Health care reform is an even bigger deal in China--and it will change the way to invest in that country

09/29/2009 8:30 am EST


Jim Jubak

Founder and Editor,

Health care spending has doubled from 2002 to 2007.

Tens of millions of people aren’t covered by any health insurance and as a result of the global economic crisis and the consequent economic slowdown millions who had insurance have lost it.

Despite the rise in health care spending the population isn’t getting any healthier. Infant mortality rates, which had steadily declined since World War II, have plateau-ed. Diseases once under control have re-emerged.

And too many people live in fear that they’ve only one illness away from poverty.

Yep, things sure are bad…in China. So bad that in January the Beijing government announced a plan to spend $124 billion by 2011 to provide some form of health insurance to 90% of the population.

That’s a huge amount of money. The dollars being thrown around in our own healthcare debate seem much larger—the draft bill now being debated in the Senate Finance Committee carried a price tag of $856 billion when first introduced by Senator and committee chair Max Baucus (D-MONT). But that’s what adding coverage for the 30 million uninsured in the United States would cost over 10 years. At $124 billion for two years the Chinese price tag is impressively large.

Especially if you remember that China is still a relatively poor country. U.S. GDP (gross domestic product) hit $14.3 trillion in 2008, estimates the CIA World Factbook. Depending on how you adjust for China’s undervalued currency, the CIA World Factbook puts the size of China’s economy at either just $4. 4 trillion (at the official exchange rate) or $7 trillion at what’s called purchasing power parity. (Purchasing power parity attempts to adjust official figures to take account of what people in different countries actually pay for the same goods and services.)

Either way you look at it—whether China’s 1,340 million people live in an economy half the size of the U.S. economy inhabited by 310 million people or one just one-third the size--spending $60 billion a year to improve health care in China has the potential to be revolutionary.

And I think it will be exactly that. Especially if it is, as I think likely, just the first wave of government spending in areas such as health care, education, retirement pensions. We are looking at the beginning of revolutionary change in the Chinese economy.

And for investors that revolution will totally change how to make money in China.

Let me explain what’s so revolutionary about spending $124 billion over two years.

The goals of the plan seem modest enough. The government wants to extend some form of health insurance to 90% of the Chinese population. “Some form” is the key. Each person covered would get an annual subsidy worth about $17 beginning in 2010. Medicines would be covered by the insurance. Some of the money would go to improving health centers in rural areas and efforts would be made to reform the operation of public hospitals.

Now $17 a year per person doesn’t seem like much and indeed it’s not in the developed economies of the world. In rural China it’s a much bigger deal. Especially in rural China, which is, on average, much poorer than the urban areas.

In the first quarter of 2009, according to a nationwide government survey, the average household in rural China showed an annual income of $237 at official exchange rates. Rural households average 4.5 people. (Or at least they did in 1995, which is the most recent data I can find.) In a household of four people the new plan would provide an annual budget of $68 a year. That’s a big percentage on a household income of $237.

The effect though is even greater if you look at the way that the China’s health care system works at present. Everything and I mean everything requires a cash payment from the minute you walk through the door.

I’m going to take a few details from a description of a hospital visit by Bill Siggins, who had surgery in a Chinese hospital to remove his appendix. (You can read the complete account here )

For charge—10 Yuan, about $1.40, to register. Then after a preliminary diagnosis, tests to confirm the diagnosis. Total cost of that $100. Fortunately for Siggins an operating room was available—but it required a $730 deposit. In recovery a thermometer cost another $1.40. Patients and their families are supposed to provide things like a bowl spoon, towel and soap. Food tickets for meals cost about $2.20. (The system reminds me a bit of the last flight I took on a low-cost airline in Europe.)

This account doesn’t take us down into the pharmacy, which in many ways is a much more wrenching economic experience than the hospital itself. With the end of much government support for the hospitals, the pharmacies attached to hospitals have become major profit centers. Pharmacies are allowed to charge a 15% markup over the wholesale price of drugs.

That doesn’t seem like much. But pharmaceutical sales provided 43% of revenue at China’s general hospitals in 2005, according to a 2009 paper by Meredith Wen, “Averting Crisis: A Path Forward for China’s Healthcare System.” (To read the entire paper follow this link ). In that same year government funding provided must 7.4% of general hospital revenue. That figure had been 10.2% in 2002.

Siggins is very positive about the care he received—and frankly it sounds remarkably good in comparison to much of the developing world and to many places in the developed world, including some in the United States. But that’s not my point.

Think about living on a household income of $237 a year and knowing that a thing like an infected appendix could bankrupt you. And that without ready money--$100 or so—you can’t get a diagnosis or tests.

 What would you do? If you live in China, you save like you’re life depends upon it. Because it does.

Do you really wonder why China’s savings rate is something like 40% (It could be as low as 30% or as high as 50%. In comparison, the Great Recession, which has caused U.S. consumers to save more, has driven the U.S. savings rate up to 4.2% in July, according to the St. Louis Federal Reserve.

But it’s not just the health care system that works—or doesn’t work for many people—this way. Most Chinese workers now don’t have meaningful retirement plans through work or the government. Many Chinese—certainly the 200 million or so migrant workers who in good times staff China’s export industries but who never get to be official residents of the city where they work—have to pay out of pocket to educate their kids.

It’s actually remarkable that the saving rate in China is as low as 40%.

The government has known about this problem of social insecurity for years. It is a completely predictable result of breaking the iron rice bowl, the sustain of government provided social services that formed the basis of Chinese society until the introduction of it’s all right to get rich economics by Deng Xiaoping.

But the decision to devote $124 billion to improving health care and providing a minimal level of health insurance is a remarkable sign that the government actually intends to do something about social insecurity in China.

And the leaders in Beijing are also moving to put money into education and pensions.

If there’s one thing we should have learned by now in the United States, it’s that once you create an entitlement—like Social Security or the Medicare drug benefit—it’s very, very hard to dis-create it. The Beijing leadership can indeed reverse course more easily than the U.S.Congress or President can—there are some advantages in not running for re-election—but it looks like the entitlement genie is out of the bottle in China for number of years to come.

What does that mean for those of us who constantly search for ways to invest in China?

It argues strongly that we should stop concentrating on the infrastructure and heavy industry, and export company stock plays that have had such a high profile in China’s recent development.

And that we should start looking, first, at the companies such as Ping An Insurance (PNGAY) or China Medical Technologies (CMED) that will be direct beneficiaries of more government spending on social services.

And second at companies that will be the future beneficiaries of a Chinese consumer who isn’t scared silly into saving 40% a year. Companies such as (CTRP), an Internet travel company.

I wouldn’t rush out and buy these companies or any other name you can think of that today. The Chinese stock market is ludicrously expensive at the moment. That will fix itself. Chinese stocks are incredibly volatile and lower prices will come to he or she who waits.

And you’re not in any hurry. This revolution in China’s economy is just getting started and it has a long way to run.

(Full disclosure: I own shares of China Medical Technologies in my personal portfolio.)
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS