China Redefines “Domestic Product” in Government Procurement, Leveling the Playing Field

Introduction

In a landmark move to deepen economic reforms and foster a unified national market, China has unveiled a new policy redefining “domestic products” for government procurement. The Notice on Implementing Domestic Product Standards and Related Policies in Government Procurement (Guobanfa 2025/34), released on September 28, 2025, aims to level the playing field for all enterprises, including foreign-invested ones (FIEs), by ensuring equal treatment and prohibiting discriminatory practices. Effective January 1, 2026, this policy is set to reshape a procurement market valued at over 3.3 trillion yuan (US$463.6 billion) in 2024.

This article provides an in-depth analysis of the new policy, exploring its core components, practical implications for businesses, and strategic recommendations for navigating this evolving regulatory landscape. While the policy introduces a 20% price preference for domestic products, its primary thrust is towards creating a more transparent, predictable, and fair competitive environment for all players in the Chinese market.

Policy Interpretation: A New Era for ‘Domestic Product’ Standards

Guobanfa 2025/34 is a cornerstone of China’s broader strategy to promote high-quality development and enhance global economic integration. Historically, China’s government procurement has faced inconsistencies and perceived biases against foreign entities. This new regulation aims to streamline processes, reduce regional protectionism, and ensure procurement decisions are based on clear, objective criteria. The policy reflects a maturation of China’s economic governance, moving towards a system that, while still prioritizing national interests, seeks to do so through more standardized and internationally aligned mechanisms. This shift is not merely cosmetic; it represents a fundamental re-evaluation of how China intends to manage its vast public spending, moving towards a system that is both more efficient domestically and more palatable internationally.

The Three-Pillar Definition of a ‘Domestic Product’: A Deep Dive

The policy introduces a clear, three-pillar definition for what qualifies as a “domestic product,” moving beyond a simple ‘made in China’ label to the substance of production and value creation within the country. This nuanced approach is critical for understanding the policy’s intent and its potential impact on global supply chains. Understanding these criteria is paramount for any enterprise seeking to participate in China’s vast government procurement market, as compliance will directly dictate eligibility for preferential treatment.

Pillar	Description	Detailed Explanation and Implications
Manufacturing Location	The product must be manufactured within the geographical borders of China.	This foundational criterion requires final assembly or significant transformation of the product to occur on Chinese soil. This is a relatively straightforward requirement for many foreign-invested enterprises (FIEs) that have already established manufacturing bases in China. However, it implicitly encourages companies that currently rely on importing finished goods to establish or expand production facilities within China. This could lead to increased foreign direct investment in China’s manufacturing sector, particularly in industries targeting government contracts, as companies seek to qualify their products. The emphasis here is on physical presence and production activity within China, irrespective of the ultimate ownership of the manufacturing entity.
Local Content Requirement	The cost of domestically produced components must meet a specified percentage threshold.	This pillar introduces a quantitative measure: a certain proportion of the product’s total cost must be attributable to components or raw materials sourced and produced within China. The exact percentage threshold will be refined and may vary by industry during the phased implementation, allowing for sector-specific considerations. This incentivizes FIEs to localize their supply chains, fostering deeper integration with Chinese suppliers and potentially stimulating local industries. For example, an automotive component manufacturer might need to ensure that a significant percentage of its raw materials or sub-components are sourced from Chinese suppliers. This necessitates detailed cost analysis and transparent accounting of component origins, which could be a new administrative burden for companies and require robust internal tracking systems to prove compliance. It also encourages the development of a more comprehensive domestic industrial ecosystem.
Critical Processes	For certain strategic products, key components and critical manufacturing processes must be completed within China.	This is perhaps the most significant and impactful pillar, especially for high-tech and strategic industries. It focuses on intellectual property, technological know-how, and advanced manufacturing capabilities within China. For instance, in sectors like information technology, medical devices, or advanced machinery, core algorithms, specialized chip fabrication, or precision engineering steps must be performed in China. This criterion aims to bolster China’s indigenous innovation capabilities and reduce reliance on foreign critical technologies, aligning with China’s broader strategic goals of technological self-sufficiency. For FIEs, meeting this might involve significant technology transfer, establishing joint ventures with Chinese partners, or making substantial R&D investments within China. This aspect raises concerns about intellectual property protection and the potential erosion of competitive advantage for foreign firms in sensitive sectors, as it pushes for the localization of core technological competencies.

