Study On The Surety Bonds Systems For Construction

The construction industry plays an important role in promoting China’s industrialization and urbanization during the high speed development of more than 30 years of reform and opening in China. Under the background of China’s economy into the "new normal", new urbanization will create huge development space for the China’s construction industry, and vigorously implement of the strategy of "going out" is more conducive to domestic enterprises to expand overseas engineering contracting business.However, the booming construction industry market faces many risk factors, for example, the construction market bidding behavior is not standard; China’s construction market project payment default phenomenon is relatively serious; the building quality problem is also common; high pressure of financial bottlenecks for Chinese enterprises going out to undertake international project still exist. In the international project contracting market, the quantities of spot projects are small and engineering advance ratio is low,so contractors mostly need enough capital for the contract. Under the condition that the scope of general contractor enterprise business is extended, higher requirements are put forward for contracting enterprises financial strength and financing ability. However, compared with big international contractor, Chinese enterprises’ financing ability are relatively weak including not perfect financing system. Hence, examination and approval procedure of the enterprises tend to complex and the process of financing guarantee conditions is demanding, etc. which is difficult to meet the needs of the international contracting project competition.From the development experience of building industry, surety bond is one of the effective ways to solve the above problems. Surety bond is widely used in public and private construction and it can avoid the contractor bankruptcy and economic losses. Surety bond issued by an insurance company can ensure the completion of project itself and pay for creditors in the case of the contractor bankruptcy. Surety bond system can be widely accepted by the market and maintain competitive advantage, the reason has two points: firstly the parties which contractors are more concerned about are achieving the goals of the contract and not only a simple monetary compensation. So, the basic principle ensuring the performance and claims principle " substituting perform" of guarantee insurance mechanism has obvious advantages. Secondly, costs of the surety bond transaction are usually more economic than other guarantee, which can save the transaction cost.In terms of the development of construction surety bond in our country, its development is still cannot meet the actual demand. At the beginning of reform and opening up, in order to coordinate introducing foreign capital and foreign contracted project, People’s Insurance Company of China in its foreign business pilot project surety bond business, which is the earliest of the surety bond business since China’s insurance industry is fully restored. But the coverage has long been treated as a high risk low-margin business policy so the insurance company is not positive. Meanwhile underwriting conditions are very harsh and according to international practice the introduction procedure of foreign capital is required to provide third party guarantee. Banks are often in the form of a bank guarantee to provide security, and gradually become dominant in this business of third-party guarantee mechanism. In the past 20 years, the surety bond that was required to provide in accordance with international practice in multinational investment of construction project was mainly provided by the bank of China and China construction bank rarely insurance companies.The main purpose of this article is through defining the nature of the construction surety bond and comparing the basis of foreign construction surety bond business and system development, pointing out the problems existing in the system of project construction surety bond in China and according to the experience of other countries, especially America, proposing recommendations to set up a relatively perfect system of project construction surety bond policy recommendations. Therefore, the thinking train of this article is through analysis of the nature and feature of surety bond, especially the advantages of surety bond relative to the guarantee and the importance of surety bond to economic and social development, determining the necessity of the developing of Chinese construction surety bond business. Then analyses construction surety bond market in China and the problem of the surety bond system; Then, on the basis of combining the researches results of project construction surety bond research abroad, summarize product variety which can be published in China state construction engineering surety bond market and analyze the potential risk of the existence; Finally, proposal recommendations to improve China state construction engineering surety bond system and risk management.