China’s regulatory crackdown on healthcare sector, outlook for investors

A woman sorts medication in the pharmacy of Yueyang Hospital at Shanghai University of Traditional Chinese Medicine in Shanghai.

JOHANNES EISELE | AFP | Getty Images

China’s health sector is likely to be the next to be scrutinized, analysts warn, as the country’s regulators crack down on everything from technology to education to data security.

Chinese President Xi Jinping this week reiterated the need to support moderate prosperity for all – or the “common prosperity” idea that he has been promoting for months.

That’s what drives the spate of corporate crackdowns, analysts say.

“‘Shared prosperity’ remains an idea that is still looking for an implementation strategy,” said Rory Green, China economist at TS Lombard. “Right now it is much easier to regulate industry and capital markets than to initiate structural reforms.”

He predicted that next to the real estate market, Beijing’s health care system would be Beijing’s next destination.

The healthcare industry is one of the country’s so-called “three big mountains,” referring to rising costs in education, real estate, and healthcare – all of which are barriers to affordable living.

The health care system is “the only one that has not yet been affected by regulatory scrutiny” and “particularly at risk,” said Green in a statement on August 31.

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The Chinese government had previously promised to keep prices in check, but efforts will now be stepped up, Capital Economics said in a statement on Tuesday.

“Public housing and healthcare are likely to expand, while private medical providers and real estate developers may soon face greater restrictions on their ability to price and make profits,” wrote Julian Evans-Pritchard, chief China economist at Capital Economics.

Chinese regulators have already tightened restrictions on the country’s education sector, targeting billions of dollars in the after-school tutoring segment.

China stocks could fall another 15%

China’s crackdown last year affected a wide range of industries, from technology to education to food delivery.

That has led to heavy sell-offs in Chinese stocks, which have wiped billions of dollars from technology stocks over the past few months.

So far this year, China’s healthcare stocks have outperformed the broader Chinese indices.

MSCI’s Chinese health index has fallen slightly below the flat line since the start of the year, while the MSCI China index is down more than 13%..

But some healthcare stocks, especially companies that use technology platforms, are already suffering. JD Health, for example, is down nearly 50% this year. Alibaba Health has slumped more than 40% since the beginning of the year.

Green said TS Lombard predicts the MSCI China index could fall another 10-15% in the worst case scenario.

He cautioned investors to be cautious, saying that political risk would remain elevated until the Chinese Communist Party’s 20th National Congress next year.

“The political calendar is charged and with cadres eager to build populist credibility to advertise, political control of the markets is likely to remain elevated – rather than weakened – over the coming months,” Green wrote.

What could be safer to buy? The so-called government favorites, said Green. These include relatively safe sectors such as technical hardware, clean energy and defense.

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