Chinese intellectual property laws have been overhauled to allow the nation's drug makers to make less expensive copies of medicines still under patent protection.
The move by China, considered a vital growth market for foreign pharmaceutical companies, comes within months of a similar action by India.
The amended patent law allows Beijing to issue compulsory licenses to eligible companies to produce generic versions of patented drugs during state emergencies, unusual circumstances, or in the interests of the public.
For "reasons of public health", eligible drug makers can also ask to export these medicines to other countries, including members of the World Trade Organisation (WTO).
"The revised version of Measures for the Compulsory Licensing for Patent Implementation came into effect from May 1, 2012," China's State Intellectual Property Office said in a faxed statement to the Reuters news agency.
China is known to be looking at Gilead Sciences Inc's Tenofovir, which is recommended by the World Health Organisation as part of a first-line cocktail treatment for AIDS patients, two sources with direct knowledge of the matter told Reuters.
In March India granted a compulsory license to local generic drugs firm Natco Pharma to manufacture Bayer's cancer drug Nexavar, used for treating kidney and liver cancer.
Key drug ingredients
China's generic drug makers have been producing the key ingredients - or active pharmaceutical ingredients (APIs) - in medicines for years, exporting them to foreign drug makers, which then sell the patented finished products back to China at prices which the average Chinese citizen often cannot afford.
In particular, the government is struggling to provide newer HIV drugs, such as Gilead's Tenofovir, known by its brand Viread and which had worldwide sales last year of $737.9m.
A difficulty that could only increase in 2013, when the Geneva-based Global Fund to Fight AIDS, tuberculosis and malaria will no longer give grants to China to fight HIV.
Although Gilead moved to share its intellectual property rights on its medicines in a patent pool with generic drug makers from many countries last July in return for a small royalty, China was excluded, which meant it had to continue paying high prices for tenofovir.
Since the change in China's patent law, Gilead has offered certain concessions, including giving China a substantial donation of Tenofovir if it continues to buy the same amount, said Paul Cawthorne, co-ordinator for Medecins Sans Frontieres' Access Campaign in Asia.
"This is all a negotiation game; this offer from Gilead came about once the news that the Chinese was considering issuing a CL [compulsory license] came out. The end game is okay, you get a better deal or you use the CL, it's a strategy that many countries use," he said.
China had signalled interest in the idea from at least 2008-2009, when its State Intellectual Property Office invited foreign experts to Beijing to show Chinese officials how to prepare the legal grounds for issuing compulsory licenses.