Chinese regulatory crackdown on the healthcare sector, prospects for investors

Chinese regulatory crackdown on the healthcare sector, prospects for investors

A woman sorting drugs at the pharmacy at Yuyang Hospital, part of the Shanghai University of Traditional Chinese Medicine.

Johannes Eisele | AFP | Getty Images

Analysts warn that China’s healthcare sector is likely to be under intense scrutiny, as regulators across the country crack down on everything from technology and education to data security.

Chinese President Xi Jinping once again this week reiterated the need to support moderate money for all – or the idea of ​​”shared prosperity” he has been advocating for months.

Analysts say this is the reason the actions against the companies are escalating.

“’Shared prosperity’ is an idea that is always looking for a strategy to implement,” said Rory Green, Chinese economist at TS Lombard. “At the moment, it is much easier to regulate industry and capital markets than to institute structural reforms.”

He predicted that with the real estate market, healthcare would be Beijing’s next target.

The healthcare industry is one of the so-called ‘three great mountains’ in the country, which refers to rising costs in the education, real estate and healthcare sectors – which all create barriers to an affordable lifestyle.

Healthcare is “the only one that has yet to go through regulatory review” and is “particularly vulnerable,” Green said in an Aug. 31 note.

Capital Economics said in a note Tuesday that the Chinese government had previously promised to keep prices in check, but is now preparing to step up efforts.

“Public housing and healthcare are likely to expand, while private medical providers and property developers will soon be more concerned with their ability to set prices and seek profits,” wrote Julian Evans-Pritchard, senior Chinese economist at Capital Economics. There may be obstacles.

Chinese regulators have already imposed sanctions on the country’s education sector and targeted the billion dollar extracurricular education segment.

Chinese stocks could dip another 15%

China’s actions over the past year have covered a wide range of industries, from technology to education and food delivery.

Chinese stocks have sold sharply in recent months, wiping out billions of dollars from tech stocks.

So far this year, Chinese healthcare stocks have outperformed the larger Chinese indices.

The MSCI China Healthcare Index edged down to a stable year-over-year level compared to the MSCI China Index, which fell more than 13%..

But some healthcare stocks, especially companies that use technology platforms, are already suffering. JD Health, for example, is down about 50% this year. Alibaba Health recorded a drop of more than 40% year on year.

Green said TS Lombard predicted the MSCI China Index could dip 10-15% in a worst-case scenario.

He warned investors to be cautious, saying political risks will remain high until the 20th National Congress of the Communist Party of China next year.

“The political calendar is busy, and with executives seeking to consolidate their populist credentials in pursuing propaganda, the political scrutiny of the markets is likely to remain high in the months to come – rather than lowering,” Green wrote.

Is it safe to buy? The so-called government favorite, Green said. These include relatively secure sectors such as technical equipment, clean energy and defense.

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