At the end of 2007, the Chinese government issued a set of measures favoring government procurement of Chinese-made products, only allowing the procurement of imported products under limited circumstances and through a government approval process. Given the already astronomical, and still rapidly growing, amount of public funds that Chinese government entities spend on procurement each year, these measures have caught a great deal of attention.

I. Requirement to Buy Made-in-China Products and Limited Exceptions

China’s central government has recently required that various government entities must first procure domestic products, and may only procure imported products when necessary and after examination and approval. Given that these government entities spent approximately RMB 400 billion on procurement in 2007, and given that the scale of government procurement will continue to grow, this new policy is expected to have profound repercussions on the market. Noticeably, China officially started negotiations for joining the WTO’s Government Procurement Agreement (GPA), which would require that China treat domestic suppliers and suppliers from membership countries equally, with certain exceptions.

On December 27, 2007, the Ministry of Finance (MOF) circulated the Measures on Government Procurement of Imported Products (Cai Ku [2007] No. 119, the Measures) in accordance with the Government Procurement Law of the PRC (the GPL), thus requiring that government entities procure domestic products.

According to the GPL promulgated in 2002, the government will procure domestic products, public works, and services unless:

1) the necessary products, projects, or services cannot be obtained within Chinese territory or cannot be obtained under reasonable commercial terms in China;

2) the procurement is completed for use outside Chinese territory; or

3) where otherwise provided in other laws or administrative regulations.

The Measures follow the GPL in stating that the government will first procure domestic products, and in specifying that in cases where it is necessary to purchase imported products under the aforementioned circumstances, the procurement must go through certain examination and approval procedures. The Measures further provide that in procuring imported products, the government will give priority to products that involve the transfer of technologies to a Chinese party, that offer training services to a Chinese party, and that involve other compensation trade measures. This policy is intended to help domestic enterprises in the innovation of, or assimilation and absorption of, core technologies.

II. Definitions of “Purchasers” and “Imported Goods”

Under the GPL, “purchasers” include government agencies, public institutions, and social organizations that use funds obtained through public finance to procure goods, projects, or services. “Goods” include raw and semi-finished materials, fuels, equipment, and products. The definition of “purchasers” under the Measures is consistent with that under the GPL, but the Measures only regulate the government procurement of imported products. Under the Measures, “imported products” mean products that are manufactured outside the jurisdiction of Chinese customs and enter China after clearing Chinese customs.

Neither the GPL nor the Measures specifically define “public institutions” or “social organizations.” However, two regulations issued by the State Council in 2004 and 1998 define these terms, respectively. “Public institutions” are public service organizations that are established by government agencies or other organizations and that use state-owned assets for the purpose of engaging in activities related to education, science and technology, culture, or health care. “Social organizations” refer to non-profit organizations voluntarily formed by Chinese citizens in order to carry out the collective will of their members. In practice, a social organization may call it an “association,” “academy,” “alliance,” “federation,” “research institution,” “fund,” or “chamber of commerce.”

Based on the above definitions, state-funded academic institutions (such as universities) will be regarded as “public institutions,” and will therefore be subject to the Measures. State-owned companies, however, will not fall into the realm of “public institutions” or “social organizations,” and will therefore not be governed by the Measures.

III. Administration of Government Procurement of Imported Products

The GPL establishes the principle that government procurement will be conducted openly and fairly. The Measures provide that the government’s procurement of imported products will mainly be conducted through public invitation for bidding. Under special circumstances however, the government may adopt other methods of procurement. The competent public finance authorities will examine and approve the government procurement of imported products, and will supervise and manage such activities through the following mechanisms:

1. Examination and Approval

Where it is necessary to purchase imported products, the purchaser must submit certain materials to the competent public finance authorities for examination and approval.

Every government purchaser of imported products must fill out and submit an Application Form for Government Procurement of Imported Products (the Application), which the Measures provide in Appendix A. In addition, if the proposed procurement involves products the import of which is encouraged by the state, the purchaser needs to provide copies of the national laws, regulations, and policies encouraging import of the products. An important document issued by the central government in this regard is the Catalogue of Technologies and Products Encouraged for Import (the Catalogue) issued in September, 2007 by the National Development and Reform Commission (NDRC), the MOF, and the Ministry of Commerce (MOFCOM). The Catalogue contains 44 types of advanced technologies and 106 types of equipment that the Chinese government encourages for import.

