1.4            1.9         1.308
Per capita productivity (Yuan)                            58,630        73,715         83,537       100,621
Sources: State Statistics Bureau, Construction Statistical Yearbook of China 1997, 1998, 1999, 2001,
         China Statistics Press, Beijing, 1997, 1998, 1999, 2001

FOREIGN CONSTRUCTION SUPERVISION IN CHINA

The Ministry of Construction set up a new department - Department of Construction Supervision in June
1988 and issued the Circular on Construction Supervision in July 1988, requiring that construction projects
should be brought under supervision of independent construction firms.

According to China Construction News, 28,629 persons have obtained certificate of supervision engineer
and got their licenses up to January 2001 [Fang, 2001].

Foreign consulting firms are allowed to supervise the construction works in China provided that the
construction works are a joint venture between foreign investors and local Chinese, financed directly by
foreigners or by international banks. The foreign firms are required to employ a certain number of Chinese
engineers when they have obtained a supervision contract.

As a rule, the supervision of joint venture projects shall not be undertaken by foreign consultants so long as
Chinese engineers have the capacity to do so. The projects financed by international banks should employ
Chinese consulting firms as principal supervisor. If the foreign investor requires employing foreign
consultants, the foreign consultants must be qualified and approved by the provincial construction
commission. A joint venture agreement shall be entered into between the Chinese consulting firm and the
foreign consultants. The agreement shall specify the scope of work, the basis against which the supervision
is to be carried out, the responsibilities and obligations of each party, income shares of the parties,
settlement of disputes and so on.

References

1.   Zhang Yi, 27.5 percent more foreign fund utilised in first quarter of 2002, compared to the same period
     of 2001, Economic Daily, 14 April 2002, page 1

2.   Fang Ning, Over 70 percent of construction works under professional supervision, Weekly News,
     China Construction News, 20 January 2001, page 1

3.   Wang ShouQing and Dulaimi M. F., Building the external wing of construction: managing risk in
     international construction project, research report, Department of Building, National University of
     Singapore, March 2002, page 22




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