Chinese regulatory crackdown on the healthcare sector, prospects for investors

China’s healthcare industry will likely be the next to come under close scrutiny, analysts warn, as regulators across the country crack down on everything from technology and education to data security.

Chinese President Xi Jinping again this week reiterated the need to support moderate wealth for all – or the idea of ​​”common prosperity” he has been promoting for months.

This is what is driving the wave of repression against companies, analysts say.

“‘Common prosperity’ remains an idea that is always looking for a strategy for implementation,” 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 reform.”

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

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

Healthcare is “the only one not yet subject to regulatory review” and is “particularly vulnerable,” Green said in an Aug. 31 note.

The Chinese government had previously pledged to control prices, but efforts are now expected to intensify, Capital Economics said in a note Tuesday.

“Public housing and health care are expected to be expanded while private medical providers and property developers may soon face greater constraints on their ability to set prices and seek profit,” wrote Julian Evans-Pritchard, Senior Chinese Economist at Capital Economics.

Chinese regulators have already tightened restrictions on the country’s education sector and have targeted the multibillion-dollar after-school tutoring segment.

China’s crackdown over the past year has affected a wide range of industries, from technology to education and food delivery.

This has led to massive sell-offs of Chinese stocks, wiping out billions of dollars from tech stocks in recent months.

So far this year, China’s healthcare stocks have outperformed the broader Chinese indices.

The MSCI China Healthcare Index has fallen slightly below the fixed line since the start of the year, compared to the MSCI China Index which has fallen more than 13%.

But some healthcare stocks, especially companies that use technology platforms, are already suffering. JD Health, for example, has fallen almost 50% this year. Alibaba Health has fallen more than 40% since the start of the year.

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

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

“The political calendar is busy; and with executives keen to bolster populist credentials in pursuit of promotion, the political scrutiny of the markets is expected to remain high – rather than lower – in the coming months,” Green wrote.

What could be safer to buy? So-called government favorites, Green said. They include relatively secure sectors such as technological hardware, clean energy and defense.