Deloitte China Monthly Report Issue 104

Economy

China’s K-shaped divergence: the view beyond 2026

China’s economy is increasingly two-tiered: strong exports and rapid growth in high-tech industries continue to provide vital support, while weak domestic demand remains the key constraint on the broader recovery. Consequently, additional fiscal support and monetary easing will be required to foster reflation and narrow the widening gap between production and demand.

August’s data continued to highlight a K-shaped divergence in the Chinese economy. On the positive side, high-tech industries maintained strong momentum, with value-added industrial output in high-tech sectors growing by 16.7% year-on-year supported by robust external demand. Driven in part by the semiconductor supply chain, exports remain the brightest growth driver, though their sustainability will be tested. Conversely, fixed-asset investment continues to contract, with slowdowns evident in both the real estate sector and consumer durables. Furthermore, growth in aggregate social financing and bank credit has continued to slide, which reflects the shift between old and new growth drivers in the financial sphere. In a recent article, Pan Gongsheng, Governor of the People’s Bank of China, noted that emerging industries require less credit relative to their output and so slower but higher-quality lending may become the new normal.

Chart: The two-tiered Chinese economy

Source: Wind

Policymakers are also aware of the impact of this K-shaped divergence on household sentiment. In August, Qiushi published an article titled “How to Understand the ‘Temperature Gap’ between Macroeconomic Data and Micro-level Perceptions”, noting that “strong activity on the production side may not immediately translate into buoyant demand”, and that “across sectors and supply chains, some are thriving while others are struggling”.

We believe that the property sector is yesterday’s story, whereas ‘new productive forces’ represent the future. However, this K-shaped economy needs more fiscal support and a stronger social safety net. Traditional industries still account for a large share of employment, and the adoption of AI could bring about job displacement and changes in income distribution, potentially creating additional headwinds to the recovery in consumption. At a time when a consumption-driven growth model has yet to be fully established, greater attention needs to be paid to income distribution and the structural imbalances within the Chinese economy.

From a policy perspective, given inadequate aggregate demand, both fiscal and monetary policies need to be more forceful and effective. At the July 30 Politburo meeting, policymakers called for "making full use of existing policies, timely planning and introducing practical and effective incremental policies, and strengthening counter-cyclical adjustments".  In the Report on the Implementation of China’s Fiscal Policies in the First Half of 2026 released by the Ministry of Finance on October 9, this position was reaffirmed, stating that a more proactive fiscal policy will be implemented forcefully and effectively. We expect the central government to take on more local government liabilities and ramp up fiscal spending. At the same time, if policymakers wish to further stimulate effective demand in the real economy, there remains a case for greater counter-cyclical monetary easing, with room for interest rates to decline further. However, bank profitability remains a concern.

In addition to medium‑ and short‑term pro‑growth policies, the central authorities issued the Guidelines on Developing New Quality Productive Forces on October 9. The document stresses a smooth transition between old and new growth drivers, flags emerging problems such as homogeneous layouts in new sectors, and advocates tailored and well‑ordered development across regions. Against this backdrop, we expect China’s GDP growth to reach 4.6% this year.

Financial Services

Document No. 54 leads PE funds to a new situation

On June 3, the State Council issued the "Guiding Opinions on Strengthening Regulation, Preventing Risks, and Promoting the High-Quality Development of Private Investment Funds". Together with related policies on venture capital and government-invested funds, this forms the policy framework for the private investment fund sector centered on "strengthening regulation, preventing risks, and promoting high-quality development". China's private equity investment fund (PEIF) sector has entered a new phase of high-quality development defined by compliance, stability, and value creation.

Current status and vulnerabilities in PEIF

As of the end of Q1 2026, China's PEIF industry managed RMB 23.4 trillion, accounting for 28% of the nation's total RMB 82.6 trillion asset management market. PE and VC funds have become a critical source of patient and innovative capital. Nearly 90% of companies listed on the STAR Market received PE/VC financing prior to their IPOs, while private securities funds accounted for 10% to 20% of A-share trading volume. These funds have played a significant role in revitalizing the capital markets and optimizing investor structure.

Chart: Private Fund AUM and Number of Products, 2021–2026

Data source: Asset Management Association of China

Behind this rapid growth, however, risks and vulnerabilities are becoming increasingly apparent. First, the industry remains "large but not strong," plagued by an unbalanced fundraising structure and state-backed funds that deviate from their intended policy functions. Second, a subset of managers lacks quality, leading to frequent risk incidents that often spill over into other sectors.