This refined definition mirrors practices in other major economies like the United States (e.g., Buy American Act) and the European Union, signaling a shift towards more objective and internationally recognized standards. However, specific thresholds and definitions for “key components” and “critical processes” will be crucial and are expected to be detailed during the five-year consultation period, allowing for industry-specific nuances and feedback from stakeholders. The clarity provided by these pillars, once fully detailed, is intended to reduce ambiguity and provide a predictable framework for businesses.

The 20% Price Preference and Equal Treatment: A Balancing Act for Market Dynamics

A key feature of the new policy is the 20% price preference for domestic products in procurement evaluations. This measure is designed to bolster domestic industries and encourage local innovation by making domestically produced goods more competitive on price. This preference means that a domestic product’s price will effectively be considered 20% lower than its actual bid price during evaluation, giving it a significant competitive edge over non-domestic alternatives. This mechanism powerfully directs government spending towards products meeting domestic criteria, supporting local manufacturing and technological advancement, and fostering a robust domestic industrial base. For instance, if a foreign-made product bids at 100 units, and a domestic product bids at 110 units, the domestic product would effectively be evaluated at 88 units (110 * 0.8), making it the more attractive option.

However, this preference is explicitly balanced by a strong commitment to equal treatment. The policy unequivocally states that all enterprises, regardless of ownership structure—state-owned, private, or foreign-invested—will be subject to the same supportive measures. This means an FIE producing a product that qualifies as “domestic” will be eligible for the same 20% price preference as a purely domestic Chinese enterprise. This addresses long-standing complaints from FIEs about unfair competition and market access barriers in China’s government procurement sector. It signals Beijing’s intent to differentiate products based on domestic content and value creation, rather than the nationality of the company’s ultimate ownership. This distinction is vital for FIEs, as it provides a clear pathway to participate competitively if they localize their operations, offering a potential win-win scenario where FIEs gain market access and China strengthens its domestic industrial capabilities. The emphasis is on where the value is created, not who owns the creating entity.

Prohibiting Discriminatory Practices: A Clearer Rulebook for Fair Competition and International Alignment

To dismantle historical barriers to fair competition, the notice strictly prohibits a range of discriminatory practices that have often created an uneven playing field. These prohibitions respond directly to feedback from both domestic and international business communities, aiming to foster a more transparent and equitable procurement environment and align China’s practices more closely with international trade norms and World Trade Organization (WTO) principles:

• Brand-specific requirements: Procurement bodies cannot designate specific brands in tenders, preventing pre-determined tenders for certain suppliers and promoting open competition based on merit and product specifications rather than brand loyalty. This ensures that smaller, innovative companies, both domestic and foreign-invested, have a fair chance to compete against established brands.
• Restrictions on brand origin: Limitations based on brand registration location or ownership are forbidden, ensuring that a brand developed by an FIE in China, or a foreign brand manufactured domestically, is not unfairly excluded. This is a significant step towards recognizing the value created by FIEs within China and promoting a brand-agnostic approach to procurement, focusing on product quality and compliance rather than national origin of the brand itself.
• Differential treatment: Imposing different conditions based on ownership type, organizational form, equity structure, or investor nationality is not allowed. This directly targets practices that have historically favored state-owned enterprises or discriminated against FIEs, aiming to create a truly level playing field where all market participants are judged by the same standards and criteria. This provision is particularly important for FIEs, as it explicitly protects them from being disadvantaged solely due to their foreign ownership.

This nationwide mandate underscores Beijing’s commitment to creating a truly level playing field and enforcing these non-discriminatory principles across all levels of government procurement. The clarity of these prohibitions is expected to reduce ambiguity and provide FIEs with stronger grounds to challenge unfair practices, potentially through administrative review or legal channels, thereby enhancing legal certainty and investor confidence. This move is seen by some as China’s effort to address long-standing criticisms from trading partners regarding market access and fair competition.

