How China Intends to Reduce the Cost of Government Tender Bidding Transactions

China is reforming the government tenders process and intends to lower the cost of bidding, which will also facilitate more SME involvement. We discuss the new bidding measures, such as reduction or exemption from deposits when bidding on government investment projects, and the streamlining of administrative requirements. Beijing, Jiangsu, Anhui, Hubei, Sichuan, and Yunnan are among the first regions to publish official interpretation and guidance for implementing the new norms.

On February 6, China’s National Development and Reform Commission (NDRC), along with 12 other departments, issued the Circular on Improving the Tender and Bidding Guarantee System to Further Reduce the Costs of Tender and Bidding Transactions (the Notice) to improve the bidding transaction guarantee system and optimize the business environment in the tender field, reduce the transaction costs for small and medium-sized enterprises, and protect the legitimate rights and interests of all parties.

NDRC’s new bidding measures will ban guarantee requirements without legal basis, increase the use of bank- and insurer-backed electronic guarantee letters to replace security deposit payments as bidding guarantees, require interest to be paid on late refunds of guarantee deposits, and encourage institutions to lower bidding guarantee requirements for bidders with good corporate social credit records.

How China intends to improve the tender transaction system

In a nutshell, the new inter-agency Notice proposes seven requirements to improve the tender transaction system in China:

1. Strict regulation of bidding transactions guarantee behavior, prohibiting the collection of security deposits or other fees without legal basis.
2. Full promotion of the bond (insurance) and encouragement of electronic bonds.
3. Regulation of the collection and return of security deposits and strict compliance with legal provisions, bidding documents, and contracts.
4. Clean up the history of deposits by urging bidders, bidding agencies, and other entrusted to provide deposit collection and management service platforms and service institutions to fully clean up the bid security, performance bonds, engineering quality bonds, and other types of historical deposits.
5. Encouraging reduction or exemption of deposits for bidding in government investment projects.
6. Encouraging differentiated payment of bid bonds, with preferential treatment for small and medium-sized enterprises (SMEs) or bidders with good credit records without a record of default.
7. Acceleration of the improvement of bidding transactions guarantee service system by relying on various public platforms and sharing credit information.

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The Notice aims to simplify the process for bidders by banning guarantee requirements without legal basis and increasing the use of electronic guarantee letters. This will reduce the transaction costs for bidders who previously had to seek certification from specific banks or insurers. In addition, the policy requires interest to be paid on late refunds of guarantee deposits, which will hold institutions accountable and provide incentives for them to return the deposits in a timely manner. The encouragement for institutions to lower bidding guarantee requirements for bidders with good corporate social credit records is also a positive step towards promoting a fair and competitive bidding process. It also supports the development of SMEs.

Further the Notice addresses some outstanding issues in the current bidding and tendering transaction security system, such as mandatory requirements for cash deposits and restrictions on the choice of transaction security and guarantee agencies, overcharging or delaying the return of security deposits, and cumbersome security processes. These issues have increased the cost and burden of bidding, especially for SMEs. The Notice applies to various government departments, agencies, and platforms involved in bidding and tendering transactions.

The Notice follows the government’s previous efforts. In May 2022, the State Council released a policy package (Guo Fa [2022] No. 12) aimed at stabilizing the economy. The policy proposed the adoption of bonds or insurance as security deposits for bidding, performance, and quality of work, instead of cash payments. Additionally, it encouraged the exemption of SMEs from bid guarantees. In September 2022, the General Office of the State Council issued the Opinions on Further Optimizing the Business Environment to Reduce Institutional Transaction Costs of Market Subjects (Guo Ban Fa [2022] No. 30), which stipulates that government procurement and bidding should not restrict the form of security deposits and should not designate specific financial institutions or guarantee institutions for issuing bonds. The aim of these requirements is to minimize the transaction guarantee costs, ease liquidity pressure for market subjects, and allow SMEs to participate in the market competition and receive relief during a crisis.

How will the Notice affect foreign companies?

The new Notice on standardizing and streamlining the bidding guarantee policy in China can have a positive impact on foreign companies. The policy changes aim to simplify and improve the bidding process, which could make it easier for foreign companies to participate in government-funded projects.

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Specifically, the increased use of bank- and insurer-backed electronic guarantee letters to replace security deposit payments as bidding guarantees could reduce transaction costs and administrative burden for foreign companies. Additionally, requiring interest to be paid on late refunds of guarantee deposits could provide greater protection for foreign companies participating in the bidding process.

However, it is important to note that the impact of these policy changes on foreign companies may vary depending on the specific circumstances and industries in which they operate. Foreign companies should carefully review the details of the new policy and consult with legal and financial experts to understand how it may affect their business in China.

What are the next steps for implementation of the Notice?

Implementation of the Notice will focus on three aspects: guidance and supervision, sharing good practices and experiences, and establishing a long-term mechanism. The focus will be on replicating and promoting these good practices nationwide to encourage market players to participate in bidding activities in accordance with the law.

Provincial governments in China have been given until March to come up with concrete plans to completely forego or gradually stop the collection of bidding guarantees for government-funded projects.

Immediately following the Notice, Beijing, Jiangsu, Anhui, Hubei, Sichuan, and Yunnan have published official interpretation and guidance for implementing the Notice in their respective regions.

Key takeaways

The Notice released by the NDRC and other government agencies in China to standardize and streamline the bidding guarantee policy is a positive development for bidders participating in the bidding process. The measures mentioned in the Notice aim to optimize the business environment for SMEs, promote the growth of the private economy, and support diverse market players. The measures are expected to provide a strong guarantee for the smooth re-opening of the economy in 2023. Overall, while the steps may appear small, they are significant in improving the business environment in China and increasing trust in the bidding process.

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