These problems stem from the industry's relatively short history, a still-evolving regulatory philosophy, and key institutional deficiencies which include an incomplete legal framework, inadequate coordination between central and local regulators, and the lack of effective market-based constraint mechanisms.

Enhanced regulation across the entire chain

The Guiding Opinions serve as the foundational text in the "1+N+X" regulatory system for private investment funds. Their core objectives are twofold:

1. Consolidate existing funds of a similar nature, eliminate non-compliant GPs, and improve overall quality and efficiency.
2. Optimize new fund formations and cultivate patient capital.

Chart: the compliance threshold of PEIF is comprehensively improved

Furthermore, regulatory scrutiny has formally extended to core investment terms such as valuation adjustment mechanism (VAM) and repurchase ("repo") clauses. A VAM is a critical clause in PE investments, yet its legal validity, scope of application, and breach liabilities have long lacked uniform rules. By elevating the VAM framework to the national regulatory level for the first time, the Guiding Opinions bring regulatory oversight down to individual investment contracts. This helps curb the use of unreasonable repo clauses to disguise guaranteed principal and returns, a practice that deviates from genuine equity investment, and encourages the industry to return to the fundamentals of value discovery.

Consolidation and repositioning of government investment funds

By 2025, state-owned capital accounted for over 90% of total LP commitments, making it the most stable source of funding and the dominant force in the venture capital market. Following the implementation of the Guiding Opinions, the industry is expected to accelerate consolidation toward leading, specialized institutions. The document explicitly requires funds to "prevent deviation from their functional positioning" and prohibits unauthorized lending or "equity investments disguised as debt". State Council Document No. 1 (2025) had already defined the functional positioning of government investment funds as supporting industrial upgrading, innovation, and entrepreneurship:

1. Industrial investment funds should support the transformation of traditional industries, the expansion of emerging industries, the layout of future industries, and key links in supply chains.
2. Venture capital funds should focus on "developing new quality productive forces and supporting technological innovation," prioritizing early-stage, small-scale, long-term, and hard-tech investments.

This new regulation further clarifies the role of state-backed funds as long-term, patient capital, leveraging social capital to amplify their impact and deepen the integration of capital with future-oriented technological innovation.

Smoothing the fund lifecycle of fundraising, investment, management and exit

Fundraising: In line with the policy direction of "expanding funding sources through multiple channels," framework rules allowing long-term capital, including social security, insurance, and corporate pension funds, to invest in PE are set to be clarified through subsequent supporting regulations.

Investment: Policy encouragement is targets early-stage, small-scale, long-term, and hard-tech ventures, as well as M&A funds that integrate core technologies and strategic emerging industries. Qualified PE, venture capital, and M&A funds will receive priority support during the registration process.

Management: Under the policy direction of "cultivating leading VC institutions", managers with deep industry knowledge and value-added capabilities will stand out. Specialized GPs focusing on hard technology and strategic sectors will be the primary beneficiaries.

Exit: M&A funds are now eligible for priority support, directly benefiting GPs skilled in industrial integration, control-oriented investments, and post-investment value creation. In Q1 2026, the number of portfolio company IPOs increased by 220.2% year-on-year. M&A exits rose by 115.2%, while S-fund transaction volume exceeded RMB 100 billion, signalling that diversified exit channels are taking shape.

In general, the fund lifecycle is becoming more streamlined, and the PE fund industry is moving from institutional improvement toward ecosystem-wide transformation. Capital will truly accompany the growth of industries, move beyond short-term arbitrage investment and "exits pursued solely for the sake of exiting", and shift toward patient capital that supports long-term industrial value creation.

Energy

Unlocking demand: mandatory standards drive green hydrogen derivatives 

Historically, discussions of renewable energy focused almost entirely on wind and solar power. That changed in June 2026 with Order No. 42, which for the first time subjects non‑electric consumption of renewables to mandatory compliance targets.

Non-power consumption covers renewable heating, biomass fuels, green hydrogen, and its derivatives, such as ammonia and methanol. Among these, green hydrogen derivatives stand out as the most strategically valuable option, given their capacity for large‑scale, cross‑regional storage and transport, alongside their potential to replace conventional fossil feedstocks. The recently released 15th Five‑Year Plan for the Development of the New-Type Energy System sets a target of 2 million tons of renewable‑based hydrogen production capacity by 2030, representing a sevenfold increase from the current installed capacity of 250,000 tons per year. This puts the industry on track for rapid expansion over the coming five years.

