1 Spotlight on substandard drugs exposes problems in CCP regime
Recently, a scandal broke out in China involving the efficacy of generic drugs purchased through a government-organized centralized procurement program.
Very low priced drugs raises alarm
The 10th round of national centralized drug procurement on Dec. 12, 2024 sparked controversy due to unusually fierce competition among drug companies and a record breaking reduction in the average price of drugs procured.
Mainland media reported that the 10th procurement round saw drugs going for “unbelievably” low prices. For instance, the winning bid price for aspirin enteric-coated tablets by the manufacturer Zhejiang Jingxin Pharmaceutical was just 0.034 yuan per tablet, a 93 percent price drop from the lowest online price of 0.48 yuan per tablet before the procurement round.
Mainland media added that no original research-based drug (patented drugs) won bids in the 10th procurement round and most foreign pharmaceutical companies only submitted symbolic quotes. For example, an original patented drug offered by Merck was quoted at a price 50 times higher than the winning bid price. Mainland media noted that due to the high research and development costs of original patented drugs, foreign companies have little room to lower prices and cannot compete with domestic generic drugs in terms of low costs.
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i) State media reported that the PRC National Healthcare Security Administration (NHSA) had led 10 rounds of national drug procurement initiatives between 2018 to the end of 2024. The price-for-volume strategy used in those initiatives led to savings of 630 billion yuan for the CCP authorities, according to state media.
ii) In China, original research-based drugs generally refer to drugs that have expired patents and are still produced by original manufacturers. Meanwhile, generic drugs are those produced by other companies after the patent protection period ends. The bulk of drugs purchased through centralized procurement are domestically produced generic drugs.
iii) The efficacy of domestic generic drugs is evaluated for consistency using original research-based drugs as a benchmark. As long as a generic drug achieves 80 percent bioequivalence, it is considered to have the same therapeutic effect as the original drug.
Political advisers call out drug efficacy issue
Mainland reported that Zheng Minhua, a standing committee member of the Shanghai Chinese People’s Political Consultative Conference and the director of the general surgery department at Ruijin Hospital (affiliated with the Shanghai Jiao Tong University School of Medicine), along with 19 other Shanghai CPPCC members (the bulk of whom are medical professionals), jointly submitted a proposal about the questionable efficacy of drugs chosen in centralized procurement.
The proposal noted the political advisers found in clinical practice that “the efficacy of some drugs procured through bulk purchasing is unstable, especially medications for high blood pressure and diabetes or anesthetics.” In some cases, “even increasing the dosage does not work,” and doctors are feeling “helpless” because “they have no right to choose other drugs and there is no channel to report to higher authorities.” The proposal also urged the authorities to allow doctors to access original drugs.
In an interview with mainland media on Jan. 15, Zheng Minhua said that the quality of ultra-low priced drugs from centralized procurement is “unstable,” resulting in “anesthesia not inducing sleep, blood pressure drugs not lowering blood pressure, and laxatives not working” even when doses are increased. Zheng added that patients often experience suboptimal treatment outcomes upon drug substitutions, with some facing life-threatening risks.
Mainland media also reported on a proposal by Lu Changlin, a Beijing CPPCC member and the chief physician at the cardiology department at Beijing Chaoyang Hospital. Lu noted in his proposal that the efficacy of some centralized procurement drugs is subpar and called for stronger post-market monitoring of drugs. He added that doctors and patients should not be forced to use drugs from centralized procurement.
Following reports about the issue in mainland media, many healthcare professionals and patients in China took to social media to raise issues about centralized procurement. Some issues include needles obtained by centralized procurement breaking easily or being difficult to insert, anesthetics failing and causing patients to wake up in pain, or patients taking excessively long to regain consciousness after being administered anesthetics.
Official response
Jan. 17
The NHSA sent a formal letter to the Shanghai Healthcare Security Bureau requesting that it contact the 20 Shanghai CPPCC members who submitted the proposal and express gratitude to them on behalf of the NHSA. The NHSA also encouraged the Shanghai Healthcare Security Bureau to carefully consider the opinion of the political advisers who submitted the proposal, and welcomed “healthcare professionals to act as whistleblowers on issues related to drug pricing and quality.”
Jan. 21
Officials from the NHSA, together with representatives from the health, industrial information, and drug regulatory departments, traveled to Shanghai to directly hear the opinions and suggestions of the 20 Shanghai CPPCC members who highlighted problems with centralized drug procurement. The officials also collected leads on quality and efficacy issues that are supported by clinical data and statistical evidence.
Jan. 22
Zheng Minhua’s Weibo account was found to have been deactivated.
