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Tuesday, June 15, 2021

A Better Bet on China’s Three-Child Policy

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China’s new three-child policy likely won’t solve the country’s demographic crisis, but investors seem excited anyway. The real opportunities will be on the other end of the aging cycle: players in healthcare and pharmaceuticals as China’s growing army of middle-class elderly demand more and better care.

Shares of baby-related stocks, from infant formula to toy makers, have gone up this week on the news that China will allow couples to have a third child, after decades of restricting most couples to one or two. These stocks have given up some of the gains in the past couple of days, but are still significantly higher than last week. Hong Kong-listed Jinxin Fertility Group, which provides assisted reproductive services, has gained 5% this week. Stroller and car-seat maker

Goodbaby International

has surged 9%.

Investors are probably getting ahead of themselves. Few countries have managed to reverse declining birthrates once they have begun, even with strong family-friendly social policies. And there wasn’t a baby boom after China scrapped its decadeslong one-child policy in 2015.

China’s healthcare demand is going up as its population ages.



Photo:

wang zhao/Agence France-Presse/Getty Images

Instead of betting on companies benefiting from an unlikely baby boom, investors would be better off preparing for rising Chinese healthcare expenditures: a more predictable implication of China’s aging population. China spent 5.4% of its GDP on healthcare in 2018, according to the World Health Organization. The country’s healthcare spending has already been growing faster than GDP over the past decade or so. An older population means more people will grapple with age-related diseases from cancer to dementia. Japan’s healthcare expenditure, for example, has risen from 7.2% of GDP in 2000 to 11% in 2018.

Paying for rising healthcare costs will likely involve reforming China’s underfunded hospitals and social-security system. The  retirement age will almost certainly go up and China’s hospital-centric healthcare system will need to adapt to strengthen primary care. Telemedicine, which has become popular during the pandemic, could serve an important role in reducing the burden on hospitals.

These reforms aren’t easy and will likely take some time, but China’s ongoing drug-price reform will help lower healthcare costs. China has managed to slash prices for generic drugs by asking pharmaceutical companies to bid for contracts to supply in bulk to public hospitals. Lower prices for generic drugs means the country’s insurance system may be able to cover more cutting-edge drugs.

The government has also been trying to encourage pharmaceutical innovation by cutting red tape in the approval process, including for foreign companies. Smaller Chinese pharmaceutical companies that don’t have many of their own new drugs will fare worse than the bigger players. But Chinese companies like Wuxi Biologics, that provide research and drug development services to pharmaceutical companies globally, could also benefit from more demand within China.

A big surge of new births in China is a long shot, but healthcare demand isn’t going anywhere but up.

Write to Jacky Wong at jacky.wong@wsj.com

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