On June 28, 2011, the Ministry of Finance of the People’s Republic of China announced the revocation of three controversial measures that provided domestic enterprises with significant advantages in the procurement by the government of high-tech products, including computers, clean power and communications.

The revocations, which took effect July 1, 2011, concerned three measures: Evaluation Measures on Indigenous Innovative Products for Government Procurement; Administrative Measures on Budgeting for Government Procurement of Indigenous Innovative Products and Administrative Measures on Government Procurement Contracts for Indigenous Innovative Products. These measures were considered by many to be the most important part of the decades-old indigenous innovation program in China, as they explicitly linked domestic indigenous innovation with government purchasing.

This revocation constitutes the second time within the past month that the Chinese government has revoked one of its policies under pressure from its trading partners. On June 7, 2011, the Chinese government ended its wind power equipment subsidies. (For more information, see Mayer Brown’s Legal Update “United States Announces Resolution of Dispute Over Chinese Wind Power Subsidies.”)

All of the revoked regulations were initially adopted in 2007. Then, in 2009, the Chinese government sought to establish a national catalogue of products that would be qualified as “accredited products” and, thus, receive significant preferences as part of China’s government procurement. The national catalogue was considered one of the most important aspects of China’s indigenous innovation procurement program; however, it had yet to be formally established.

The revocation of the three measures has rendered establishment of the national catalogue largely meaningless. Had the national catalogue been established, according to US business groups, the three regulations (along with the catalogue) would “have made it nearly impossible for US companies to participate in the Chinese government procurement market…”

Even though there was no national catalogue in place while the three key measures were in effect, individual provinces and big cities like Beijing had their own “Indigenous Innovative Products Catalogue,” which, along with the three revoked measures, conferred various advantages on China’s domestic high-technology industry, such as:

  • 5-10 percent price deduction for the accredited companies;
  • 4-8 percent credits in the evaluation; and
  • Priority for the accredited companies to contract with the government, provided the quality of competing products are at the same level, etc.

Prior to the revocation of the three measures, US and other businesses have suffered from the revoked policies at various governmental levels in China. Thus, it is important that revocation has been directed to all central and local government agencies, whose government procurement accounts for the largest amount of total purchasing of the relevant products.

The revocation was announced after the mid-year review meeting of the US–China Joint Commission on Commerce and Trade. It is considered as the fulfillment of pledges made by President Hu Jintao during his visit to the United States in January 2011 and the May 2011 Strategic and Economic Dialogue.

The announcement by the Ministry of Finance was welcomed by both the US–China Business Council and the EU Chamber of Commerce in China. They considered the revocation as “an important step to removing market access barriers,” and “a forward step toward leveling the playing field in the government procurement market in China.” The revocation of the measures will most probably create a more attractive environment in which US and EU companies can compete more effectively in the Chinese market for high-technology products.