"Made in China" 20% Stronger: The new public measure that stimulates China's domestic production

I. THE NEW STANDARD FOR GOVERNMENT PROCUREMENT

The vast and strategic Chinese government procurement market is undergoing a fundamental restructuring. The Circular of the General Office of the State Council on the Implementation of Domestic Product Standards and Related Policies in Government Procurement (Guobanfa [2025] No. 34), published on September 28, 2025, and effective from January 1, 2026, redefines the rules for government procurement.

These formal processes, which are the set of procedures that the State Council and affiliated bodies follow to acquire goods and services, will now have a more rigorous system for defining what constitutes a "domestic" product. The rule changes the eligibility conditions for a product to receive a price advantage in public tenders, prioritizing the product with detailed criteria for local manufacturing.

This move, aligned with the pursuit of a unified and open market system but focused on strengthening domestic industry, has profound implications for all companies, both national and foreign, competing for government contracts. What does this mean for companies and the market?

II. THE REDEFINITION OF "DOMESTIC PRODUCT": THE THREE REQUIREMENTS

The Circular establishes detailed technical criteria for certifying a product as being of Chinese origin, requiring more than just final assembly.

A. Geographic and Production Criterion (Substantial Transformation)
Eligibility requires that the transformation of properties of raw materials and components into the final product occurs within the Customs Territory of the People's Republic of China. The Circular lists minor operations (such as packaging, simple painting, and labeling) that do not qualify as transformation of property.

B. Localized Cost Criterion
A percentage of the cost of components must be produced in China. The Ministry of Finance (MoF), in conjunction with regulatory bodies, will determine this specific percentage by product type, focusing on the costs of second-tier components.

C. Essential Technology Criterion
For specific products, the MoF will require key components and key processes to be produced and completed within China. Strategic and high-tech products will face more stringent localization requirements to ensure that essential technologies and steps remain within Chinese borders.

III. THE 20% RULE: THE "BONUS" THAT MAKES THE DOMESTIC PRODUCT A WINNER

The most tangible support for domestic products is the price preference in the evaluation phase.

In tenders, the price quoted for the domestic product receives a 20% deduction for evaluation purposes only. In practice, a domestic product can have a price up to 20% higher than its foreign competitor and still be declared the winner. The final price the government pays does not change, but the chance of the domestic product being chosen increases dramatically. The 20% advantage is a market protection mechanism that ensures public money is invested to strengthen local production.

The Package Rule (80%): This important incentive for the supply chain extends the 20% advantage to comprehensive projects. If the cost of domestic products supplied in an acquisition project or package exceeds 80% of the total cost, the bidder's entire supply (the entire package) will receive the 20% deduction in the evaluation. This rule encourages suppliers to incorporate as many domestically certified components and products as possible into large-scale projects.

3.1 Equal Treatment and the Role of Foreign-Invested Enterprises

A highlight of the Circular is the emphasis on equal treatment for all types of business entities. The Circular explicitly states that: "State-owned enterprises, private enterprises, foreign-invested enterprises, and other business entities shall equally enjoy government procurement support policies for domestic products." (GUOBANFA, 2025, title 4.3, our translation)

This means that Foreign-Invested Enterprises (FIEs) operating in China, which produce a good that meets the rigorous nationality criteria, will be able to compete for government contracts and benefit from the 20% deduction as a domestic product.

IV. GRADUAL IMPLEMENTATION AND TRANSITION PERIOD

It is crucial to note that the government will adopt an approach of "steady progress." The Ministry of Finance (MoF) has five years to finalize the detailed cost proportion and key process/component requirements by product, promising extensive consultation with national and foreign companies and associations. Furthermore, when issuing specific requirements for each product, a transition period of 3 to 5 years will be granted, demonstrating the commitment to mitigating regulatory shock in the industry.

While the government finalizes the classification parameters, the transition rule temporarily classifies as domestic products that satisfy the substantial transformation criterion. Concurrently, strategic and high-tech products will immediately face more severe localization requirements to ensure that essential processes and technologies remain within Chinese borders.

V. THE IMPERATIVE OF LOCALIZATION: STRATEGIC ACTION PLAN FOR FOREIGN-INVESTED ENTERPRISES

For a company to succeed and access the 20% advantage in public tenders, it is essential that it operates as a Foreign-Invested Enterprise (FIE) established in China, ensuring the compliance of its products. Companies targeting the government procurement market must, therefore, adopt a proactive and strategic stance focused on the deep localization of their operations. The essential adaptation actions for FIEs are:

1. Re-engineering and Supply Analysis: It is imperative to conduct a complete audit of the supply chain. Companies must map the origin of each component in detail and calculate their current proportion of domestic costs, beginning the planning for future compliance with cost limits.

2. Deepening Production Localization (In-Sourcing): Companies with a low rate of domestic components should start the process of relocating the production of critical parts and processes to Mainland China. This is a mandatory investment, especially for high-tech sectors, to ensure that the substantial transformation of the product occurs within the Chinese customs territory.

3. Continuous Regulatory Monitoring: Active monitoring of public consultations and publications by the Ministry of Finance (MoF) is crucial. Engagement with sectoral associations will allow FIEs to anticipate and quickly adapt to the percentage limits and technical specifications that will be applied to their products.

4. Compliance Structure and Documentation: To validate compliance and access the 20% advantage, companies must establish robust cost tracking systems and transparent accounting records. The ability to generate the Declaration of Conformity accurately and quickly will be the determining factor in mitigating the risk of disqualification and ensuring competitiveness in tenders.

VI. CONCLUSION

Guobanfa [2025] No. 34 is an industrial policy guideline that uses the government's purchasing power to incentivize high-quality local production with a high intensity of components and processes. By redefining the concept of a product "made in China," the Circular transforms the competitive landscape, requiring all companies, including foreign ones, to adjust their manufacturing and sourcing strategies to ensure compliance and thus maintain their position in one of the world's largest procurement markets.

(Image for illustrative purposes only, generated by AI)

REFERENCES

General Office of the State Council of the People's Republic of China. (September 28, 2025). Circular on the Implementation of Domestic Product Standards and Related Policies in Government Procurement (Document No. Guobanfa [2025] No. 34). Available at: https://www.gov.cn/zhengce/content/202509/content_7042999.htm