Last December 05, 2024, The Chinese Ministry of Finance (MOF) published the Draft for opinions on standards and policies regarding domestic products in government procurement (关于政府采购领域本国产品标准及实施政策有关事项的通知-征求意见稿). The new Draft for opinions, designed in accordance with the Government Procurement Law (政府采购法), the Foreign Investment Law (外商投资法) and other relevant laws and regulations, aims to define domestic products standards in the field of government procurement tenders. The topic has been already discussed in the public notice on the Procurement Law (关于《中华人民共和国政府采购法（修订草案征求意见稿）》再次向社会公开征求意见的通知) issued by the Ministry of Finance in 2022, where the document stated that a product can be considered as “domestic” for tender purpose if goods are produced within Chinese territory and meet the specified value-added percentage, so that they can get a preferential channel in procurement. Based on 2022 document, the recent Draft for opinions deepens and clarifies the issue concerning the concept of Chinese domestic product in the field of government procurement.
What does “Chinese domestic product” mean?
According to the mentioned Draft for opinions, the product should be “produced in China” for being considered a “Chinese domestic product”. What are the outlines for a “domestic product”? The main point is how to determine the substantial transformation (属性改变) from raw material to finished good. The product shall be realized within the customs territory of China. Therefore, substantial transformation refers to the manufacturing, processing or assembly processes, resulting in a new product completely different from the raw materials and components. As a result, finished goods have new name（名称）and characteristics (特征).
On the other hand, the Draft for opinions specifies that the substantial transformation does not include:
- operations performed to ensure that the product remains in a certain state during transportation or storage.
- Packaging or presentation of the product for transportation or sale.
- The affixing or printing of logos, brands, signs and other markings for differentiation on the product or its packaging.
- Simple painting, polishing and packaging.
Which are the key points of the Draft for opinions on standards and policies regarding domestic products in government procurement issued by the Ministry of Finance?
The Draft on standards and policies regarding domestic products in government procurement mainly provides information regarding domestic products in the field of government procurement and the support policy for domestic products.
Concerning the standards for domestic products in the field of government procurement, the notice specifies:
- “The product must be produced in China”: the so-called substantial transformation – from raw materials, components to products – has to be realized in China’s customs territory, excluding labeling, simple packaging and other operations.
- “The cost of components produced in China should meet specific requirements calculated according to the specified proportion of a formula reported in the Draft” (Cost of components produced in China/total product cost ≥ specified rate). Components are classified in primary (component that directly composes the product) and secondary (component that directly composes a primary component of the product). If secondary components are produced in China, their cost is included in the cost of the components produced in China. But, if secondary components are not produced in China, their cost is not included. The total product cost will be calculated according to relevant accounting data, purchase contracts and purchase records. Nevertheless, MOF has not yet announced the specified rate.
- On the basis of the foregoing conditions, for specific products, it is also required that “the key components are produced in China and the key processes are completed in China”.
Nevertheless, the Draft also specifies that the standard system will be established in stages. According to the Ministry of Finance the standardized system will be established in a step-by-step manner (three to five years to develop the relevant products within China to produce the proportion of the cost of components, as well as the key components and key process requirements for specific products).
In reference to the support policy for domestic products, the notice also mentions: “no matter the nature of the manufacturer’s ownership – will be accorded preferential treatment in Chinese government procurement, including a 20 per cent reduction in bidding price”.
Can this policy benefit foreign-owned enterprises?
Yes. The policy behind the Draft, referring to the principle of “fair competition” (公平竞争), aims to treat domestic and foreign enterprises equally. Therefore, after the introduction of national product standards and support policies in the field of government procurement, both domestic and foreign-funded enterprises, as long as they meet the standards, can enjoy government procurement support policies.
According to the Draft for opinions issued by the Ministry of Finance, PRC promotes local products and empower equal access for private and foreign businesses in order to fully localize their supply chains in Chinese territory. This policy might give foreign-owned enterprises a wonderful opportunity to win more contracts. In the wake of this policy, it is expected that many foreign-owned enterprises will take place entirely in the country.
In this context, the distinction between “Made in China” (中国制造) and “Chinese domestic product” (本国产品) can play a very useful role. In recent years, Chinese brands are using the “Made in China” label as a marketing tool to obtain competitive advantage. This trend is deemed a reflection of the growing national consciousness of Chinese society; however, “Made in China” label is more important in terms of its function as marketing tool. The situation is different for “Chinese domestic products”, not only in the context of government procurement, but also in the procurement of goods such as equipment and machinery.
China Desk – Zunarelli Law Firm
