Is China’s healthcare market open to foreign investment?

When investing in China’s healthcare market, one of the first considerations should be whether the specific sector they want to enter allows foreign investment.

Despite China’s continuous liberalisation of its healthcare industry to allow foreign participation by removing items from the Special Administrative Measures (Negative List) for Foreign Investment Access (hereafter referred to as the “FI Negative List”) and adding items to the Catalogue of Encouraged Industries for Foreign Investment (hereafter referred to as the “FI Encouraged Catalogue”), there are still certain sectors that remain off-limits or restricted to foreign investment.

Medical institutions

On 8 September 2024, the Ministry of Commerce (MOFCOM) published a circular on its official website announcing the expansion of pilot programs for opening up the medical sector. This circular permits wholly foreign-owned hospitals in selected cities. The Chinese government has emphasised that China will “further relax foreign investment access, completely removing restrictions on foreign investment in the manufacturing sector and accelerating the opening of the telecommunications, education, and healthcare service sectors”.

Following the initial announcement, on 29 November 2024, the National Health Commission (NHC), together with three other government departments, released a detailed work plan for wholly foreign-owned hospitals in nine cities: Beijing, Tianjin, Shanghai, Nanjing, Suzhou, Fuzhou, Guangzhou, Shenzhen, and the entire island of Hainan.

In practice, even prior to recent adjustments to the regulations, some foreign investors had managed to break through these restrictions on foreign ownership ratio or even gain complete control over domestic medical institutions through historical investment, domestic reinvestment, VIE arrangement, or custody agreement. However, they may face obstacles when changing or renewing their operational qualifications, such as the Practicing License of Medical Institutions. Furthermore, in the case of subsequent shareholding changes, regulatory authorities may review the actual foreign shareholding ratio based on the “look-through approach” (穿透式审查, meaning tracing to the ultimate shareholder by looking through the multiple layers of shareholding structure based on the current effective law at that time), which may require foreign investors to reduce their ownership. Therefore, foreign investors should exercise caution when planning their investment structure.

Human stem cells and genetic technology

The aforementioned MOFCOM circular from September 2024 also lifted bans on foreign-invested enterprises (FIEs) engaging in cell and gene therapy (CGT) in selected free trade zones (FTZs).

Foreign investors are encouraged to invest in the manufacturing of high-throughput gene sequencing systems, according to the latest FI Encouraged Catalogue. Foreign investors are also generally not restricted from engaging in the import and export, production, sales, and research and development of genetic testing equipment.

On the other hand, in accordance with the Regulations of the People’s Republic of China on the Administration of Human Genetic Resources, foreign investors can cooperate with domestic institutions in scientific research related to stem cell and/or genetic diagnosis and treatment, provided that certain requirements are met, and regulatory approvals are obtained. They can also grant licenses to domestic institutions for the technological development and sale of genetic diagnostics and/or stem cell products owned by them.

Although there are established pathways for foreign investment in the sector, foreign investors may still encounter challenges. For instance, it can be challenging to clearly distinguish between the development of genetic testing equipment and the research and development of genetic testing technology in practice. Consequently, some activities of genetic testing equipment research and development enterprises may be classified as the application of genetic diagnosis and treatment technology, thereby prohibiting foreign investment. To avoid such complications, foreign investors are advised to communicate with relevant authorities in advance.

Traditional Chinese medicine

Foreign investors are prohibited from investing in the application of steaming, frying, moxibustion, calcination, and other processing techniques of traditional Chinese medicine (TCM) decoction pieces, as well as the production of confidential prescription products of proprietary Chinese medicines. However, such restrictions do not exist in China’s 21 free trade zones.

Beyond these three sectors – medical institutions, human stem cell and genetic diagnosis and treatment technology, and TCM – other healthcare sectors are mostly open to foreign investment in China.

In fact, foreign investment is actively encouraged in many healthcare areas, such as the manufacturing of new compound drugs or drugs with active ingredients, researching and developing (R&D) and manufacturing of cell therapy drugs (excluding areas where foreign investment is prohibited), manufacturing of dental implant systems for implant repair in patients with bone loss, postpartum maternal and child services in maternity centres, and rehabilitation institutes for autistic children, to name a few. Foreign investors with expertise and a strong presence in a particular area should confirm whether their business falls within these encouraged sectors to benefit from corresponding investment facilitations and receive preferential land and tax incentives.