Our take
The CCP’s centralized drug procurement program was established as part of the Xi Jinping leadership’s attempt to address a range of issues in the PRC healthcare system. The recent scandal, however, shows that the program is being marred by corruption and other systemic flaws of the CCP authoritarian system, and could yet create greater crises for the regime.
1. The centralized drug procurement program was one of the outcomes of the Xi leadership’s effort to tackle the problems left behind by his predecessors. Healthcare in the PRC was commercialized during the Jiang Zemin faction’s era of dominance (1997 to 2012), resulting in high costs for medical treatment and creating difficulties for people requiring medical attention. For a prolonged period, hospitals would rely on kickbacks from pharmaceutical companies or marked up drug prices to maintain operations; this phenomenon came to be informally known as “using drugs to sustain medical institutions” (以藥養醫). At the peak of the problem, drug expenses accounted for 45 percent of medical costs in China, making it the country with the highest proportion of drug-related medical expenses globally.
Meanwhile, corruption was rampant in the healthcare system during the Jiang era and the early years of Xi’s tenure when the Jiang faction retained influence. For instance, an anti-corruption documentary aired by state broadcaster CCTV on Jan. 7 revealed that Wang Maosheng, the former Party secretary and director of the People’s Hospital of Gaozhou in Maoming City in Guangdong Province, received over 200 million yuan in kickbacks from April 2013 to June 2022.
The Xi leadership started to address the “using drugs to sustain medical institutions” phenomenon and other Jiang era healthcare system problems starting from 2017. That year, Beijing implemented a “zero mark-up” policy for drugs to end hospitals’ long-standing reliance on drug sales for funds. The “zero mark-up” policy was extended to medical consumables in 2019, but Beijing’s arrangement to help medical institutions make up for reduced funds was not ideal (see below) and led indirectly to current issues with the centralized drug procurement program.
The Xi leadership would intensify efforts to combat corruption in the healthcare sector after the 20th Party Congress in 2022. More than 350 officials in the pharmaceutical and healthcare system were investigated between 2022 and 2024, according to incomplete statistics compiled from mainland media. More than a third of those investigated held key positions in local healthcare systems, including more than 30 bureau-level officials. Data from the NHSA showed that in 2024, the CCP authorities exposed 2,008 fraudulent healthcare insurance institutions and recovered 27.5 billion yuan in healthcare insurance funds nationwide, as well as investigated 3,018 healthcare-related cases in collaboration with public security agencies and arrested 10,741 suspects.
As part of healthcare reforms, Beijing rolled out a national centralized drug procurement program at the end of 2018. The Xi leadership likely intended for the program to achieve several objectives:
i) Make healthcare more affordable for most people and alleviate some public dissatisfaction with the CCP regime while keeping healthcare spending low. The CCP has been less generous in funding healthcare historically, with healthcare spending in 2023 accounting for just 7.2 percent of China’s GDP (by contrast, the United States healthcare spending was 17.6 percent of America’s GDP in 2023).
In theory, the Xi leadership would indirectly increase disposable incomes without raising overall income levels by bringing down healthcare expenses. Making drugs cheaper for everyone also fits into Xi Jinping’s “common prosperity” agenda.
ii) Making drugs cheaper would ease the burden on national and local healthcare insurance funds. Healthcare insurance funds and local government finances came under pressure during the three COVID-19 pandemic years given the high frequency of large-scale nucleic acid testing and other medical expenses related to the “zero-COVID” policy. Local officials were also known to exploit loopholes and siphon off healthcare funds for themselves and related interest groups.
On paper, the centralized drug procurement program appeared to have done its job to bring down drug prices. The CCP authorities spent just 8.513 billion yuan to obtain drugs in the 10th procurement round, or less than one-sixth of what was paid during the fifth procurement round (55 billion yuan) when procurement spending was the highest. On the flipside, the recent scandal showed that the ultra-low price drugs are mainly of substandard quality.
iii) The centralized drug procurement program encourages the localization of drug production. This reduces the PRC’s reliance on imported drugs and minimizes foreign exchange expenditures.
iv) Reducing the supply of expensive imported drugs in the public healthcare system creates a demand for private or joint-venture hospitals among the wealthy Chinese and those with the means. The increased demand creates conditions for the CCP authorities to open up part of its medical sector to foreigners and attract investments. Meanwhile, wealthy Chinese would be more inclined to remain in the mainland given that they can still access a greater supply of “exclusive” healthcare resources at private or joint-venture hospitals.
