On January 6, 2012, the Ministry of Finance (MOF) and the Ministry of Industry and Information Technology (MIIT) issued a joint statement outlining a number of preferential procurement policies for small- and medium-sized enterprises (SMEs) to boost their development. Government agencies usually prefer larger companies and well-known brands during the procurement process, and SMEs have had a difficult time successfully bidding on tenders.

The MOF/MIIT Notice provides that government agencies are required to set aside at least 30% of their total budgets for SMEs, of which at least 60% should be dedicated to small- and micro-sized enterprises. Small- and micro-sized businesses will also be entitled to an extra price preference between 6% and 10% when they submit a tender for government procurement projects. The MOF/MIIT Notice also encourages SMEs to form consortiums and allows large enterprises to subcontract purchases from SMEs.

The PRC defines small, medium or "micro-sized" companies as follows: industrial companies with fewer than 1,000 employees and an annual income of less than RMB400 million (US$63.32 million) qualify as SMEs, and companies with fewer than 20 employees and less than RMB3 million (US$477,000) in income are considered to be "micro-sized." China’s government procurement was RMB842.2 billion in 2010.

These measures are a positive step in reducing the monopolistic practices of the State-owned sector. It is no mystery that SOEs are favored vendors for government procurement, and especially those SOEs that have historical ties to the government agencies that are also customers. These rules should help to level the playing field between the SMEs and the SOEs, and bring some degree of competition to the procurement sector (although foreign companies still do not have effective access). Going forward, SMEs will likely pose a commercial threat to the monopolistic SOEs. China’s SMEs exceed 43 million companies and are reported to account for 58.5% of China’s GDP and responsible for half of China’s tax revenues.

For more information concerning this blog and other China-related topics, contact James Zimmerman in the Beijing office at jzimmerman@sheppardmullin.com.