Approval and licensing

The healthcare sector has always been subject to stringent regulations as the quality of medical services and healthcare products directly impact the safety and wellbeing of individuals. Recent efforts have been made to simplify and streamline administrative procedures in the healthcare industry, as part of medical reforms aimed at encouraging social capital, including foreign investment, to participate in providing diversified healthcare services. However, relevant market players still need to obtain various qualifications and fulfil registration and approval procedures to demonstrate their technical capabilities and ensure compliance with regulations.

Pharmaceuticals

In the pharmaceutical area, depending on their specific business scope and business type, different certifications and qualifications are required:

For businesses engaging in pharmaceutical R&D, they will need to obtain a Good Laboratory Practices for Nonclinical Drug Research (GLP) certificate issued by the National Medical Products Administration (NMPA) for doing preclinical trial; a record-filing with local health bureau for the use of pathogenic microbiology and an approval from local department of science and technology for use of experimental animals in laboratories; a Radiation Safety Permit from local environmental protection bureau if the drug R&D process involving radiative materials; and import-export related licensing and approvals if the drug R&D involves in imported raw materials.

For businesses engaging in pharmaceutical manufacturing, they will need to apply for a Drug Manufacturing License from provincial NMPA and then comply with the Good Manufacturing Practices (GMP) standards. They also need to obtain a Work Safety License for the production activities, and relevant import-export licenses if needed.

For businesses engaging in drug supplying and trading, they will need to apply for a Drug Trading License and comply with the pharmaceutical Good Supply Practice (GSP) standards.

Medical devices

Medical devices in China are subject to classified management: medical devices are divided into three classes based on the level of risk they present to patients or users. Class I is the lowest risk class and is subject to record-filing management, which is comparatively easier, and Class II and Class III are the higher risk classes and are subject to product registration management, which involves a longer and more rigorous process.

Upon registration, the business will obtain a Medical Device Registration Certificate for relevant Class II and Class III medical devices. Also, businesses will need to file a record with local NMPAs for trading Class II medical devices while they need to obtain an approval for trading Class III medical devices.

Medical institutions

As for setting up medical institutions, foreign investors will need to obtain an Approval for the Establishment of Medical Institutions and a Practicing License of Medical Institutions from local health authorities.

Medical institutions will additionally need to obtain multiple licenses based on their business scope, such as the license for radiological diagnosis and treatment, license for maternal and infant health technical service institutions, license for occupational health examination and diagnosis institutions, and license for purchase and use of narcotic drugs and category I psychotropic drugs.

However, under the “many-in-one” reform, most of these post-establishment licenses, except the Large Medical Equipment Configuration License, have been integrated into the Practicing License of Medical Institutions. That is to say, upon getting approval for relevant applications, the authority in charge will affix relevant information on the Practicing License of Medical Institutions, rather than issuing separate licenses.

Crackdown on corruption in the healthcare sector

Businesses operating in the healthcare industry should also pay attention to anti-corruption management, as China sees corruption in the medical fields as one of the main factors that undermine the reliability and efficiency of the country’s medical system. The government has taken a strong stance against anti-competitive behaviours and corruption in the medical field, leading to increased scrutiny and low tolerance for such actions.

In August 2020, the Central Supervision Commission (CSC) issued a notice emphasizing the importance of strict anti-corruption investigations in the medical field. In October of the same year, the CSC issued another statement calling for the investigation of power-money transactions, the establishment of a list of dishonest individuals, and the cutting off of the benefit chain of medical bribery.

Companies in the healthcare sector are thus at a higher risk of being implicated in commercial bribery and subject to administrative or even criminal penalties. Therefore, it is crucial for relevant enterprises to include anti-corruption measures as an essential part of their overall compliance system. They should also continuously monitor the authenticity, rationality, and verifiability of their employees’ behaviour in subsequent marketing processes.

Key takeaways

China’s healthcare sector is highly regulated and competitive and is among the most promising markets in the global healthcare sector. To succeed in this market, foreign investors must be proactive and agile, planning strategically, acting quickly, and working diligently.

In addition to the considerations mentioned above, foreign investors should stay abreast of the latest policies, not only those related to the administration and compliance of the healthcare sector, but also those outlining the government’s industry priorities. They should adjust their strategy and operations accordingly.

Furthermore, innovation is a key advantage for foreign investors, especially those with expertise in a particular area, but smaller in size. It is wise to capitalise on their creativity by customising their products to meet the needs of the Chinese market and addressing existing challenges. They should also develop a comprehensive intellectual property strategy early on to maintain their competitive edge.

Finally, foreign investors who are unfamiliar with the Chinese market are advised to partner with local companies and hire professional agencies to facilitate market entry and compliance management. However, they should conduct due diligence to verify the reliability and qualifications of potential local partners and professional agencies.