Green hydrogen derivatives enter the energy strategic core in 2026

In 2026, China introduced a series of supportive policies for the green hydrogen derivatives industry. The Government Work Report, released in March, proposed for the first time that China should "foster new growth drivers such as hydrogen energy and green fuels." The 15th Five‑Year Plan Outline further designated hydrogen as a priority sector for future industrial development. Also in March, multiple ministries jointly launched pilot programs for integrated hydrogen applications, allocating up to RMB 1.6 billion per city cluster over a four‑year trial period to promote large‑scale deployment across transport, chemicals, and metallurgy, among other sectors.

Overseas strategic moves are also accelerating. The EU's Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase in 2026. Hydrogen and ammonia are already included in its scope, directly creating a carbon-cost advantage for green hydrogen and ammonia. In the United States, the April 2026 revision of the Renewable Fuel Standard (RFS) set the highest-ever blending mandates for 2026–2027 to boost green fuel uptake. India also launched several pilot projects for hydrogen-based metallurgy in 2026.

The driving force behind these developments extends beyond decarbonization value. As “liquid carriers” of renewable energy, green hydrogen, ammonia and methanol convert intermittent wind and solar power into storable, transportable energy forms, offering an alternative to fossil fuels. Their strategic importance became even more pronounced amid the geopolitical disruptions to global energy supply chains in 2026.

Order No. 42 to complete the final link in the value chain

Despite their considerable market potential, green hydrogen derivatives have long been trapped in a “potential‑to‑reality” gap. By the end of 2025, China had announced 908 green hydrogen projects, representing 15 million tons of annual green hydrogen capacity. However, most projects remained at the preliminary planning or design stage, with less than 3% of that capacity coming online.

The main hurdle was uncertain demand. Before the introduction of Order No. 42, there were no binding rules on non‑electric renewable energy use in China. Faced with the higher cost of green hydrogen derivatives, enterprises preferred to meet their carbon reduction obligations by purchasing green electricity instead. Exports, meanwhile, faced stringent and evolving certification regimes abroad. By mandating renewable energy targets for energy‑intensive industries, Order No. 42 now opens up a large-scale domestic market that could be prove to be the game changer the industry has been waiting for.

Opportunities emerging across sectors

With demand picking up, green hydrogen derivatives are creating opportunities in multiple sectors.

• Domestic applications: Main applications will be concentrated in shipping, steel, chemicals, and thermal power generation, all key emissions-intensive industries covered by the assessment framework. These derivatives will be used not only as substitutes for conventional fuels, but also as feedstocks for chemical synthesis and reducing agents in ironmaking processes. This shifts the producer–customer relationship from purely transactional to long-term partnerships, requiring closer collaboration to develop low‑carbon solutions tailored to specific production processes.
• International markets: The decarbonization strategies of global shipping and aviation are opening up export opportunities for green fuels. The International Maritime Organization's (IMO) 2030 target of 10% zero- or near-zero-emission fuels implies a global green methanol demand of up to 20 million tons per year. However, market access hinges on establishing internationally recognized accounting and certification frameworks. With global standards for green hydrogen derivatives still fragmented, producers that proactively map out export pathways and secure compliance certifications will be best positioned to capitalize on overseas markets.
• Professional services: Demand for services related to certification, carbon footprint accounting, and carbon asset trading for green hydrogen derivatives is growing rapidly. Under increasingly stringent regulatory requirements, data will serve not only as the basis for carbon footprint calculations, but also as the gateway to market access and green price premiums.

As the industry scales up, the production costs of green hydrogen, ammonia and methanol will gradually decline. However, given the diversity of applications and the complexity of the underlying technological pathways, cost advantages alone will not suffice. The ability to achieve deep process integration with downstream industries, combined with a credible green certification system, will emerge as the key differentiator for long‑term competitiveness.

