China the Mother of All Grey Swans / Japan Past the Point of No Return - October 2010 - By Vitaliy Katsenelson
Is China on the verge of imploding? Is the excess and idle capacity going to drag the entire country under, and with it the rest of the world?
Many very interesting points raised in this presentation from Vitaliy N. Katsenelson of Investment Management Associates.
China Permits Foreign Investment WFOEs in Medical Industry
Dec. 14 – In a follow up to the piece we wrote last week on China opening up its medical industries to foreign investment, here we offer readers a direct translation of the pertinent text taken from Guobanfa  No. 58 issued on November 26.
Article 5: Allowing overseas capital to establish medical institutions
Opening up shall be further deepened for medical institutions and investments in medical institutions by overseas capital shall be adjusted into permitted foreign-invested projects.
Overseas medical institutions, enterprises and other economic organizations shall be allowed to set up medical institutions through the form of joint ventures or cooperative joint ventures within China with Chinese medical institutions, enterprises and other economic organizations to gradually cancel restrictions over the proportion of equity held by overseas capital.
Eligible overseas capital may establish wholly-owned medical institutions within China on a pilot basis and restrictions shall be removed gradually.
Overseas capital may make investments in both for profit medical institutions and non-profit medical institutions.
Overseas capital shall be encouraged to establish medical institutions in the central and western parts of China.
Capital from Hong Kong SAR, Macau SAR and Taiwan region in establishing medical institutions in the mainland shall enjoy priority support policy in accordance with relevant provisions.
Article 6: Simplifying and standardizing examination and approval procedures for overseas capital making investments in medical institutions
The establishment of Sino-foreign joint venture medical institution and Sino-foreign cooperative joint venture medical institution shall examined and approved by health authorities and commerce authorities at the provincial level, among which the establishment of Chinese medicine hospital, Chinese and western medicine hospital and minority medicine hospital shall seek the opinions of Chinese medicine administration authorities at the provincial level.
The establishment of foreign wholly-owned medical institutions shall be examined and approved by the Ministry of Health and the Ministry of Commerce, among which the establishment of Chinese medicine hospitals, Chinese and western medicine hospitals and traditional Chinese medicine hospitals shall seek the opinions of the State Administration of Traditional Chinese Medicine. Specific measures shall be separately formulated by relevant authorities.
At present, foreign investment is only permitted (with very rare exceptions) in the form of Joint Ventures, however the circular states the equity amount in favor of the Chinese partner may now be reduced. Initial pilot schemes will be permitted for the establishment of WFOEs, while the promulgation of the application procedures is still being worked on.
Also within the circular are the provisions for more “social capital” to be made available for the reform of public hospitals. It dictates the circular is intended to “stably transform some public medical hospitals into non-public medical institutions, appropriately lower the proportion of public hospitals, promote the reasonable distribution of public hospitals and create the situation in which multiple investments are made in medical institutions,” effectively meaning the door has now opened for a class of private hospitals to be both funded from overseas to service the domestic market.
This circular paves the way for far easier access to the large medical care industry in China for foreign investors. Further information concerning this development and the implications for interested parties may be made to Richard Hoffmann, senior legal associate at Dezan Shira & Associates. The firm handles numerous clients in China’s health care and medical industry and can be contact at email@example.com.
Big news for the opening up of Chinese markets to foreign competition. It still probably makes little sense to try to operate on the mainland without a local partner, but a major step in policy regardless.
Perhaps its because I am the son, grandson and great-grandson of contractors. Or maybe its because I spent my summers during high school building steel staffolding for my dad's crews as a part-time job. Whatever the reason, I found myself absolutely fascinated by the skyscrappers built of what from a distance looks like popsicle sticks, but upon closer inspection is in fact bamboo tied together by nimble Chinese labors scrammbling up and down without harness.
Its truly an amazing sight of modern engineering that an innovative and modern skyscape like Hong Kong's could be born from such a 19th century building technique!
U.S. and China Agree to New Public/Private Healthcare Partnership
Jan. 20 – China and the United States announced a new public/private sector joint partnership yesterday focusing on the healthcare industry. The U.S. Trade and Development Agency, the U.S. Department of Health and Human Services and the U.S. Department of Commerce joined with China’s Ministries of Health and Commerce to announce their support for the establishment of the new organization.
“The economic and social development of any nation depends on the health and productivity of its people,” said U.S. Department of Health and Human Services Secretary Kathleen Sebelius. “This partnership builds on a strong foundation of bilateral cooperation in this critical sector of our economies.”
The American Chamber of Commerce in China (AmCham-China) was an early proponent of this partnership on the U.S. side and applauds its establishment.
The Healthcare Partnership Program follows two highly successful, existing public/private partnerships that operate under AmCham-China’s umbrella, namely the Aviation Cooperation Program and the Energy Cooperation Program.
