For the last decade, guessing when China’s economy will slow down has been something of a sport. Much of this is because such a moment, or as those most pessimistic have long argued, an “inevitable” domestic financial crisis, would test the Beijing Model.
China’s success thus far has reflected its ability to allow a quasi-authoritarian government to co-exist with an equally quasi-capitalist economy. Ideological purists, especially those in the west who remain suspicious of China’s rise, believe the tension between the two is not sustainable.
Many within this group of cynics hold the belief that China’s rise will prove short-lived once its economy hits an inevitable air pocket, and its people no longer accommodate the trade of economic growth in exchange for an inflexible and corrupt political system.
While the questions of whether and how China’s political system could change in the midst of a domestic financial crisis is interesting, this question involves unwieldy geo-political theories that prove unhelpful for us to understand the more practical impact of a major slowdown, or even worse a true crisis, within China’s economy and financial system.
Among the first and most notable casualties of a slowdown or crisis would be China’s planned investments in its healthcare sector.
The inevitable financial triage that would take place after a shock to the financial system – and in fact, as some have argued, something that may already be occurring – would force the central government to re-allocate capital planned for healthcare spending towards bolstering other parts of the country’s financial system and providing stimulus to banks, industry and consumers.
The counterargument to such an approach, that China cannot afford to pull back from its healthcare investment plans out of fear from the political backlash that would ensue, makes an important point, but comes up short when measured against the much bigger and more catastrophic risks should the country’s banks or municipalities face fundamental challenges to their liquidity.
Does the possibility of increasingly limited financial resources from the government because of an economic slowdown play any role in the country’s recent attempts to open the healthcare sector – hospitals and senior care in particular – up to foreign investment? Yes.
Recognition that China faces overwhelming needs to increase capacity on both fronts, with finite capital to do so, has made the decision to open its healthcare system to foreign investment necessary.
While the general question about whether a financial crisis would impact China’s planned spending on healthcare is interesting, for healthcare businesses and investors the more important point is how such a moment could create new opportunities and commercial issues specific to their market access strategies in China.
Given the increasingly political nature of the country’s healthcare economy and the associated pressures multinational pharmaceutical and device companies now face across China, now is a good time to pause and think through both the risks and rewards that could present themselves if China’s central government finds itself poorly positioned to deliver on its promised healthcare investments.
Unfortunately, one of the greatest risks to multinationals would be growing intensity on prices. Among the most immediate impacts from this summer’s GSK scandal was the realization on the part of the Chinese government that they have the upper hand on pricing matters.
This power comes not only from the massive volume opportunities the government controls as part of its Essential Drug List (EDL), but also the simple fact that China’s market remains one of the few bright lights in an otherwise murky future for international pharma companies.
In the midst of an economic crisis that redirects financial resources away from the government’s planned spending on healthcare, it is all but inevitable that Beijing would put more pressure on pharma and device companies to lower prices.
Following the GSK scandal, later this summer the Chinese government made similar noises about investigating the prices of multinational medical devices, this time with an eye on what they called monopolistic pricing tendencies.
This strategy uses the very powerful National Development and Reform Commission (NDRC) and its ability to investigate using domestic anti-trust laws. While this is not a new tactic in China for other industries, it is one with very immediate and powerful implications to pricing for both pharmaceuticals and device companies.
In the aftermath of a domestic financial crisis, the government’s attempts to add further pressure on manufacturers to lower prices may seem obvious; however, at some point if the market opportunity in China begins to look like that of other international markets where high volumes are matched to poor margins, multinational pharma and device companies will find one of their last sources for growth has been heavily pruned back.
If these forces are tied to additional pressures by the Chinese government to get international life science companies to transfer technology to domestic partners, and if multinationals believe they are being held to standards fundamentally at odds with those domestic players are allowed to get away with, the calculus of doing business in China will alter for the worse.
These frustrations would be likely to grow much worse as companies feel the full weight of being political targets for the Chinese government. One of the under-anticipated impacts of this summer’s GSK crisis were the political points scored by characterizing the foreign pharmaceutical companies as “gouging” the government and the Chinese consumer.
Multinationals in China are particularly sensitive to how they are perceived by the Chinese consumer, something companies such as Wal-Mart and Starbucks have learned the hard way.
GSK’s prompt round of price concessions in China – some nearly 30% off what had been charged in the days prior to the corruption allegations – made the simple point not only that they had this sort of room to lower prices, but also that Beijing could flex its muscles and make a political point that served the added value of distracting Chinese from the state’s own problems delivering modern healthcare to its people.
While risks related to an economic slowdown are very real, they may also be felt disproportionately between manufacturers in the pharma, device and diagnostic fields versus providers of healthcare services. In the latter areas, China most needs additional capacity.
The country’s existing plans to greatly expand the role of private healthcare have already resulted in some initial domestic and foreign capital moving into the country’s primary care, specialty and general hospital sectors.
During a period where the government’s massive plans for new public hospital capacity building would come under severe strain, the pressure to further roll back limitations and roadblocks that inhibit private capital going to work in China’s domestic healthcare delivery would likely roll back, to the advantage of both consumers and investors.For over thirty years, China’s economic growth has been nothing short of breathtaking.
