New Chinese Procurement Rules: Defining Domestic Product

China has adopted new rules that define “domestic product” for the purpose of government procurement. This measure also introduces a 20% price evaluation advantage for domestic products that meet the qualification standards. The adoption of these standards addresses a long-standing gap in the implementation of China’s 2003 Government Procurement Law, which requires government entities to purchase domestic goods. The US Trade Representative had previously highlighted this issue, noting that the lack of clear rules often led procurement officials to “prefer to err on the side of caution and purchase products from domestic Chinese companies”.

The final standards, which are similar to a draft issued in December 2024, conclude a process that began 15 years ago when China first solicited public comments on a proposed definition. The State Council issued the Notice on Implementing Domestic Product Standards and Related Policies in Government Procurement on September 30, 2025. These new standards and policies are set to become effective on January 1, 2026.

Domestic Product Standards

The newly adopted standards require a product to meet three cumulative conditions to qualify as a domestic product: substantial transformation within China, local cost component ratio, and requirements for key components and processing.

1. Substantial Transformation within China: The product must be manufactured within China’s customs territory. The manufacturing process must result in a new product that is “completely different from its raw materials and components” and possesses a new name, characteristics, and use. The standards specifically exclude certain activities from constituting the necessary transformation, such as packaging, labeling, or protective operations during storage or transportation.

2. Cost of Components Produced in China (Local Cost Component Ratio): This second condition requires that the cost of components produced in China must account for a specified proportion of the product’s total cost. The Ministry of Finance (MOF) and other regulatory authorities are tasked with determining this specific ratio on a product-by-product basis. Crucially, until the MOF and other authorities set these specific ratios, a product will be considered domestic if it simply meets the substantial transformation requirement.

3. Key Components and Key Processes: Specific categories of products may be required to meet additional requirements related to key components and key processes, as determined by the MOF and other authorities.

The MOF and regulators are committed to developing these product-specific standards (for component costs and key processes) within five years of the implementation date. An additional three-to-five-year transition period will follow to allow for suppliers to gradually achieve compliance. China has also pledged to conduct broad consultations with industry associations, chambers of commerce, and both domestic and foreign-invested enterprises when developing these future standards.

Application and Price Evaluation Advantage

The domestic product standards apply to the direct procurement of goods and to goods embedded within service contracts. The goods subject to these standards are listed in the “Catalogue for Government Procurement Items,” with certain exclusions.

The new measure supports domestic products through a price evaluation advantage mechanism. This mechanism is applied when domestic and non-domestic products compete in the same government procurement.

• Goods that qualify as domestic products will receive a 20% price advantage in the evaluation of bids.
• This advantage functions by reducing the domestic product’s quoted price by 20% solely for the purpose of evaluation, thereby giving it a competitive edge over non-domestic suppliers.
• If a supplier offers multiple products in a procurement, they may receive the 20% deduction across all offered products, provided that domestic products account for more than 80% of the total cost of those products.

Procuring entities are required to demand a “Declaration Letter of Conformity with Domestic Product Standards” from suppliers. Following the award, the successful bidder’s “Declaration Letter” must be publicly disclosed alongside the bid results. The notice also includes specific cost accounting rules for calculating the costs of components produced in China.

Equal Treatment and International Commitments

The new policy guarantees equal treatment for all business entities, including private enterprises, state-owned enterprises, and foreign-invested enterprises. Consequently, products offered by foreign firms are entitled to the 20% price evaluation advantage, provided those products qualify as domestic products under the new standards.

Currently, China has not joined any international agreement that mandates the opening of its procurement market to foreign suppliers or prohibits discrimination against foreign goods. However, the new measure includes a critical provision: should China conclude or join an international treaty or agreement, the domestic product standards and policies would not be applied if they were inconsistent with the terms of that treaty or agreement. This provision would become especially relevant if China were to join the WTO Government Procurement Agreement or the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)

Reference: China Defines Domestic Product in Government Procurement