In our April 1, 2008 special edition of the China Update, we briefed you on the new rules in relation to the procurement of imported products under limited circumstances and through a government approval process. With China's government procurement market expanding dramatically and China's ongoing negotiation to join the WTO's Government Procurement Agreement, these rules have caught a great deal of attention. The Ministry of Finance recently issued new rules to further clarify issues concerning government procurement of imported goods. Several important issues from the new rules of particular interest to industry insiders are discussed in this China Update.

The Ministry of Finance (MOF) recently circulated the Notice on Questions Concerning the Administration of Government Procurement of Imported Products (Cai Ban Ku [2008] No. 248, the Notice) to clarify an earlier pronouncement, the Measures on Government Procurement of Imported Products (Cai Ku [2007] No. 119, the Measures). The Notice reflects procurement reform by supervisors at MOF and should alleviate major lingering concerns among government procurement specialists. Several important issues from the Notice of particular interest to industry insiders are discussed below.

I. Definition of “Imported Goods”

Under the Government Procurement Law of the PRC (the GPL), purchasers (categorized into government agencies, public institutions and social organizations) are generally required to purchase from domestic companies. Purchasers may only purchase imported goods under the following circumstances: (1) where the necessary goods are not available within China or are not available on reasonable commercial terms; (2) where the procured goods will be used outside of China; or (3) where otherwise provided in other laws or administrative regulations. Given the ambiguity of these exceptions, a clear definition of what constitutes an “imported good” is important to foreign manufacturers hoping to sell products to the Chinese government.

The Measures supplement the GPL by defining the term “imported goods.” “Imported goods” refers to goods manufactured outside of the jurisdiction of Chinese customs that enter China after clearing Chinese customs. Accordingly, understanding the jurisdiction of Chinese customs is key to understanding what constitutes “imported goods.”

The Notice states that bonded zones, bonded seaports, comprehensive bonded zones, processing areas for export, the Zhuhai Park of Zhuhai-Macau Cross-Border Industrial Zone, and the Chinese portion of the China-Kazakhstan Boundary Cooperation Zone are areas receiving special customtax treatment and trade regulation, yet remain within the jurisdiction of Chinese customs and subject to Chinese custom law. Products manufactured or processed in these “areas under special customs regulation” and subsequently sold elsewhere in China will not be considered “imported goods,” even though imported raw materials may be used to produce such goods. However, if products from foreign jurisdictions enter these “areas under special regulation,” and are sold to other areas in China after customs declaration, they will be considered “imported goods.”

II. Methods for Identifying Imported Goods without Obvious Evidence

The “rule of origin” requires PRC customs authorities to determine the country of origin of a good using the customs declaration materials for that good. However, a large amount of goods are often traded many times after entering China and their corresponding declaration materials go missing in the process. As a result, when such goods are offered for sale in government procurement bids, purchasers are unsure whether the goods are domestic or foreign. To address this problem, the Notice offers some alternative and practical methods to identify the sources of goods.

The Notice acknowledges that products legally entering China may become separated from customs declaration materials in the stream of commerce. According to the Notice, however, it is possible to backtrack through a good’s trading trail to identify the original import agent or recipient that made a customs declaration, which will ultimately lead to the records showing the country of origin. This method of backtracking is usually achievable when dealing with manufacturing equipment, machines, automobiles, and other finished goods that at one point went through customs.

For goods smuggled into China, however, the country-of-origin label on the packaging or the goods may be used as circumstantial evidence of that good’s source of origin.

III. Opinion of the Competent Industry Authority

Under the Measures, if a procurement purchaser wants to import products restricted by the state, the purchaser must, in addition to an application, provide an expert opinion on the government procurement of imported products, and an opinion letter from the competent authority supervising the industry to which the imported goods belong. Specifically, if the purchaser intends to procure key technical or scientific equipment, or key industrial technology, it must obtain an opinion letter from the National Development and Reform Commission (NDRC), or from the Ministry of Science and Technology (MST).

The Notice specifies that to ascertain whether a product’s import is prohibited by the state, procurers should refer to the classifications contained in the relevant catalogues published by the Ministry of Commerce, NDRC, and MST.

IV. Enforcement

The Notice reiterates the rule that the purchaser can procure goods from the market only after obtaining the approval of the public financial authorities. If the purchaser begins procurement bidding without the public financial authority’s approval, the purchaser must explicitly state in all procurement-related documents that imported goods are excluded from the bidding process.

V. Expert Panel

According to the Notice, the purchaser is responsible for organizing an expert panel to offer an opinion on the necessity and feasibility of buying imported goods. Each expert must be familiar with the relevant imported goods, and they must act independently from the purchaser to be qualified to sit on the panel. The experts may or may not be selected from the expert pool developed by the public financial authorities. In principle, the public financial authorities may not organize the panels.

With China’s government procurement market expanding dramatically and China’s ongoing negotiation to join the WTO’s Government Procurement Agreement (GPA), any development concerning PRC government procurement policy receives a great deal of attention. China is now more quickly building a sophisticated and well-functioning government procurement regime.