The People’s Hospital of Ning County, located in Gansu province in China’s poor hinterland, announced a plan[1] last year to purchase 42.8m RMB ($5.9m) worth of medical equipment, including ultrasonic, CT, and MRI scanners. It was an unusually large order for a hospital in a poor part of the country that was on the government’s ‘impoverished county’ list until four years ago. But it wasn’t reckless spending. According to local media[2], the procurement is part of China’s ‘One Thousand Counties Project,’ which aims to upgrade infrastructure at more than 1,000 hospitals by 2025, providing better healthcare for rural Chinese. 

China’s ageing population and the lessons from the pandemic are driving the government to ramp up medical expenditure, especially in lower-tier cities and rural regions. According to an official report released in January, one in five of the country’s 1.4 billion people were 60 or older at the end of 2023[3]. Age-related chronic diseases and ailments are boosting demand for medical devices, including imaging machines, ventilators, and endoscopes. Between 2012 and 2022, China’s total health expenditure - government and households - more than tripled to 8.5trn RMB ($1.2trn). The higher spending, as well as the shifting attitudes towards living healthier lives, will continue to support fast expansion of Chinese medical equipment makers, despite the economic challenges. 

The medical sector is also recovering from the repercussions of an anti-corruption crackdown, which spooked investors when it was launched in July 2023. Industry conferences are resuming. Business activity is gradually returning to normal. We believe the clean-up, which targets the bribing of doctors in drug and medical equipment sales, will benefit the sector in the long run. 

In our visits to leading medical equipment makers in Shenzhen and Shanghai in January, management teams reported that the government’s support for more domestically-produced devices at hospitals, together with an improvement in manufacturing capabilities, are helping their companies to gradually gain share of the domestic market (historically dominated by established global players such as Siemens Healthineers, Philips, and GE Healthcare). Moreover, they no longer rely on low costs to beat competitors. They have ramped up R&D expenditure to catch up with foreign peers on innovation.  

Power of innovation

A good example is the world’s first total-body PET-CT scanner produced by Shanghai United Imaging Healthcare, a provider of medical screening and radiotherapy equipment.

PET-CT scanners are generally considered to be one of the most advanced imaging machines for detecting a range of illnesses, including cancers and heart disease. However, long imaging times (patients typically have to stay inside the machines for 15 to 20 minutes) and the large radiation dose necessary to produce the high-resolution images have been a drawback. According to local media[4], United Imaging’s full-body PET-CT scanner not only provides a more detailed image of the entire body in a single scan but can do so in under one minute. In addition, thanks to the scanner’s high sensitivity, the amount of radiation radiotracer a patient receives can also be reduced. 

With the rapid improvement in technological capabilities, domestic champions are making inroads abroad. Shenzhen Mindray Bio-Medical Electronics’ overseas revenues climbed 17 per cent year-on-year in 2022[5]. United Imaging’s sales outside of China more than doubled in 2022 from a year earlier.[6]

The top domestic firms are appealing to investors with their better earnings growth prospects than foreign players. Some of them have also boosted dividend payments in the last five years, making them attractive stocks to hold for a long term. 

But it will take a long time for many of the domestic players to catch up with foreign rivals on some subsectors’ market share. Chinese surgical robot manufacturers, for example, still only have a tiny share of the local market. 

Regulatory risks

Beyond corporate fundamentals, there are, of course, the regulatory risks that come with any Chinese company. Since 2018, policymakers have sought to drive down the prices of drugs and some medical devices through a centralised volume-based procurement programme. A few provinces have adopted the scheme for medical equipment purchases. We will be watching closely to see whether it is extended to more provinces. 

Most importantly, the government is keen on supporting homegrown brands as China seeks to strengthen its self-reliance in technology. With strong policy support and rising demand, we think Chinese medical equipment makers will continue to expand their market share at home. As the population challenge becomes ever more pressing, the rise of domestic players will give Beijing a cost-effective way to upgrade local hospitals’ services across the country.  

[1] China Central Government Procurement http://www.ccgp.gov.cn/cggg/dfgg/gkzb/202305/t20230503_19806529.htm, May 3, 2023. 

[2] Caijing, https://news.ifeng.com/c/8Q3MhubE8pl, May 24, 2023. 

[3] National Bureau of Statistics of China, https://www.stats.gov.cn/sj/zxfb/202401/t20240117_1946624.html, January 17, 2024. 

[4] People’s Daily, http://ip.people.com.cn/n1/2020/0902/c136655-31846827.html, September 2, 2020. 

[5] According to company filings. 

[6] According to company filings.