Chart: distribution of downstream consumption for green hydrogen projects in China

Source: H2 Plus Big Data

Retail

15th Five-Year Plan Consumption Policies Drive Green & Smart Upgrading and Business Format Innovation

Domestic consumption recovery slowed overall in the first eight months of 2026, with the market exhibiting significant structural divergence. Service consumption demonstrated strong resilience, while physical goods performed weakly, leading to a widening growth gap between services and goods. Total retail sales of consumer goods increased by 1.1% year-on-year during the first half, with goods retail up 1% and service retail up 4.9%. Against this backdrop, the government introduced a series of supportive policies targeting both demand stimulation and supply-side optimization. Adjustments on both the supply and demand sides have become the core levers for stabilizing overall consumption and fostering long-term growth momentum, creating room for subsequent industrial transformation and technological innovation.

Chart: The divergence between goods retail and services retail continues to widen

Data source: National Bureau of Statistics

Further intensified divergence in services and goods sectors

Physical goods consumption: Categories such as grains, oils, food, and daily necessities continued steady growth. However, consumption of real estate-related goods, including home appliances, furniture, and building materials, contracted significantly due to high base effects from the previous year and weak overall demand, directly weighing down physical retail performance. Although retail sales of household appliances among designated enterprises declined because of last year's high base, green appliances and smart, upgraded products continued to achieve rapid growth. From January to May, key categories subsidized under national subsidy programs, such as portable handheld devices and green appliances, performed strongly with cumulative growth rates reaching 24% and 30%, respectively. National subsidy policies are gradually shifting toward more targeted support. By mid-June, the consumption leverage ratio of the first two rounds of national subsidies had increased from 7.8 times in 2025 to 10.3 times.

Services consumption: Domestic service consumption related to culture, tourism, travel, and recreational activities continued to grow rapidly. According to data released by the National Bureau of Statistics, during the first half of the year, sales revenue from immersive experience sectors such as artistic performances and museums increased by 28.3% and 24.6%, respectively. Revenue from sightseeing and entertainment services rose 12.3% year-on-year, while retail sales in travel consultation and leasing services, as well as cultural and recreational services, increased by 11.3% and 10.4%, respectively. At the same time, inbound tourism remained strong, further boosting domestic service consumption. As the largest component of travel service exports, inbound tourism has driven further expansion in travel service exports, which reached RMB 229.2 billion from January to June, up 31.1% year-on-year.

Current consumer sentiment remains generally cautious, with reduced spending on non-essential big-ticket items. Most manufacturing enterprises face fluctuating upstream costs, yet intense industry homogenization and escalating internal competition severely limit their ability to adjust end-product prices. As a result, firms struggle to pass on rising costs to consumers, leading to mounting profit pressures. Against this backdrop, there is a clear market need for policy support to provide a floor for economic stability.

Subsidy policies to lead both supply and demand sides to benefit.

Since mid-June, a series of multidimensional support policies have been implemented, bringing incremental improvements to the consumer sector by supporting demand-side consumption and promoting industrial upgrading on the supply side.

Demand side: Targeted consumption subsidies and employment stabilization measures are being implemented. In the short term, in addition to the third tranche of RMB 62.5 billion in national consumer subsidies, coverage is expanding into service consumption, with a focus on experiential sectors such as accommodation, catering, and short-distance cultural tourism. Starting in early July, RMB 450 million in cultural and tourism subsidies has been gradually disbursed to boost consumer spending in summer vacation leisure, family-oriented accommodations, and related activities. Furthermore, the Ministry of Human Resources and Social Security and the Ministry of Finance have introduced subsidies to stabilize and expand employment, reimbursing eligible enterprises 30%–60% of the unemployment insurance premiums actually paid in the previous year, thereby alleviating cash flow pressures on labor-intensive sectors and small/micro enterprises. In the medium to long term, the employment-first strategy under the 15th Five-Year Plan will be leveraged to institutionalize measures such as social security cost reductions and entrepreneurship support tools, continuously stabilizing household income expectations.

Supply side: Further efforts are being made to expand and optimize supply to boost consumption. The government has introduced key tasks under the 15th Five-Year Plan for Expanding Consumption, including promoting high-quality and people-centered service consumption, advancing the expansion and upgrading of goods consumption, cultivating new consumption models and scenarios, enhancing consumer spending capacity, optimizing the consumption environment, and improving institutional mechanisms. Meanwhile, the 15th Five-Year Plan for Building a Tourism Powerhouse proposes accelerating tourism's role in stimulating domestic demand, promoting employment, and increasing the sector's contribution to GDP. Additionally, guidelines on "AI+ in consumption" have been released, emphasizing the integration of artificial intelligence with goods consumption, service consumption, and business model innovation. These policies clarify the long-term development direction for the industry, with structural growth opportunities expected in modern consumer services, green and smart products, and the overseas expansion of retail formats.