Phased Implementation and a Five-Year Transition: A Pragmatic Approach to Reform

The policy will take effect on January 1, 2026. Recognizing the inherent complexities and potential disruptions of such a significant policy shift, the State Council has planned a pragmatic, phased implementation approach. This includes a crucial five-year period during which the Ministry of Finance, in collaboration with relevant industry authorities, will extensively consult with domestic and foreign enterprises, as well as industry associations and chambers of commerce. The goal is to refine specific standards and criteria for various sectors, ensuring they are practical, achievable, and reflect industry realities, rather than imposing one-size-fits-all regulations. This consultative period is vital for gathering feedback and making necessary adjustments before full implementation.

Following this consultation phase, a three- to five-year transition period will be set. This extended timeline provides businesses ample opportunity to adapt operations, supply chains, and investment strategies to align with new requirements. This gradual approach is a welcome development for FIEs, mitigating the risk of sudden market disruptions and allowing for strategic planning. As Xu Qiyuan points out, this transition period is particularly beneficial for foreign companies, “giving them time to adjust production set-ups and investment decisions in China, making it easier for them to meet the domestically manufactured standard.” This demonstrates flexibility and recognition of the challenges businesses face in reconfiguring complex global supply chains, offering a window for proactive adjustments rather than reactive compliance, and fostering a more collaborative approach to policy implementation. This extended timeframe allows for significant capital investments and re-tooling of production lines, which are often necessary for substantial localization.

Impact on Foreign-Invested Enterprises (FIEs) and Market Access

The new policy presents a nuanced landscape of opportunities and challenges for FIEs in China. While some may view it as a protectionist measure, many analysts see it as a step towards greater regulatory transparency and predictability, ultimately aiming to integrate FIEs more deeply into China’s domestic economic fabric. The policy’s success will largely depend on its consistent and fair implementation across all levels of government and its ability to truly foster a non-discriminatory environment, which remains a key concern for foreign businesses and international trade bodies.

Positive Implications for FIEs: Unlocking New Avenues for Growth

1. Enhanced Transparency and Predictability: The clear definition of “domestic product” and the explicit prohibition of discriminatory practices are expected to significantly improve the transparency of government procurement. This clarity addresses a long-standing concern among foreign businesses regarding opaque rules and arbitrary decisions that previously hindered their participation. As noted by Xu Qiyuan of the Chinese Academy of Social Sciences, “Previously, a lot of foreign firms complained that the lack of clear standards undermined transparency in government procurement. The new rules, however, provide explicit criteria… making it more viable” for foreign firms. This increased transparency can foster greater trust and confidence, enabling FIEs to make more informed investment and operational decisions with a clearer understanding of the rules of engagement, thereby reducing business risks and fostering a more stable investment climate. This move aligns with China’s stated goal of creating a market-oriented, law-based, and internationalized business environment.
2. Fairer Competition and Expanded Market Access: For FIEs that can meet the new “domestic product” criteria, the policy promises a more level playing field. By explicitly granting equal treatment to products manufactured by foreign-invested enterprises within China, the policy opens avenues for FIEs to compete for government contracts on an equal footing with domestic counterparts. This is a significant shift from previous practices where FIEs often faced implicit or explicit disadvantages, such as being excluded from certain tenders or facing biased evaluation criteria. This could unlock substantial market access for FIEs willing to deepen their localization efforts, potentially leading to new revenue streams and growth opportunities within China’s massive public sector market, which is a significant and growing portion of the national economy. This is particularly relevant for sectors like infrastructure, healthcare, and technology, where government procurement plays a dominant role.
3. Incentives for Localization and Deeper Integration: The three-pillar definition of a domestic product, particularly the requirements for local component cost proportion and critical processes, strongly incentivizes FIEs to increase their local sourcing, establish R&D centers, and integrate more deeply into China’s domestic supply chains. This strategic imperative aligns with China’s broader goal of building resilient and self-sufficient supply chains, reducing external dependencies, and fostering indigenous innovation. The extended transition period provides a valuable window for FIEs to strategically adjust their investment and production strategies, allowing for a more gradual and planned shift towards localization rather than an abrupt, forced change. This could lead to more robust and localized operations for FIEs in China, potentially making them less vulnerable to global supply chain disruptions and geopolitical risks, while also benefiting from closer proximity to the market and customers. This deeper integration can also lead to knowledge transfer and the development of local talent, further strengthening the FIE’s long-term presence in China.

