Chinese Procurement Law

By: kekepana.com

China had no effective government procurement laws until the 1980s when some government agencies began to write regulations for their own purchases. These were rudimentary and often the rules of one agency were at odds with the rules of another government agency, leading to a fragmented market. The Tendering & Bidding Law (BL) was issued in 1999 by the State Planning Commission, and was quickly joined in 2002 by the Government Procurement Law (GPL), enacted by the National People’s Congress. The two differ considerably and it is critical to find out which law (and enforcing agency) governs procurements by the government agency or state-owned company you are interested in. Many of the earlier regulations still exist, so the proliferation of confusing and sometimes conflicting procurement rules opens ample ground for corruption.

Not subject to WTO procurement rules.

I have been working my waythrough the new study by the European Union Chamber of Commerce in China – Public Procurement in China, which highlights the many problems encountered by European bidders trying to win official business in China. 

The GPL, for the most part, covers central and sub-central procurements by government agencies, but the BL usually applies for purchases by state-owned enterprises and for China’s big infrastructure projects. But that is just a rule of thumb and there is much more detail in the study. And each law creates its own set of problems for foreign bidders.

Let’s start with the GPL. Purchases under the GPL are governed by the Ministry of Finance, which maintains a catalog of products that can be purchased – and the purchases must be through a central purchasing agency. If you can’t get your product into the MOF catalog, you are out of luck. And getting into the catalog may require a complex series of certifications, release of some company secrets, and may require that your product contain a percentage of Chinese content. The domestic content rule is pretty tough. Under the GPL, Chinese government agencies are required to discriminate in favor of products having 50% or more Chinese content, a fairly common practice around the world. Where it gets onerous is that foreign products can only be purchased if they beat the price of Chinese product by at least 20%, a pretty tough hill to climb. In effect, Chinese agencies using the GPL take Chinese products made by Chinese companies first, then they go to Chinese=produced products made by foreign firms in China, and they turn last to foreign products.

The BL is a bit looser. The law has no domestic content requirement, but leaves that up to individual agencies to decide – and many of them consider a product Chinese only if it has 70% or more Chinese content. Almost all procurements under the BL are by state-owned enterprises that have been created to carry out a special large project, such as the Beijing metro system, construction of the Formula 1 track in Shanghai or the Three Gorges Dam project.

A host of other laws apply to Chinese procurements, including the now-infamous “indigenous innovation” policy that required foreign firms to put R&D facilities into China to produce “indigenous” technology.

The European Union, as well the United States and many other countries, is trying to address problems in Chinese procurement law through China’s accession negotiations to join the WTO’s government procurement code of conduct. Signing the code is in China’s interest because it greatly levels the playing field for China’s exporters going after contracts in the rest of the world. But, in return, China has to effectively open up its own procurement market to foreign competition, something that has been slow in coming. The EU Chamber study comments that China’s latest offer to the code signatories still falls well short of acceptability. China’s offer only covers a fraction of the country’s government procurements and that largely only at the national level. There is little or no commitment to cover procurements at sub-central levels and almost no coverage of purchases by state-owned enterprises (e.g., for all those big infrastructure projects). No local government agencies are included in the offer either. Very few services procurements are covered and some services are specifically excluded, including most services in the transportation, energy, water, communications and postal sectors. Almost no construction projects are covered by the offer.