If the proposed procurement involves products the import of which is restricted by the state, the purchaser must, in addition to the Application, provide the following:

1) an Expert Opinion on the Government Procurement of Imported Products issued by a panel of experts; and

2) an Opinion Letter from the Competent Authority Supervising the Industry to which the Imported Goods Involved in the Government Procurement Belong, issued by the competent industry authority at the municipal level or above.

The template for this Letter is provided in Appendix B of the Measures. However, if the purchaser intends to procure key technical or scientific equipment, or key industrial technology, it must obtain an opinion letter from the NDRC, or from the Ministry of Science and Technology.

The members of the expert panel must consist of an odd number of five or more people, at least one of whom must be a legal expert. Experts on the product and technology must be from organizations other than that of the purchaser. The purchaser’s representative will not be allowed to join the panel.

Government procurement of imported products will not be subject to re-examination and reapproval if:

1) the purchaser needs to procure more of the originally procured items from the original supplier in order to maintain consistency in the products, or if required by supportive services. However, the total amount of the additional procurement may not exceed 10% of the original purchase; or

2) during the performance of the procurement contracts, if it is necessary for the purchaser to acquire more of the same products, it may enter into a supplementary contract with the supplier, provided that all other terms and conditions of the contract remain the same, and that the purchase amount of all supplementary contracts does not exceed 10% of the purchase amount in the original contract.

The Measures do not specify a timeline for the examination and approval process. According to MOF officials, the amount of time used in the competent finance authority’s examination and approval of an application may vary from case to case.

If a purchaser procures imported products without having obtained the public finance authorities’ approval, or if it submits false materials in its application, the purchaser will receive a warning and be ordered to correct the violation within a certain time limit, and the responsible persons will be censured.

2. Procurement Methods

The primary method for government procurement of imported products will be open bidding. If particular situations require any method other than open bidding, including selected bidding, competitive negotiation, or purchasing from a single source, prior approval must be obtained from the competent authorities supervising the government procurement.

In accordance with the GPL, selected bidding may be employed under the following circumstances:

1) the products are special in nature and can only be procured from a limited number of suppliers; or

2) the percentage of expenses relative to the total value of the government procurement is too large if the products are procured through open bidding.

When using selected bidding, the purchaser will randomly select more than three suppliers from among all qualified suppliers and invite them to bid.

In accordance with the GPL, a purchaser may employ competitive negotiation in any of the following situations:

1) after an open bidding, there is no bidder or qualified bidder, or re-bidding is not possible;

2) specific descriptions or requirements cannot be determined due to the complexity of the product’s technology or because the product is special in nature;

3) the time limit cannot meet the users’ demand if using an open bidding; or

4) the total price of the goods or services cannot be established beforehand.

Imported products may be procured by purchasing from a single supplier if:

1) the product can only be procured from a single supplier;

2) procurement from other suppliers is impossible due to an unexpected and critical situation; or

3) additional procurement needs to be made from the original suppliers for consistency in the products or services, and the total amount of the additional procurement does not exceed 10% of the purchase amount for the original procurement.

When using a single supplier, the procurement must be completed on the basis of guaranteeing the quality of the products, and the prices must be reasonable.

A purchaser may use the price inquiry method when the products to be procured are standardized, have an ample supply in the market, and have little fluctuation in price.

IV. China’s Engagement in the WTO Government Procurement Agreement

On December 28, 2007, the day following the Measures’ issuance, China tabled an initial market access offer regarding the WTO’s Government Procurement Agreement (GPA), officially beginning formal negotiations for joining the GPA. The timing of the Measures’ issuance demonstrates that while China may agree to join the GPA in the future, it will still use government procurement as a tool to protect its domestic industries. However, since the GPA generally requires national and non-discriminative treatment in government procurements of goods, services, and public works, once China signs the GPA, the GPL provisions and regulations requiring that government entities give priority to domestic products will face major revisions.

China’s negotiations for joining the GPA involve three areas: goods, services, and public works. Because the GPA’s general principle is that the market must be open to member countries, the only thing China can negotiate is what goods may be excluded from this rule. China is also expected to negotiate heavily on the final list of government entities subject to the GPA, which will be a major measurement of how favorable the results are to the Chinese government.

Between 1998 to 2006, the average annual increase in the amount of government procurement was 68.1%, reaching an annual total of RMB 400 billion for 2007. Due to the massive size of the market, industry insiders, foreign governments and international organizations, and the Chinese public will be watching China’s government procurement policies closely.