Challenges and Strategic Considerations: Navigating the Complexities of a Evolving Market

1. Need for Significant Strategic Adjustments: FIEs will need to carefully assess their current production models, global supply chains, and product portfolios to ensure compliance with the new standards. This may require substantial investments in local manufacturing capabilities, technology transfer, and sourcing from Chinese suppliers. For some FIEs, particularly those with highly integrated global supply chains or proprietary technologies that are difficult to localize, these adjustments could be costly, complex, and time-consuming. The decision to localize will involve a careful cost-benefit analysis, weighing the potential gains from government procurement contracts against the investment required and the potential impact on global operational efficiency and intellectual property management. Companies will need to evaluate whether the potential market access justifies the restructuring of their global operations.
2. Implicit Pressure to Localize and Potential for Technology Transfer Concerns: While the policy aims for equal treatment, the 20% price preference for domestic products could create implicit pressure on FIEs to localize production to remain competitive in the government procurement space. This has been a long-standing concern for foreign businesses in China, with the EU Chamber of Commerce previously highlighting “buy China” practices as a significant market access barrier. Furthermore, the “critical processes” pillar of the domestic product definition, especially in high-tech sectors, might necessitate FIEs to transfer advanced manufacturing techniques or R&D capabilities to their Chinese operations. While not explicitly forced, the competitive advantage conferred by meeting these criteria could make such transfers a practical necessity, raising concerns about intellectual property protection, the erosion of technological leadership, and the potential for creating future domestic competitors, which could eventually undermine the FIE’s market position. This delicate balance between market access and IP protection will be a continuous challenge for FIEs.
3. Implementation Uncertainties and Regional Variations: Despite the central government’s clear guidelines, the practical implementation of the policy across different regions and sectors will be crucial and may present inconsistencies. China’s vast and diverse administrative landscape means that local interpretations and enforcement can vary significantly, leading to a fragmented market environment. FIEs will need to closely monitor how the policy is being applied in different provinces and municipalities, identifying best practices and potential inconsistencies. This vigilance will be key to adapting strategies effectively and advocating for fair treatment. The ongoing consultation period is an opportunity to voice concerns about potential regional disparities and ensure a unified application of the policy, but ongoing monitoring and proactive engagement with local authorities will be essential to navigate these potential pitfalls.
4. Historical Context of Market Access Barriers and Geopolitical Tensions: It is important to acknowledge that “preference for ‘domestically manufactured’ products in public procurement is a long-standing market-access barrier for foreign companies in China,” as noted in a late 2024 report by the EU Chamber of Commerce. While the new policy aims to address some of these issues, FIEs will remain vigilant about its actual impact on market access, especially given past experiences, such as China barring European companies from medical device contracts in 2025 in response to EU restrictions. The policy also comes amidst broader geopolitical tensions and calls for supply chain decoupling, which could influence its interpretation and enforcement, adding another layer of complexity for FIEs. Companies must consider the broader geopolitical context when making strategic decisions related to localization and market participation, as these external factors can significantly impact business outcomes and the overall risk profile of operating in China.

Expert Analysis and Strategic Recommendations

The new government procurement policy in China represents a sophisticated and nuanced evolution in its economic governance, balancing national development objectives with commitments to market openness. Experts offer diverse perspectives on its implications, which in turn inform strategic recommendations for businesses operating in this dynamic environment.