2. The centralized drug procurement program appears to have incentivized the creation and proliferation of ultra-low price, subpar drugs. The problems caused by those drugs and the Xi leadership’s healthcare reforms are threatening to unleash new crises for the CCP regime.
i) The centralized drug procurement program is driving extreme price competition between Chinese pharmaceutical companies and worsening the broader problem of excessive competition (“involution”) among Chinese enterprises. To remain competitive and survive in an ultra-low drug price environment, pharmaceutical firms are forced to cut corners in drug manufacturing or even resort to fraud. For instance, Chinese doctor Xia Zhimin wrote in a Jan. 24 post on his widely followed Chinese social media account that some of the 1,988 generic drugs that passed the PRC National Medical Products Administration’s consistency evaluations had identical evaluation results (down to the second decimal place). Xia said senior experts in the field of generic drugs revealed that the consistency evaluation of some of the drugs cost as low as 8 million yuan when the industry standard was in excess of 30 million yuan. Xia speculated that the third-party organizations likely subcontracted the evaluations to downstream companies, leading to identical results. On the same day, a former Chinese journalist published a piece claiming that the consistency evaluation results of some of the 1,988 drugs were an attempt to deceive the public through “direct plagiarism” and that data fraud “might be a broader problem in China’s generic drug industry rather than an isolated incident.” The journalist added that the problematic generic drugs have already entered the market and some were acquired through centralized procurement.
Xia also wrote in his post that the consistency evaluation process, which was introduced in 2012, initially offered hope for reversing the decline in China’s pharmaceutical industry and driving out bad practices. But after the centralized procurement program was launched in 2018, the consistency evaluation process was accelerated and provincial drug regulators started losing oversight of production inspections.
The ultra-low drug price environment also pushes foreign manufacturers of original patented drugs out of the Chinese market while retarding domestic innovation as local companies face shrinking profit margins. Xia Zhimin noted in his Jan. 24 social media post that foreign original patented drug companies have been virtually squeezed out of China and domestic generic drug companies that conduct proper research are finding their costs too high to remain competitive. Even when those generic drug companies win centralized procurement program bids, they are often relegated to the lowest procurement tier, receive minimal purchase volumes, and struggle to survive.
ii) The Xi leadership’s doing away with “using drugs to sustain medical institutions,” the ultra-low drug price wars, and other healthcare reforms are making it difficult for hospitals to maintain operations.
Concurrently, insufficient government subsidies have led to a wave of hospital closures in recent years. Citing data from the medical exchange platform Xinglinyuan, mainland media noted that over 500 hospitals closed in China in 2024, the bulk of which were private hospitals. Reasons for closure include poor management and reductions in government subsidies caused by policy adjustments in some regions. Additionally, a search for “hospital” on the National Enterprise Bankruptcy and Restructuring Cases Information website between Jan. 1 and Dec. 20, 2024 returned 591 cases, including bankruptcy review, bankruptcies, compulsory liquidation review, and compulsory liquidation.
Should the Xi leadership fail to address the pharmaceutical company “involution” problem and boost government subsidies, the CCP regime could be faced with more closures of hospitals and pharmaceutical firms. This would place an even greater strain on the PRC’s struggling public healthcare system, especially in the event of future pandemics.
iii) Ultra-low drug prices, corruption, and lax regulation have led to the procurement of drugs with low efficacy or harmful side effects. This results in increased health risks for Chinese patients and grows public dissatisfaction with the CCP regime. Meanwhile, healthcare officials are incentivized to push for lower drug prices to produce more impressive political “achievements,” thereby worsening the price competition, fraud, corruption, and other ongoing problems.
Should Beijing allow the current situation to persist, it could find itself with a larger public health crisis on its hands as bad practices drive out the good.
iv) Xi Jinping’s healthcare reforms have almost certainly disrupted the vested interests of CCP elites and power networks in the healthcare system. As their profits decline, those individuals and groups would be inclined to push back against the Xi leadership, such as by engaging in sabotage (including exaggerating or distorting Xi’s policies) to undermine Beijing, escalate social tensions, and redirect public discontent toward Xi.
The outcome of factional struggle between Xi and “anti-Xi” elements in the healthcare system is deteriorating political stability in the CCP regime.
2 China’s 2024 fiscal revenue, non-tax data signal coming pains
On Jan. 24, the PRC finance ministry released China’s fiscal revenue data for 2024.
National revenue
- The general public budget revenue was up 1.3 percent from a year ago to 21.9702 trillion yuan.
- Tax revenue was down 3.4 percent year-on-year to 17.4972 trillion yuan.
- Non-tax revenue was up 25.4 percent year-on-year to 4.473 trillion yuan.
- Key tax revenue items include:
- Domestic value-added tax: Down 3.8 percent year-on-year to 6.6672 trillion yuan.
- Domestic consumption tax: Up 2.6 percent year-on-year to 1.6532 trillion yuan.
- Corporate income tax: Down 0.5 percent to 4.0887 trillion yuan.
- Personal income tax: Down 1.7 percent to 1.4522 trillion yuan.