This article was originally published by China Briefing from Dezan Shira and Associates with the title ‘Key Considerations for Entering China’s Healthcare Market’

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During the 21^st century, measures to reduce poverty whilst improving healthcare, pensions and social services (including education and housing) have all moved up the policy agenda of the Chinese state. The Chinese Communist Party has shifted its goals from economic growth to ‘economic and social development’ – no longer are they focussed just on raising incomes, but now want to also provide services and safety nets.

The Party’s shift appears to be aimed at enhancing its legitimacy by realising ‘a moderately prosperous society’, and at reducing the protest and dissatisfaction that might threaten ‘social stability’. As China’s economic growth rates slow, attention has turned to quality of life along with concerns about the problems China will face as its society ages. There is also a commitment to China’s national development and a view that improving China’s economic and social health enhances its global status and influence.

The evolution of social policy since the 1990s

During the 1990s the Chinese party-state focussed on economic growth and state enterprise reform and, as part of this, reformed health insurance and pensions for urban workers – primarily the state sector. It also introduced means-tested income support and programmes for laid-off state enterprise workers to prevent urban protest (a particular concern in the years following the Tiananmen demonstrations of 1989).

But following the Asian Financial Crisis of 1997 and China’s entry into the World Trade Organisation in 2001, the focus began to turn to rural areas and the non-working urban population – now seen as a source of untapped domestic consumption and demand. The party-state introduced rural income support and pensions as well as cooperative medical schemes to help rural residents with their healthcare costs. It also introduced basic health insurance for the urban non-working population, made a commitment to a minimum of nine years of free education for all children, and announced major health care reforms.

Impressive achievements

China has seen huge reductions in extreme poverty, introduced universal entitlements to health insurance and pensions, and ensured steadily rising social services expenditure. Now categorised as an ‘upper middle income’ country by the World Bank, only 1.4 percent of the population lives on the international poverty line of $1.90 per day (2011 Purchasing Power Parity), a fall from 67 percent of the population in 1990. By 2010, China had extended health insurance and pensions across the entire population – for the first time establishing entitlements for rural residents. According to the OECD, public social spending in China has risen from 6 percent of GDP in 2007 to 9 percent in 2012. China’s government spending on health, education and social safety nets also increased in both real terms and as a share of total government spending over the decade to 2017.

Only 1.4 percent of the population live on the international poverty line, a fall from 67 percent of the population in 1990

Substantial problems remain

Despite the progress, China’s social problems are still enormous and social services remain problem-ridden. According to the latest World Bank data, from 2015, on the upper middle-income poverty line of $5.50 per day, 31.5 percent of the population remains in poverty – 430 million people. The quality of health care, education and housing varies enormously both within and between rural and urban areas – largely the result of fiscal decentralisation and policies that benefit the middle classes.

The quality of health care, education and housing varies enormously both within and between rural and urban areas

Public spending on health insurance and pensions, meanwhile, remains highly regressive, meaning that the most generous insurance schemes provide for the well off, and the least generous for the poorest in society. For example, from 1999 to 2006, although the number of people participating in publicly financed health insurance (mainly for employees in government and public institutions) was falling, this scheme still accounted for about 40 percent of the total government health budget. Meanwhile, overall public social spending remains considerably lower than the OECD average of 22 percent of GDP.

China has also set the goal of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy by 2030

Ever more ambitious goals

Under Xi Jinping, the Party has continued to set ambitious goals. It aims to eli­­­minate absolute poverty by 2020 (using the national poverty line of 2,300 RMB per annum, or about a dollar a day). It has also set the goal – by 2030 – of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy. It is pressing forward with primary care reforms in health and is introducing IT in education and has recommitted itself to increasing the quantity of affordable housing – something that has been promised for over a decade but not yet delivered on. It has also begun to tackle the very difficult problem of merging locally administered health insurance and pension schemes to reduce the divisions between urban and rural and increase mobility.

Achieving these ambitious goals and pushing through next-stage reforms will not be easy. The Party is mobilising both public and private sector firms as well as local governments to eliminate absolute poverty, and this goal looks achievable. But other initiatives will require substantial public investment and effort if vested interests are to be overcome. This is particularly evident in the health and real estate sectors, where local governments’ revenues tie them to such interests, making reform particularly difficult. Since Xi Jinping’s supporters argue that he has amassed power precisely so that he can tackle vested interests, social services may be an important test of the leadership’s commitment and ability to use their new powers for the public good.

Professor Jane Duckett is Edward Caird Chair of Politics at the University of Glasgow and Director of the Scottish Centre for China Research. Follow her on Twitter: @j_duckett.

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