Diverse Expert Perspectives: A Spectrum of Views on China’s Economic Trajectory

• Unified Market and High-Level Opening-Up: Experts like Shu Wenqi, deputy director of the China Institute for Urban Development, and Tao Qizhi, a professor at the Institute of Chinese Financial Studies, view the policy as a crucial step towards creating a unified national market and a concrete manifestation of China’s high-level opening-up. They argue that by standardizing definitions and prohibiting discriminatory practices, China is moving towards a more integrated and efficient domestic market, beneficial for all participants. Tao Qizhi highlights that the policy, while supporting domestic products, ensures fair participation by all ownership types, reflecting a more unified and open market orientation. This perspective emphasizes the long-term vision of China’s economic reforms, aiming for a more mature and integrated domestic economy that can compete globally. This move is seen as a strategic effort to reduce internal market fragmentation and enhance overall economic efficiency.
• Transparency and Predictability: Xu Qiyuan, deputy director of the American Studies Institute at the Chinese Academy of Social Sciences, emphasizes that the policy’s clear and objective criteria will create a more predictable and favorable environment for foreign firms. This transparency directly responds to previous complaints from FIEs regarding opaque government procurement processes and arbitrary decision-making. The explicit rules provide a clearer framework for compliance and competition, reducing the scope for arbitrary decisions and fostering a more stable business environment, which is crucial for attracting and retaining foreign investment. This increased clarity is expected to reduce the “cost of doing business” associated with navigating a complex and often unpredictable regulatory landscape.
• Innovation and International Cooperation: Tao Qizhi also suggests the policy is expected to spur innovation and expand international cooperation, aligning with President Xi Jinping’s call to advance the building of a unified national market. By encouraging localization and deeper integration into China’s supply chains, FIEs may contribute more directly to China’s innovation ecosystem, potentially leading to new collaborative opportunities and shared technological advancements. This could foster a symbiotic relationship where foreign expertise contributes to China’s development while FIEs gain access to a massive market and benefit from local innovation. This collaborative approach could be particularly fruitful in areas like green technology, digital economy, and advanced manufacturing.
• Potential for Trade Distortions: Conversely, Global Trade Alert’s “certainly harmful” classification highlights the potential for the policy to create trade distortions and disadvantage imported goods. This perspective suggests that despite the rhetoric of equal treatment, the 20% price preference could still act as a significant barrier for products that cannot meet the domestic product criteria, potentially leading to trade friction and impacting global supply chains that rely on exports to China. This viewpoint underscores the need for FIEs to carefully evaluate the economic viability of localization versus the costs of being excluded from government procurement, and the potential for increased protectionism despite stated intentions. This concern is echoed by some foreign business groups who worry that the policy, while seemingly neutral, could in practice favor domestic companies with established local supply chains.

Strategic Recommendations for Businesses: A Roadmap for Success in the New Era

To navigate this new landscape successfully, FIEs should adopt a proactive, adaptive, and well-informed approach. The following strategic recommendations provide a roadmap for businesses to not only comply with the new regulations but also to leverage them for competitive advantage.

1. Rigorous Compliance Assessments and Gap Analysis: Businesses must thoroughly analyze their entire product portfolios and supply chains against the new “domestic product” definition. This involves a detailed assessment of manufacturing locations, the origin and cost proportion of components, and the location of critical processes. A comprehensive gap analysis will identify which products currently qualify, which can be adapted to qualify, and which may remain non-domestic. This assessment should be ongoing, especially as sector-specific criteria are released, and should involve legal, supply chain, and technical experts to ensure accuracy and completeness. For example, a medical device company would need to map out its entire supply chain for each product, from raw materials to final assembly, to determine the percentage of local content and identify which manufacturing steps are considered “critical.”
2. Comprehensive Localization Strategies: FIEs should explore opportunities to deepen their localization efforts beyond mere compliance. This could include:
   • Increased Local Sourcing: Actively identifying and integrating more Chinese suppliers for components, raw materials, and services. This not only helps meet local content requirements but can also build stronger local relationships, reduce supply chain vulnerabilities, potentially lower logistics costs, and improve responsiveness to market demands. For instance, a European car manufacturer could partner with local battery suppliers to meet the local content requirements for its electric vehicles sold in China.
   • Investment in Local Manufacturing and R&D: Establishing or expanding manufacturing facilities and research and development centers within China to meet the “manufactured within China” and “critical processes” criteria. This could involve significant capital expenditure but may unlock access to the government procurement market and position the FIE as a more integrated and valued player in the Chinese economy, potentially benefiting from local talent and innovation ecosystems. An American software company, for example, might establish a local R&D center to develop specific features for the Chinese market, thereby meeting the “critical processes” requirement.
   • Strategic Partnerships and Joint Ventures: Forming alliances with local Chinese companies can provide valuable insights into the domestic market, help navigate regulatory complexities, and facilitate technology transfer or co-development, particularly for meeting the “critical processes” requirement. These partnerships can also help mitigate risks, share the burden of localization investments, and leverage local expertise. A Japanese robotics company could form a joint venture with a Chinese counterpart to co-develop and manufacture robots for the Chinese market, sharing technology and market access.
3. Proactive Policy Dialogue and Advocacy: The five-year consultation period offers a critical opportunity for FIEs and their representative bodies (e.g., chambers of commerce, industry associations) to engage constructively with Chinese authorities. Providing well-researched feedback and practical suggestions can help shape the final implementation details of the policy, making them more favorable or manageable for foreign businesses. Active advocacy can help ensure that the spirit of equal treatment is upheld in practice and that any unintended negative consequences are addressed before they become entrenched, fostering a more collaborative regulatory environment. For example, industry groups could provide data-driven analysis on the impact of different local content thresholds on their sector, helping policymakers make more informed decisions.
4. Monitor Implementation and Regional Dynamics Closely: While the central government has issued a unified policy, its implementation at provincial and municipal levels can sometimes vary due to local economic priorities or administrative interpretations. Businesses should closely track the application of the policy across different regions and sectors, identifying best practices, potential inconsistencies, and any emerging local protectionist tendencies. This continuous monitoring will be key to adapting strategies effectively and challenging any unfair practices through established channels, ensuring a consistent and fair application of the policy nationwide. This could involve subscribing to local policy updates, attending regional industry forums, and maintaining close relationships with local government officials.
5. Robust Risk Management Frameworks: The policy introduces new variables and potential complexities into the operating environment. FIEs should develop robust risk management frameworks to assess and mitigate potential disruptions to their supply chains, market access, and competitive positioning. This includes scenario planning for different levels of localization, potential changes in policy interpretation, and geopolitical shifts. Diversifying market strategies and not solely relying on government procurement will also be a prudent risk mitigation step, ensuring business resilience in a dynamic regulatory landscape. For example, a company could develop a “plan B” that focuses on the private sector market in case the government procurement market becomes too challenging to access.
6. Showcase Contributions to the Chinese Economy and Society: FIEs should proactively communicate their contributions to the Chinese economy, including job creation, technology transfer, local innovation, environmental protection, and social responsibility initiatives. This can help build goodwill, demonstrate their commitment to China’s development goals, and foster a more favorable operating environment for their participation in government procurement. A strong local corporate image can be a significant asset in navigating regulatory and market challenges, enhancing their social license to operate. This could involve publishing annual corporate social responsibility reports, participating in local community events, and highlighting their positive impact on the local economy through media outreach.

