China’s Government Procurement Law (the “GPL”) has a “Buy China” clause. It states that:
Domestic goods, public works and services shall be procured for government procurement, except in the following circumstances:
(1) the required goods, public works or services cannot be acquired within the territory of China or cannot be acquired under reasonable commercial conditions within China;
(2) the goods, public works and services to be procured are for use outside China; or
(3) where otherwise provided in other laws or administrative regulations.
For the purposes of the preceding paragraph, the term “domestic goods, public works and services” shall be defined by the relevant regulations of the State Council.
However, State Council has not yet given definitions to the term of “domestic goods, public works and services” since GPL became effective on January 1, 2003. The government ever attempted to define “domestic goods” in several drafts of government regulations; for example, “domestic goods” refer to products that are produced within the territory of China, and the proportion of domestic development or production costs exceeds 50%, according to a draft rule released in 2010. All such drafts failed to come into effect.
China has for years stuck to its goal of achieving unified rules for government procurement. On July 4, 2024, the State Council issued an action plan on improving government procurement, vowing to establish a system of standards for government procurement of domestic products to ensure that products produced in China by enterprises of different ownership systems could participate in government procurement on an equal footing. On December 5, 2024, the Ministry of Finance (the “MOF”) released a daft circular concerning standards for domestic products in government procurement and implementation policies for public comments.
Recently, the State Council has officially issued a Circular on Implementing Domestic Product Standards and Related Policies in Government Procurement (the “Circular”) which is to take effect on January 1, 2026. The Circular clarifies the standards of domestic products (made-in-China products) and their application scope, requires the MOF to set specific cost proportion of components manufactured within China, and offers price incentives for domestic products in government procurement.
1. The Circular provides detailed criteria for determining domestic products
Domestic products shall meet all of the following criteria:
(1) Products are manufactured in China: Specifically, transformation of attributes from raw materials or components to products must be achieved within the territory of China. “Transformation of attributes” refers to the creation of a completely new product through processes such as manufacturing, processing, or assembling, resulting in a product that is fundamentally different in name, characteristics and purposes from its raw materials or components. The “transformation of attributes” does not include the following minor operations:
• Operations intended to maintain the product in a certain state during its transportation or storage;
• Packing or displaying the product for transportation or sale;
• Affixing or printing banding elements, trademarks, labels, or other distinguishing marks on the product or its packaging;
• Simple painting, polishing, or repackaging;
• Other operations that do not constitute a transformation of attributes.
(2) Cost proportion of components manufactured in China meets the required proportion: The calculation formula is as follows:
cost of components manufactured in China ÷ total product cost ≥ required proportion
• The Circular clarifies in its appendix basic calculation rule as to the cost of components manufactured in China. In principle, the cost should be calculated based on cost of the secondary components of a product (the primary components of a product refer to the components that directly constitute the product, and the secondary components refer to the components that directly constitute the primary components of the product. If a primary component is non-decomposable, it shall be regarded as a secondary component.)
• The cost of components manufactured in China and the total product cost must be based on relevant accounting data, procurement contracts, purchase records, etc.
• The required proportion will be determined by the MOF within 5 years for different products on a product-by-product basis.
(3) Key components and key processes of specific products are manufactured or completed in China: For specific products, in addition to meeting the above (1) and (2) criteria, their key components should be manufactured in China and their key processes should be completed in China. The key components and key processes of specific products will be determined by the MOF within 5 years.
2. Products Deemed Manufactured in China
Before the MOF releases the determined cost proportion of components manufactured in China, as long as products are manufactured in China as required by the item (1) in the criteria, they are deemed as domestic products in government procurement.
For assembled products or components, the relevant suppliers and manufacturers should provide procurement contracts, purchase records, records of manufacturing, processing, and assembly, as well as other supporting materials. If it can be proven that the products or components are manufactured within China, the relevant products or components can be deemed as being manufactured in China.
For products or components directly manufactured or processed from raw materials, such as steel, ceramic products, glass, etc. the relevant suppliers and manufacturers should provide documentation such as the factory address legally marked on the product or component packaging. If the factory address is within the customs territory of China, the relevant products or components can be deemed as being manufactured in China.
3. Standards of Domestic Products Apply to Goods Only
The standards of domestic products apply to goods exclusively, including those in government procurement goods projects and service projects involving the procurement of goods. Goods subject to domestic product standards specifically refer to items classified as “goods” in the Government Procurement Item Classification Catalogue. It excludes lands, buildings and structures, cultural relics and exhibit, books and archives, specialized flora and fauna, agricultural forestry, animal husbandry, and fishery products, minerals, electricity, urban gas, steam and hot water, food, beverages, and tobacco raw materials, and intangible assets.
4. Price Incentive Offered to Domestic Products
The Circular offers a 20% price deduction for domestic products when domestically made and non-domestically made products compete in government procurement.
In addition, for procurement projects or packages containing multiple products, if the total cost of domestic products accounts for 80% or more of total cost of all products to be supplied by a supplier in the government procurement, all products will enjoy a 20% price deduction in the bidding process.
5. All types of enterprises, including private and foreign-invested enterprises, will enjoy equal treatment in government procurement
The Circular is to ensure equal participation of all types of business entities in government procurement. It prohibits designating brands, restricting the place of band registration or ownership, and imposing different conditions based on ownership type, organizational form, equity structure or nationality of investors.
The issuance of the Circular is China’s latest move to build a unified, open and transparent market and ensure fair competition among state-owned, privately owned and foreign-invested enterprises in the field of government procurement. For foreign companies and foreign-invested enterprises, implementation of “Buy China” clause will require more localization, but it will also provide more equal competitive business opportunities. Meanwhile, requirements for the cost proportion of components manufactured in China and requirements for key components and key processes for specific products are yet to be formulated. When such detailed requirements are formulated, the government will set a 3-5 year transiting/grace period, in order to gradually establish a domestic product standard system and dynamic adjustment mechanism in government procurement. It would be advisable to keep an eye on the relevant future legislation in connection with the Circular.
————————————————
© MHP Law Firm
This Newsletter is only offered for the purpose of sharing information. It discusses legal developments and should not be regarded as legal advice for specific situations. If you wish to obtain more information, please contact us at .