Now, as questions mount about the country’s ability to rebalance its economy and the stability of its domestic financial system occur at the precise moment when the country is working to re-direct investment towards domestic consumption and re-invest in much needed sectors such as healthcare,
multinational healthcare investors and manufacturers at work in China need to understand the new pressures they are going to be under, and how these could intensify if China’s domestic economy takes a turns for the worse.
forbes.com
China’s success thus far has reflected its ability to allow a quasi-authoritarian government to co-exist with an equally quasi-capitalist economy. Ideological purists, especially those in the west who remain suspicious of China’s rise, believe the tension between the two is not sustainable.
Many within this group of cynics hold the belief that China’s rise will prove short-lived once its economy hits an inevitable air pocket, and its people no longer accommodate the trade of economic growth in exchange for an inflexible and corrupt political system.
While the questions of whether and how China’s political system could change in the midst of a domestic financial crisis is interesting, this question involves unwieldy geo-political theories that prove unhelpful for us to understand the more practical impact of a major slowdown, or even worse a true crisis, within China’s economy and financial system.
Among the first and most notable casualties of a slowdown or crisis would be China’s planned investments in its healthcare sector.
The inevitable financial triage that would take place after a shock to the financial system – and in fact, as some have argued, something that may already be occurring – would force the central government to re-allocate capital planned for healthcare spending towards bolstering other parts of the country’s financial system and providing stimulus to banks, industry and consumers.
The counterargument to such an approach, that China cannot afford to pull back from its healthcare investment plans out of fear from the political backlash that would ensue, makes an important point, but comes up short when measured against the much bigger and more catastrophic risks should the country’s banks or municipalities face fundamental challenges to their liquidity.
Does the possibility of increasingly limited financial resources from the government because of an economic slowdown play any role in the country’s recent attempts to open the healthcare sector – hospitals and senior care in particular – up to foreign investment? Yes.
Recognition that China faces overwhelming needs to increase capacity on both fronts, with finite capital to do so, has made the decision to open its healthcare system to foreign investment necessary.
While the general question about whether a financial crisis would impact China’s planned spending on healthcare is interesting, for healthcare businesses and investors the more important point is how such a moment could create new opportunities and commercial issues specific to their market access strategies in China.
Given the increasingly political nature of the country’s healthcare economy and the associated pressures multinational pharmaceutical and device companies now face across China, now is a good time to pause and think through both the risks and rewards that could present themselves if China’s central government finds itself poorly positioned to deliver on its promised healthcare investments.
Unfortunately, one of the greatest risks to multinationals would be growing intensity on prices. Among the most immediate impacts from this summer’s GSK scandal was the realization on the part of the Chinese government that they have the upper hand on pricing matters.
This power comes not only from the massive volume opportunities the government controls as part of its Essential Drug List (EDL), but also the simple fact that China’s market remains one of the few bright lights in an otherwise murky future for international pharma companies.
In the midst of an economic crisis that redirects financial resources away from the government’s planned spending on healthcare, it is all but inevitable that Beijing would put more pressure on pharma and device companies to lower prices.
Following the GSK scandal, later this summer the Chinese government made similar noises about investigating the prices of multinational medical devices, this time with an eye on what they called monopolistic pricing tendencies.
This strategy uses the very powerful National Development and Reform Commission (NDRC) and its ability to investigate using domestic anti-trust laws. While this is not a new tactic in China for other industries, it is one with very immediate and powerful implications to pricing for both pharmaceuticals and device companies.
In the aftermath of a domestic financial crisis, the government’s attempts to add further pressure on manufacturers to lower prices may seem obvious; however, at some point if the market opportunity in China begins to look like that of other international markets where high volumes are matched to poor margins, multinational pharma and device companies will find one of their last sources for growth has been heavily pruned back.
If these forces are tied to additional pressures by the Chinese government to get international life science companies to transfer technology to domestic partners, and if multinationals believe they are being held to standards fundamentally at odds with those domestic players are allowed to get away with, the calculus of doing business in China will alter for the worse.
These frustrations would be likely to grow much worse as companies feel the full weight of being political targets for the Chinese government. One of the under-anticipated impacts of this summer’s GSK crisis were the political points scored by characterizing the foreign pharmaceutical companies as “gouging” the government and the Chinese consumer.
Multinationals in China are particularly sensitive to how they are perceived by the Chinese consumer, something companies such as Wal-Mart and Starbucks have learned the hard way.
GSK’s prompt round of price concessions in China – some nearly 30% off what had been charged in the days prior to the corruption allegations – made the simple point not only that they had this sort of room to lower prices, but also that Beijing could flex its muscles and make a political point that served the added value of distracting Chinese from the state’s own problems delivering modern healthcare to its people.
While risks related to an economic slowdown are very real, they may also be felt disproportionately between manufacturers in the pharma, device and diagnostic fields versus providers of healthcare services. In the latter areas, China most needs additional capacity.
The country’s existing plans to greatly expand the role of private healthcare have already resulted in some initial domestic and foreign capital moving into the country’s primary care, specialty and general hospital sectors.
During a period where the government’s massive plans for new public hospital capacity building would come under severe strain, the pressure to further roll back limitations and roadblocks that inhibit private capital going to work in China’s domestic healthcare delivery would likely roll back, to the advantage of both consumers and investors.For over thirty years, China’s economic growth has been nothing short of breathtaking.
Now, as questions mount about the country’s ability to rebalance its economy and the stability of its domestic financial system occur at the precise moment when the country is working to re-direct investment towards domestic consumption and re-invest in much needed sectors such as healthcare,
multinational healthcare investors and manufacturers at work in China need to understand the new pressures they are going to be under, and how these could intensify if China’s domestic economy takes a turns for the worse.
forbes.com
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