Conclusion

China’s new policy on “domestic product” standards in government procurement marks a pivotal moment in the country’s economic evolution. It represents a sophisticated attempt to balance the imperatives of fostering a unified national market and supporting domestic industries with the broader commitment to high-level opening-up and equal treatment for all market entities. The policy’s detailed definition of domestic products, coupled with a 20% price preference and strict prohibitions against discriminatory practices, signals a more structured and transparent approach to government procurement.

For foreign-invested enterprises, this policy presents a dual reality: significant opportunities for those willing and able to localize their operations and supply chains within China, alongside potential challenges for those who cannot or choose not to. The emphasis on local content and critical processes will undoubtedly drive FIEs to re-evaluate their manufacturing footprints and investment strategies in the country. While the policy aims to enhance transparency and predictability, the “certainly harmful” assessment by Global Trade Alert underscores the ongoing debate and potential trade implications, highlighting the need for careful strategic navigation and continuous adaptation.

Ultimately, the success of this policy will hinge on its consistent and fair implementation across all levels of government. Businesses that proactively assess their compliance, strategically localize their operations, and actively engage in policy dialogues will be best positioned to navigate this evolving landscape. China’s move to level the playing field, while complex, is a clear indicator of its determination to build a more sophisticated and self-reliant economic system, inviting both adaptation and strategic engagement from the global business community. The coming years will be a crucial test of whether this policy can truly achieve its stated goals of fairness, transparency, and mutual benefit for both China and its foreign partners.

References

[1] Ren Qi. (2025, October 2). China targets unified, open national market. China Daily Asia. Retrieved from https://www.chinadailyasia.com/article/620995

[2] Li, A. (2025, October 2). Beijing clarifies ‘Made in China’ standards, giving foreign firms the ‘national treatment’. South China Morning Post. Retrieved from https://www.scmp.com/economy/china-economy/article/3327635/beijing-clarifies-made-china-standards-giving-foreign-firms-national-treatment

[3] Global Trade Alert. (2025, September 28). China: New preference margin in public procurement for goods produced in China. Retrieved from https://globaltradealert.org/state-act/89636