Table: Consumer-related policies released since mid-June 2026

Source: Government official website, Deloitte Research

Overall, short-term policies will focus on targeted support and stabilizing the fundamental economic base. Medium- to long-term industrial policies will guide industry resources to continuously shift progressively toward service consumption, smart consumption, and green consumption. For enterprises, the focus of market competition will shift from simple price and channel rivalry to comprehensive competition involving digital operations, product quality, and experiential scenarios.

Automotive

China’s shift toward regulated development in L3/L4 autonomous driving

2026 marks a turning point for L3/L4 automated driving in China, as the industry moves from pilot programs toward a more formal regulatory framework. China has approved its first mandatory national safety standard for L3/L4 systems, establishing a common safety benchmark across companies and technical approaches. In parallel, a draft amendment to the Road Traffic Safety Law has introduced a dedicated chapter on automated driving for the first time. Together, these developments signal a shift from technology and pilots advancing ahead of regulation toward closer alignment between industry development, standards and legislation.

A mandatory safety baseline for L3/L4 ADS

On July 30, China approved GB 44721-2026, Safety Requirements for Autonomous Driving Systems of Intelligent and Connected Vehicles, the country’s first mandatory national standard specifically covering L3/L4 ADS. It will take effect on July 1, 2027. Together with existing mandatory standards covering driver assistance, cybersecurity, software updates and data security, China is building a tiered product safety framework spanning L2 through L3/L4.

• System design and development: The standard sets safety requirements for both normal operation and abnormal conditions, including driving capabilities within the operational design domain (ODD), responses to system failures and minimum-risk strategies. Safety, therefore, needs to be built into the product earlier. OEMs will need to define ODD boundaries, identify potential failure modes, and incorporate redundancy, fallback and risk-mitigation measures into system design.
• Testing and validation: The standard introduces multiple layers of safety assurance, combining evidence provided by manufacturers with external validation. OEMs must conduct simulation, closed-course and on-road testing and maintain structured safety documentation, while regulators and third parties will review both company safety capabilities and actual system performance. L3/L4 validation is therefore moving beyond passing prescribed tests toward providing a comprehensive and traceable body of evidence that demonstrates safety.
• Product use and lifecycle management: The standard defines requirements for key human-machine interactions, including system activation, deactivation and takeover requests, and requires clear disclosure of automation level, system capabilities and operating limitations. OEM responsibilities also extend to software updates, operational monitoring, incident analysis and continuous improvement. As a result, competition is expanding beyond algorithms, performance and test mileage to broader capabilities in safety engineering, validation, organizational processes and post-launch safety management.

Legal framework for autonomous driving takes shape

On August 25, a draft amendment to the Road Traffic Safety Law was submitted to the Standing Committee of the National People’s Congress for its first review. For the first time, the draft includes a dedicated chapter on automated vehicles, distinguishing autonomous driving from driver assistance and addressing road access, traffic violations and insurance. For example, it proposes that traffic violations committed while the automated driving system is active be the responsibility of the vehicle manufacturer or importer.

China’s existing road traffic legislation was designed around human drivers and primarily regulated vehicles, drivers, and road use. The proposed amendment would bring autonomous driving systems into the national road traffic legal framework for the first time, beginning to address the rules and responsibilities that apply when L3 and higher-level systems operate on public roads.

Industry implications

Together, the mandatory safety standard and proposed road traffic legislation provide a clearer foundation for advanced autonomous driving, but they also raise the bar for market participation.

