China: Opportunities For Investment In The Chinese Health Care Market

China is the world's most populous country and the second largest economy. In the past three decades, it has maintained rapid economic development. China's urban population is projected to reach one billion by 2030 (approximately 70 per cent of the population), with more than 220 cities housing at least one million residents. The high-density environment and the lifestyle and diet associated with urban living are creating enormous health care challenges.

CHINA'S HEALTH CARE BOOM

Currently, over 185 million Chinese residents are over the age of 60 (approximately 15 per cent of the population), and China is projected to become the world's most aged society by 2030. In recent years, there has been a substantial increase in spending on pensions and social security, which has created a relatively wealthy segment of elderly consumers. The growing senior population is driving increased demand for senior care services such as skilled nursing facilities, independent senior living facilities, and services that target age-related health problems such as diabetes, hypertension, cancer and respiratory illness.

On the other end of the spectrum, China has recently revised its one-child policy by allowing its citizens to have two children per family. As a result, China may experience a baby boom, which will likely lead to strong demand for more medical facilities, equipment and services in connection with gynecology, obstetrics and pediatrics.

Finally, the Chinese Government has been increasing its health care spending in an effort to enhance affordability and access to medical care. Since the per-capita health expenditure in China is still very low relative to the United States (US$367 : US$9,416 in 2015), there is a huge potential for additional spending increases in the future.

OPPORTUNITIES FOR FOREIGN INVESTORS

China adopted its 13th Five-Year Plan in March 2016. The Plan reflects a recognition that the government alone cannot meet the increased demand for higher quality health care and senior care services and products. As such, the Plan promotes a "Healthy China" movement, which aims to establish an integrated health care and senior care system and encourages private investment in the health care and senior care sector. This is consistent with the recent trend of the Chinese Government encouraging investment in private health care and senior care facilities. Foreign capital participation in this sector is viewed as a key lever to achieving international quality standards and practices.

This means there are increasing opportunities for non-domestic health care providers. Foreign senior care operators, which are now permitted to set up wholly-foreign owned enterprises (WFOE) in China, will enjoy various favourable policies. Tax incentives, administrative fee exemptions and special deductions and waivers, which were once provided only to Chinese-owned, senior care facilities are now being offered to those that are foreign-owned.

Although senior care facilities are now permitted to be wholly-owned by foreign investors, policies on foreign ownership of Chinese hospitals have see-sawed. In 2013 and 2014, China issued special policies that permitted establishment of hospitals that are WFOE in Beijing,

Fujian, Guangdong, Hainan, Jiangsu, Shanghai and Tianjin. In 2015, however, China took a step back and restored its restriction on the maximum foreign equity ownership (70 per cent) in hospitals, except for health care providers from Australia, Hong Kong, Macau and Taiwan.

Despite the new restriction on WFOE hospitals, foreign investors continue to show interest in China's hospital market. According to data from Dealogic, there have been 11 inbound investment transactions in China's hospital sector in 2016 so far, with a total transaction value of US$354.7 million. This is a significant increase from a single deal worth US$9.1 million in 2014.

Given the acute need to rapidly improve the availability and quality of health care and senior care facilities, increasing foreign investment in these sectors is expected for many years.

OUTBOUND INVESTMENTS AND INTERNATIONAL OPPORTUNITIES

China has not fully liberalised the country's capital account. As a result, all outbound investments from Chinese companies are subject to regulatory approvals and require filings with various authorities, including the Chinese Ministry of Commerce, the Chinese National Development and Reform Commission, the State Administration of Foreign Exchanges, the China Securities Regulation Commission, the China Banking Regulation Commission and the China Insurance Regulation Commission.

The good news is that, in recent years, China has effectively abolished many of the administrative controls that had previously restricted overseas investments and greatly streamlined the regulatory approval regime. Investments in non-sensitive markets and sectors can now use a streamlined process based on record filing rather than direct approval by the Ministry of Commerce and the National Development and Reform Commission. This record filing normally takes less than a week. The State Administration of Foreign Exchanges (SAFE) has also relaxed rules to permit Chinese companies to obtain foreign currency more quickly via banks rather than through SAFE. These liberalisations have provided Chinese companies with greater control and flexibility over outbound investments and greatly reduced bureaucratic red tape.

Nevertheless, China will continue to be cautious in lifting control over its capital account and outbound investments owing to the uncertainty persisting over China's growth prospects and economic fundamentals. For example, given the recent devaluation of Chinese currency, SAFE has tightened its control on foreign exchange for outbound investments and required Chinese banks to maintain a balance of their own income and expenditure of foreign currency when selling foreign currencies to Chinese outbound investors. This has caused significant timing and funding issues for Chinese companies that are trying to obtain sufficient foreign currency to finance their outbound investments. In response to these issues, foreign sellers have begun to guard against funding risk by imposing a reverse break-up fee ranging generally from 3 to 15 per cent.

Chinese companies also want to tap into the increasing domestic demand for high-end health care services and products. As a result, they have been stepping up their outbound investment in Australia, Europe, Israel and the United States, in an effort to access advanced health care technology, expertise and branding that can be brought back to China to satisfy the needs of the domestic market.

According to data compiled by Bloomberg, as of July 2016, Chinese companies had announced more than US$3.9 billion in overseas acquisitions in the pharmaceutical, biotechnology and health care sectors this year, which is a tenfold increase over 2012. ChemChina, China's largest state-owned chemical company, is on track to acquire Swiss seed and pesticide company Syngenta AG in a deal described as a "mega merger" valued at US$43 billion.

The changing demographic and economic landscape in China is increasing the demand for health care services and products. At the same time, the global reach of Chinese industry— including the health care and life sciences sectors—is increasing, as these firms identify opportunities abroad.

The Chinese Government has been taking steps to improve the regulatory environment to ease both foreign direct investment in the Chinese health care sector and outbound investment by Chinese firms. While market conditions will drive business decisions, these changes will give Chinese and non-Chinese health care sector participants more flexibility and comfort in these markets.

Opportunities For Investment In The Chinese Health Care Market

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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