Do I have to set up my manufacturing in China to supply China market?

It is encouraged. There are over 16,000 hospitals in China, 85 percent of which are publicly owned and which spend more than RMB200 billion every year purchasing low to mid-end medical devices from domestic manufacturers and import mid to high-end products from foreign manufacturers. Procurement is conducted through a centralized tender process.
Public hospitals are not prevented from importing medical devices; however, in practice, public hospitals are encouraged to purchase domestically manufactured and domestically branded products. In light of this incentive scheme, a number of foreign companies are setting up or considering setting up their production in China to supply the China market.