• For the Overall Market: The new framework should accelerate the transition of L3 from road testing and pilots toward regulated production, with highways and urban expressways likely to lead given their more clearly defined ODDs. However, L3 requires the system to assume greater responsibility for safe fallback, increasing development, validation, and compliance costs. Initial deployment is, therefore, likely to concentrate among leading OEMs with strong engineering capabilities and on higher-end vehicles that can absorb the additional cost. Over the longer term, broader L3 adoption will depend more on how quickly ODDs expand, system costs decline, and consumers demonstrate a willingness to pay.
• For OEMs: Clearer standards and legislation reduce regulatory uncertainty but also make whether to pursue L3 a more explicit strategic choice. Two approaches are emerging, differentiated primarily by whether L3 is viewed as a necessary step toward L4. One camp sees L3 as an important stage for validating system capabilities, progressively expanding ODDs, and building real-world experience for regulators and insurers. The other argues that the underlying technology can evolve directly toward L4, while products are deployed primarily as consumer L2+ systems and L4 services, reducing or potentially bypassing L3 as an intermediate product stage. Both approaches are likely to coexist in the near term, with greater convergence possible over time.
• For Suppliers: Higher safety and fallback requirements should create additional demand for redundant sensing and computing, drive-by-wire systems, driver monitoring, simulation, scenario libraries, testing, and certification. As OEMs build structured safety documentation, these requirements will also flow down the supply chain, making safety development, validation, and traceability increasingly important supplier qualifications. Greater alignment between China’s mandatory standards and international safety principles should also reduce the effort required for Chinese OEMs and technology suppliers to adapt their L3/L4 systems for overseas markets.

China’s regulatory framework for L3/L4 automated driving is still taking shape. The Road Traffic Safety Law amendment remains under legislative review, while insurance products and risk-pricing models for consumer L3 vehicles are still at an early stage. Nevertheless, the combination of mandatory product safety standards and progress in national legislation is closing key regulatory gaps and creating a clearer path toward the orderly commercialization of advanced autonomous driving.

Life Science & Healthcare

Compliance and Reimbursement Policies Align to Expand Pricing Space for Innovation

In H1 2026, China’s life sciences and healthcare (LSHC) sector began to show signs of an inflection point. One main thread was a broad tightening of compliance, exemplified by measures that took effect on May 1. Its impact goes beyond regulation itself. Clearing out the sector’s grey areas has, in effect, opened the way for a second thread: the repricing of homegrown innovation. Below, we trace this shift along four dimensions: compliance, payment policy, overseas expansion, and capital markets.

Tighter compliance: drawing the line, opening the space

The density and intensity of compliance actions in H1 were unprecedented in recent years. In May, a judicial interpretation issued by the Supreme People’s Court and the Supreme People’s Procuratorate took effect, clarifying for the first time the criminal thresholds for kickbacks received by medical staff and bribes paid by drug companies. Concurrently, fourteen ministries jointly issued the annual work plan on rectifying misconduct, bringing tax violations and medical data security within its scope for the first time. The revised implementing regulations of the Drug Administration Law reinforced the marketing authorization holder’s end-to-end liability, while the five-year action plan for the supervision and inspection of medical insurance funds was also initiated.

In the near term, this will raise compliance costs significantly, particularly for small and mid-sized companies, with the resulting adjustment pains likely surfacing over the next one to two years. Over a longer horizon, however, as grey-area competition recedes, marketing spend will matter less and clinical and scientific value will matter more—redirecting resources toward genuine innovation. Compliance capability is also a precondition for going global; international buyers are paying for auditable data and robust R&D systems, not just pipelines.

Exhibit 1: Timeline of key LSHC policies in H1 2026

Source: NHSA, NMPA, National Health Commission and State Council public documents; compiled by Deloitte Research

Policy & payment: rewriting pricing logic and return profiles

If tighter compliance is about subtraction, the payment reform represented by the "dual-catalogue" system is about addition. National Reimbursement Drug List (NRDL) price negotiations have in recent years implied average cuts of around 60%, while drugs outside the list face a limited self-pay market. Introduced in 2025, the Commercial Health Insurance Innovative Drug Catalogue recommends drugs that offer high clinical value but are priced beyond the "basic coverage" remit to commercial insurers, exempting them from hospitals' insurance-budget performance metrics to create a more moderately priced intermediate payment tier.

While 2025 was about building the mechanism, 2026 is about making it work. The 2026 "dual-catalogue" adjustment plan, released on May 31, introduces three institutional innovations aimed at compressing the time lag between approval, launch, and volume ramp-up to unlock the benefits of the tiered reimbursement mechanism.

