This post is a summary of the current state of healthcare restrictions for foreign investors in Mainland China. The rules for foreign investors in China's healthcare space are constantly changing, so this is our attempt to provide some general guidance. At the end of the article, I offer some guidance for how these rules should impact the ways (1) investors approach investment opportunities in China's healthcare industry, and (2) investors evaluate major, publicly listed healthcare players in China's healthcare industry.
In short, Macao, Hong Kong and Taiwanese investors can establish wholly-foreign owned enterprises (enterprises entirely owned by the investor, henceforth "WFOEs") in certain well-defined areas of the healthcare industry (i.e. not hospitals and senior care facilities, which still have to be established through equity or contract joint ventures). Everyone else still has to enter the healthcare industry exclusively through a Chinese joint venture partner, according to the July 1, 2000 law, "Tentative Measures on the Administration of Sino-Foreign Equity Joint Venture and Sino-Foreign Contractual Joint Venture Medical Institutions" (henceforth "The 2000 Tentative Measures on Medical Institutions"). Let's unpack that.
The Foreign Investment Industrial Guidance Catalogue's revisions at the end of 2011, which went into effect January 30, 2012, removed healthcare from the restricted list of industries. The Guidance Catalogue prompted even skeptical foreign investors to again hold out hope that they would be allowed to establish hospitals free of restrictions on wholly foreign ownership. This is because of two things:
- The Guidance Catalogue itself did not explicitly mention that foreign investors in the healthcare industry would be subject to limitations on investment form or a shareholder cap, stating only that "Medical treatment (limited to equity joint ventures or contractual joint ventures)" was being nixed from the 2011 Guidance Catalogue, and
- A 2010 promulgation, co-signed by several ministries, the Opinions on Further Encouraging and Guiding Privately Owned Capital to Establish Medical Institutions, (henceforth "the Opinions on Medical Institutions") called for abolishing the shareholder caps in healthcare enterprises and for permitting otherwise qualifying foreign investors to establish wholly foreign-owned medical institutions on a pilot basis.
Taken together, these two documents were cause for optimism that The 2000 Tentative Measures on Medical Institutions would be replaced with a law much more friendly to foreign investors. Nevertheless, whether the 2011 Guidance Catalogue language meant that all limitations on investment form would be lifted, or only that absolute restriction on investment into medical treatment facilities would be lifted with continued restrictions on investment form and shareholder cap remaining in place, was anyone's guess. The favored interpretation among US analysts was that this would be the beginning of a new age of uncapped, WFOE foreign investment into the Chinese medical industry; otherwise, the removal of limitations as phrased in the 2011 Guidance Catalogue would be rendered meaningless.
It is important to remember when digesting this last point that neither the draft nor the opinion created actual law. Rather, they were just signals of what the fully revised version of The 2000 Tentative Measures on Medical Institutions could look like.
It turns out that the analysts were too optimistic. Since the issuance of the Guidance Catalogue at the start of January 2012, it has become clear that the Opinions on Medical Institutions is at the very least concerned with long-term goals, and that in the short term the opening of the private healthcare industry is going to be much more conservative.
To wit, subsequent developments and proposed revisions in the law seem to point to the creation of two categories of foreign investor - those from Macao, Hong Kong and Taiwan are now in one category while everyone else is in another, less favored category - as well as the continued presence of investment form and shareholder cap restrictions for the less favored category of investor. We'll take each point in turn.
1. Macao, Hong Kong and Taiwan
As of an October 22, 2012 Ministry of Health issuance, Macao and Hong Kong investors are allowed to set up solely-owned healthcare organizations in addition to equity and contractual joint ventures on the mainland. This is actual law, and not a mere opinion or signal. The right given to Macao and Hong Kong applies to all healthcare organizations except for hospitals and senior care facilities, which still must be established through a joint venture agreement. Taiwan investors also have this same bundle of rights. All other foreign investors are currently still subject to The 2000 Tentative Measures on Medical Institutions, and are likely going to be subject to the investment form and ownership cap provisions outlined below.