- Securities transaction stamp duty: Down 29.1 percent to 127.6 billion yuan.
National expenditure
- The general public budget expenditure was up 3.6 percent year-on-year to 28.4612 trillion yuan.
- Debt interest payments were up 8.8 percent year-on-year to 1.2877 trillion yuan.
National government fund budget revenue
- The government fund budget revenue was down 12.2 percent to 6.209 trillion yuan.
- Revenue from state-owned land use rights transfers was down 16 percent to 4.8699 trillion yuan.
National government fund budget expenditure
- The government fund budget expenditure was up 0.2 percent to 10.1478 trillion yuan.
- Expenditures related to state-owned land use rights transfers were down 8.6 percent to 5.0812 trillion yuan.
Backdrop
The National Bureau of Statistics announced on Jan. 17 that China’s GDP grew by 5 percent year-on-year to 134.9 trillion yuan in 2024. We previously estimated that China’s actual GDP growth in 2024 was 3.6 percent.
Our take
Of the official economic data that the CCP authorities release, fiscal revenue figures are generally considered to be more reliable as they are relatively harder to falsify. A review of the official 2024 fiscal data suggests that China’s GDP in 2024 is unlikely to have grown by 5 percent as the CCP claimed. Further, an analysis of local government land sales data underscores the fiscal challenges faced by local governments and hints at a very bleak economic outlook for China in 2025.
1. The drop in tax revenue in 2024 reflects contracting economic activity rather than growth. Concurrently, the sharp increase in non-tax revenue, which is partially attributable to local government fines and confiscations (including “deep-sea fishing”), highlights intensified pressure on businesses. Local governments appear to be resorting to heavy-handed tactics to extract from businesses. A video that recently made the rounds on the Chinese internet spotlighted a case in Shaoyang Country in Hunan Province from back in February 2024 when local police appeared to extort an entrepreneur from out of town. The surveillance footage showed the police “persuading” the entrepreneur, who was placed under residential surveillance, to “return” 100 million yuan to avoid prosecution or face a prison sentence of five years. Such cases worsen the business environment in China, which in turn hinders economic expansion.
Meanwhile, declines in key tax revenue items such as domestic value-added tax, corporate income tax, and personal income tax suggest reduced business activity, profitability, and personal earnings. This in turn lowers the believability that China’s GDP grew by 5 percent in 2024. By comparison, the domestic value-added tax (up 11.8 percent), corporate income tax (up 15.4 percent), and personal income tax (up 21 percent) all grew at rates far exceeding GDP growth in 2021 (8.4 percent).
2. The official local government land sale figures suggest that local governments likely suffered worse fiscal shortages in 2024. Local government land sales revenue reached 8.7 trillion yuan in 2021 when China’s real estate market was performing comparatively better. By 2024, this figure had dropped to just 4.9 trillion yuan (down 44.06 percent from 2021).
Land sales revenue has historically been a critical source of funding and political “achievement” for local governments and officials. The sharp drop in land sales revenue in 2024 indicates that local governments are likely more reliant than ever on central government fund transfers, as well as non-tax revenue obtained through the levying of fines, asset liquidations, and “deep-sea fishing” to offset revenue shortfalls. However, non-tax revenue in 2024 was only 1.5 trillion yuan higher than in 2021, and is likely to cover less than 40 percent of the revenue lost through decreased land sales.
Meanwhile, the official data for land sales in recent years suggests that local governments have been engaging in fraudulent measures during the year-end period to pad their data. For instance, the ratio of land sales revenue in December to the monthly average from January to November has grown from 3.2 times in 2020 to 5.4 times in 2024. In December 2024 alone, land sales revenue reached 1.6 trillion yuan, or 32.7 percent of total land sales revenue for the whole year. The last-minute spike in land sales is likely driven by local governments engaging in so-called “self-buying and self-selling” (自買自賣) schemes as they look to artificially inflate fiscal revenue figures, manufacture GDP growth, and secure political “achievements.”
3. China’s fiscal situation in 2024 suggests that the central government will need to issue even more bonds to address local fiscal problems. Per official data, local governments accounted for 54.28 percent of the national general public budget revenue and 85.7 percent of the total expenditure, resulting in a gap of 12.5 trillion yuan. This means that if China’s economy does not improve, Beijing will need to issue over 13 trillion yuan in debt in 2025 to “maintain” 5 percent GDP growth and ensure that local governments can continue operating.
However, the large-scale issuance of debt comes with its problems. As we previously analyzed, the move will:
- Draw liquidity away from capital markets and the financial system, resulting in stock market declines.
- Force the People’s Bank of China to purchase large amounts of government bonds.
- Drive down benchmark bond yields.
- Put pressure on the renminbi to depreciate and heighten the risks of capital outflows.