Table 1: Three institutional innovations in the 2026 "dual-catalogue" submission process

Source: NHSA public documents; compiled by Deloitte Research

Under the staged-access pathway, for example, a high-value innovative drug can first secure moderate pricing through the commercial insurance catalogue, accumulate real-world data, and then move into the NRDL at the right time to scale volume. The return curve thus shifts from a one-shot bet on annual national negotiations to a stepwise ladder. On the existing-catalogue side, traditional Chinese medicines whose package inserts still mark safety information as "unclear" have been designated as priority candidates for removal, while the 12th round of Volume-Based Procurement (VBP) continued steering toward "quality-assured price cuts with reasonable margins." Together, these incremental and existing-catalogue measures form the policy foundation of this repricing.

Exhibit 2: return curves for innovative drugs under old vs. new reimbursement access models

Source: Deloitte Research (illustrative; not measured data)

Going global: from selling pipelines to selling capabilities

Domestic price discovery is improving, but the payment ceiling remains clear. Realizing greater innovation value in global markets has therefore become an essential imperative. In H1, China’s license-out deals totaled roughly USD 99.7 billion, nearly double the full-year 2024 figure and over 70% of the 2025 total. Chinese companies accounted for eight of the world’s top ten deals by value.

Exhibit 3: China innovative-drug license-out deal value, 2023–H1 2026

Source: Next Pharma; compiled by Deloitte Research

Exhibit 4: Top 10 global pharma deals by value, H1 2026

Source: Next Pharma; compiled by Deloitte Research

Beyond the headline numbers, three structural features show Chinese innovation being repriced globally at different levels:

• Upgraded assets: MNCs are beginning to pay for capabilities, not just assets. The USD 18.5 billion CSPC–AstraZeneca partnership in January was priced primarily on the rights to two technology platforms (sustained-release drug delivery and AI-driven peptide discovery) rather than any single pipeline. Insilico Medicine’s roughly USD 7 billion in new business development (BD) deals in H1 likewise involved purchases of a reusable AI platform rather than individual molecules.
• Validated exit routes: The "NewCo" model's exit routes have been validated. In March, Gilead agreed to acquire Ouro Medicines, a NewCo co-established by Keymed, for up to USD 2.175 billion; in April, Kailera Therapeutics, co-founded by Hengrui, listed on Nasdaq, demonstrating that equity in innovative assets is now being priced directly by international capital.
• Deepening academic endorsement: At the 2026 ASCO annual meeting, Akeso’s HARMONi-6 study became the first China-originated study presented at the plenary session, with Chinese research setting new records via 94 oral presentations and 12 late-breaking abstracts.

Capital markets: a structural recovery favoring frontier "hard tech"

The capital market recovery is equally structural, with capital concentrated on assets that can be priced globally and have overseas potential. In the IPO market, six LSHC companies listed on the A-share market in H1 (five on the Beijing Stock Exchange), while Hong Kong saw 16 listings, with the LSHC IPO queue at one point reaching 91 companies. The sector composition says more than the raw numbers: 11 pre-profit biotech companies listed under Chapter 18A, spanning frontier areas such as ADCs, siRNA, synthetic lethality, and surgical robotics, while broad healthcare segments such as digital health and medical services saw no IPOs in H1.

The primary market improved in tandem; 451 financings worth USD 7.5 billion were completed in H1, up 114% year-on-year and already exceeding the 2024 full-year total. The center of gravity for large financings shifted markedly upward: the largest single round in all of 2025 was about RMB 1 billion, whereas H1 2026 alone saw four rounds in the RMB 2 billion range. By sector, primary and secondary market preferences aligned. "Hard tech" sectors such as AI-driven drug discovery, cell therapy, radiopharmaceuticals, and brain-computer interfaces attracted significant focus. The four largest deals were:

1. Deep Intelligent Pharma: USD 787 million (AI drug discovery)
2. BrainCo: RMB 2 billion (brain-computer interface)
3. Jiyu Pharmaceutical: Nearly RMB 2 billion (boasting four out-licensing deals worth over USD 2.3 billion in three years)
4. Qixing Pharmaceutical: USD 287 million (featuring an oral small-molecule GLP-1 RA as its core pipeline)

In contrast, sectors such as pharmaceutical commerce and medical services saw virtually no financing activity. This divergence in capital allocation shows that investors are now applying a stricter standard to each company’s clinical value and global potential.

For China's LSHC industry, the contours of this repricing are becoming clear. However, it will unlikely lift the whole sector evenly; it will reward "true innovation" that can withstand compliance scrutiny, clinical testing, and global competition. Whether companies can demonstrate clinical value and commercial viability in the real world will be a critical imperative for every industry player.