2. Everyone else
On April 13, 2012, China's Ministry of Health issued a working draft revision of The 2000 Tentative Measures on Medical Institutions called, "Sino-foreign Joint Venture and Cooperative Joint Venture Medical Institutions Administrative Measures Draft" (henceforth "The Administrative Measures Draft"). It is the Administrative Measures Draft because the document was promulgated with the intent of collecting public comment and is still undergoing revisions. Therefore, it is also not yet law. A final draft is to be expected soon, but there is no set date as to when the final draft will be promulgated. It is likely that the next issuance may also be a draft. This is the first revision to the catalogue since 2000, so the discussions on the law's changes can reasonably be expected to take some time. (That being said, a final draft could come at any time. Ultimately, the process and timeline are not transparent.)
In any case, for now, the Administrative Measures Draft in its current form indicates that the uncapped, WFOE dream is not going to be realized in the near future for foreign investors not from Macao, Hong Kong or Taiwan.
If The Administrative Measures Draft were implemented today, participation in the healthcare space would still require that one enter into an equity joint venture or a contractual joint venture agreement, and foreign ownership in healthcare ventures still could not exceed 70%, just like in The 2000 Tentative Measures on Medical Institutions. Moreover, the Administrative Measures Draft would also increase the previous investment threshold for the foreign participant from 20 million RMB to 100 million RMB or 50 million RMB depending on the socio-demographic characteristics of the invested-into area (ex. less developed central and western provinces).
If this seems like the hurdle for participation in the healthcare space, would not only remain but also be raised by the implemented form of the current Administrative Measures Draft, that's because it would in some very basic ways.
The good news is that, if the Draft is implemented, the registration and administration of healthcare industries would be moved to the sub-national level and registration and approval processes would be better streamlined. For a very good summary of these and other changes, I cede the space to the China team of Faegre, Baker & Daniels, who provide an excellent and full bullet-point analysis of the changes.
In summary, what investors need to be aware of is that the regulations governing foreign healthcare investments are still developing, but seem like they are shifting the focus and responsibility of healthcare development, and the administration of partnerships in the healthcare space even more to sub-national levels.
The import of this continued decentralization of healthcare development and financing, and continued restriction on foreign investment in the healthcare space, is that investors will be increasingly tasked with evaluating the dependence certain healthcare companies in China have on business operations at the sub-provincial levels of China's healthcare system. The capacity of local governments to successfully finance healthcare spending is going to vary widely from locality to locality, so this evaluation will have to be done on a case by case basis.
For example, Chindex International, Inc., (NASDAQ:CHDX) has announced plans to build bigger hospitals and more hospitals over the next two to three years. Investors would be wise to ask Chindex about the sorts of funding changes and partnership challenges that Chindex expects to face given the continued existence of limitations of foreign-run healthcare organizations. Does the above-described, somewhat unexpected decision of China's MOH to continue imposing an ownership cap on foreign-invested hospitals put unexpected pressure on Chindex's own expansion plans?
On the other hand, investors should also take care not to be overly discouraged by these developments. Companies like Chindex already established in the China healthcare space have a golden opportunity to expand and flourish if the healthcare reforms continue to open up the market in key ways. Running concurrently with the developments described in this article is a push by the Chinese government to establish a level playing ground for private healthcare enterprises as compared to public healthcare enterprises when it comes to participation in the social insurance scheme. This is a very big prize considering that the social insurance covers 98% of China's 1.3 billion strong population. Therefore, far from shunning China's healthcare market due to the inherent risk of joint ventures, one should learn to read and appraise local market conditions (see here for a post on doing local due diligence on healthcare acquisition targets in China) and strive to understand how local conditions and relationships will impact the success possibilities of investment. At the same time, healthcare companies operating in China should also strive to be as open as possible by the challenges they are facing, and to keep investors informed on how they are adapting to meet those challenges head on.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.