China Reiterates Equal Treatment of Foreign-Invested Companies in Government Procurement

Recently, the Chinese Ministry of Finance issued a document titled “Notice on the Implementation of Relevant Policies regarding Equal Treatment for Domestic and Foreign-invested Enterprises in Government Procurement Activities (link in Chinese).” In principle, the notice states that all products and services made in China, regardless of whether they are made by Chinese or foreign-invested companies, shall be allowed to participate in government procurement equally. However, it sets out a national security and state secret exception, which raises questions as to the actual scope of equal treatment. This piece translates the notice, and reviews related Chinese legislations on government procurement.

The notice, addressed to lower-level government agencies, sets forth equal treatment of domestic-invested and foreign-invested companies in three ways: Ensuring equal participation of domestic and foreign companies in government procurement; implementing the requirements to treat domestic and foreign companies equally in government procurement activities; equally protecting the legitimate rights of domestic and foreign companies. The key provisions of this notice are:

Ensuring equal participation of domestic and foreign enterprises in government procurement

According to the law, government procurement shall give equal treatment to the products (including the services, the same definition applied in the rest of the notice) produced by domestic and foreign-invested enterprises in China. All budgetary units at all levels shall strictly implement the Government Procurement Law of the People's Republic of China, the Foreign Investment Law of the People's Republic of China, and other relevant laws and regulations. In government procurement activities, except for procurement projects involving national security and state secrets, it is not allowed to treat products produced by domestic and foreign companies in China differently. Products produced in China, regardless of whether their manufacturers are domestic or foreign enterprises, shall have the right to participate in government procurement on an equal footing in accordance with the law.

Implementing the requirements of equal treatment of domestic and foreign enterprises in government procurement activities

In government procurement activities, budgetary units at all levels shall not apply differential or discriminatory treatment to domestic or foreign-invested enterprises in terms of release of government procurement information, as well as qualification determination, qualification review, and review standards of vendor candidates, and shall not use ownership, organization, shareholding structure, investors’ nationality, product brand, and other unreasonable conditions to restrict suppliers. They shall effectively ensure fair competition between domestic and foreign companies.

Equally protect the legitimate rights and interests of domestic and foreign enterprises

In government procurement activities, domestic and foreign-invested enterprises that believe their rights and interests have been harmed by procurement documents, procurement process, bid winning or results can raise questions and complaints in accordance with relevant regulations. Finance agencies at all levels shall strictly implement the Government Procurement Questioning and Complaint Measures (Order No. 94 of the Ministry of Finance), unblock complaint channels, accept and process complaints in accordance with the law. They shall not apply differential or discriminatory treatment to domestic and foreign enterprises in handling complaints. They shall protect the legitimate rights and interests of vendors of government procurement programs.

In a timely manner, all local governments shall rectify any activities that are inconsistent with the requirements of this notice, as well as regulations and practices of establishing candidate lists, directory databases, qualification databases of products and vendors as well as others. The rectifications shall be reported to the Ministry of Finance by the end of November.

The notice is largely a reiteration and implementation of existing policies. The Foreign Investment Law (link in Chinese), effective in 2020, states in Article 16 that:

The state ensures that foreign-invested enterprises participate in government procurement activities through fair competition in accordance with the law. Products produced and services provided by foreign-invested enterprises in China shall be treated equally in government procurement activities in accordance with the law.

The Implementing Regulations of the Foreign Investment Law (link in Chinese) also prevent government agencies from obstructing or restricting foreign-invested enterprises from entering the government procurement markets, with similar language to that used in the second bullet point of the notice. The Implementing Regulations also provide for agencies’ obligation to respond to complaints, questions and inquiries of foreign companies regarding government procurement, and rectify discriminatory actions.

According to data (link in Chinese) released by the Ministry of Finance, China's government procurement amounted to 3.7 trillion yuan (579 billion USD) in 2020, accounting for 10.2% of nation-wide fiscal expenditure and 3.6% of GDP. 92.3% of this amount was local-level government procurement.

79.3% of public procurement is through public bidding in 2020. Procurement of goods, engineering projects, and services accounted for 24.8%, 47.3% and 27.9% of government procurement, respectively.

China has been in negotiations to join the plurilateral WTO Agreement on Government Procurement (GPA) for years. Until it officially joins the GPA or other international agreements with stringent government procurement rules (such as the CPTPP), its domestic laws and regulations will continue governing the area.

How much of the market will be open to foreign-invested companies is unclear. According to a 2021 report from the US-China Business Council, there are hurdles for American companies to participate in China’s public procurement, including preference of domestic products and broad security criteria.

The national security and state secret exception creates more uncertainties. The notice does not provide a definition or examples of national security or state secret. China’s National Security Law (link in Chinese) offers a definition in Article 2:

“National security” means a status in which the regime, sovereignty, unity, territorial integrity, welfare of the people, sustainable economic and social development, and other major interests of the state are relatively not faced with any danger and not threatened internally or externally and the capability to maintain a sustained security status.

It also notes that “all national security work shall adhere to a holistic approach to national security.” The concept of the “holistic view to national security” was first raised by President Xi Jinping in 2014:

At present, the national security issues facing China encompass far more subjects, extend over a greater range and cover a longer time scale than at any time in the country's history. ...Therefore, we must maintain a holistic view of national security, take the people's security as our ultimate goal, achieve political security as our fundamental task, regard economic security as our foundation, with military, cultural and public security as means of guarantee, and promote international security so as to establish a national security system with Chinese characteristics.

With regard to the definition of state secrets, the Law on Protecting State Secrets defines state secret as “matters that have a vital bearing on state security and national interests and, as specified by legal procedure, are entrusted to a limited number of people for a given period of time”. It further illustrates seven categories of state secrets:

secrets concerning major policy decisions on state affairs
secrets in the building of national defense and in the activities of the armed forces
secrets in diplomatic activities and in activities related to foreign countries as well as secrets to be maintained as commitments to foreign countries
secrets in national economic and social development
secrets concerning science and technology
secrets concerning activities for safeguarding state security and the investigation of criminal offenses
other matters that are classified as state secrets by the state secret-guarding department.