“The Healthcare Partnership Program is a milestone in U.S.-China cooperation in healthcare and will strengthen the contribution of U.S. companies to China’s healthcare reforms,” said AmCham-China Chairman Ted Dean. “Public/private partnerships like the Healthcare Partnership Program are important examples of how the two countries can come together for mutual benefit.”
The new public/private partnership was announced as part of Chinese President Hu Jintao’s official state visit to the United States this week. The Healthcare Partnership Program will be headquartered in AmCham-China’s Beijing office.
China Briefing broke the news of foreign investment being allowed into China’s healthcare and medical industries six weeks ago. Foreign investors may now establish WFOEs in the sector, our full overview of the applicable regulations are contained in our article “China to Allow Foreign Capital into Medical Organizations” and a translation of the regulations in this piece, “Foreign Investment WFOEs in China’s Medical Industry.”
Dezan Shira & Associates have been advising foreign manufacturers and pharmaceutical companies about establishing a presence in the China market, and obtaining the pertinent licenses, since 1992. Please contact the firm for legal and tax advice concerning investments into this industry at firstname.lastname@example.org, or download the firm’s brochure here.
The puzzle of China’s rising household saving rate | vox - Research-based policy analysis and commentary from leading economists
In an effort to reduce its sizeable current-account surplus, the Chinese government has made it a priority to “rebalance” growth in China by stoking private consumption. This column examines the determinants of the high household saving rate that keeps Chinese consumption so low.
Economists have repeatedly warned policy-makers about imbalances in the global economy, including those caused by the actions of China in running up a colossal current-account surplus. During the global financial crisis and the following global recession, this surplus shrank from 11% of GDP in 2007 to an estimated 5% in 2010, but many analysts view this as a temporary respite related to the contraction in trade and expect China’s current-account surplus to rise again (Baldwin 2009). Chinese government officials, meanwhile, have argued that the current-account surplus is driven by structural factors and that the exchange rate has little role to play in influencing the saving-investment balance. They have also made it a priority to “rebalance” growth in China by stoking private consumption. As part of this debate, we ask what determines the high household savings that have been keeping China’s consumption so low.
Gross domestic saving in China has surged since 2000, climbing to over 50% of GDP starting in 2007 (Figure 1). In particular, enterprise saving – including that of state-owned enterprises – has risen sharply in recent years. Government saving has also increased. Over this period, the share of household saving in national saving has not changed much, but this is mainly because of a fall in the share of household income in national income rather than a decline in the household saving rate (Prasad 2011).
Figure 1. Gross saving rates by sector
Source: National Bureau of Statistics (Flow of Funds data).
Figure 2. Household saving rates
Source: National Bureau of Statistics, Flow of Funds data and Urban and Rural Household Survey. Saving rate from national accounts is significantly higher than that from the household surveys. This discrepancy is common (it is present in most countries), and can be due to differences in definitions of income and consumption, methodology and sample coverage.
Chinese households save a large share of their disposable incomes and their average saving rate has increased over the last decade and a half (Figure 2). This pattern is particularly pronounced for urban households, which account for about two-thirds of national income. After remaining relatively flat during the early 1990s, the average saving rate of urban households relative to their disposable incomes rose from 18% in 1995 to nearly 29% in 2009.
This increase took place against a background of rapid income growth and a real interest rate on bank deposits that has been low over this period (and even negative in some years, as nominal deposit rates are capped by the government). This pattern of a rising household saving rate at a time of high income growth seems inconsistent with a certainty-equivalent life-cycle hypothesis model, which would imply that future high income growth should cause households to postpone their savings.
New explanations: Evidence from survey data
In our first paper (Chamon and Prasad 2010), we use data from the annual Urban Household Surveys to characterise household saving patterns. These are large annual cross-sectional surveys conducted by the National Bureau of Statistics.
We document that saving rates have risen across the board in urban China, but especially among households with relatively younger and older household heads. That has led to an unusual “U-shaped” age-saving profile (see Figure 3), where the saving rates are higher at the two ends of the age distribution of household heads. Typically, one would expect saving rates to increase with the household head’s age, peaking prior to his or her retirement, and then turning negative in retirement.
Figure 3. Urban household saving rates by age of head
Notes: Based on a 10 province/municipality subsample of the National Bureau of Statistics Urban Household Survey. Saving rates smoothed by a moving average with 4 neighbouring age averages. For details on the data, and how saving rates are defined, please refer to Chamon and Prasad (2010).
We test a number of conventional theories and find little evidence that they can explain these patterns. For instance, the data suggest a limited role for demographic shifts in explaining saving behaviour. The cohorts most affected by the one-child policy are not among the highest savers.
Instead, the declining public provision of education, health, and housing services (the breaking of the “iron rice bowl”) appears to have created new motives for saving. This can contribute to rising savings as younger households accumulate assets to prepare for future education expenditures and older households prepare for uncertain (and lumpy) health expenditures.
The inefficiency of “self-insurance” contributes to higher aggregate savings (as many households save in order to protect against a shock while relatively few may actually be hit by one). We estimate that the motive of saving for health expenditures accounts for an increase of more than 5 percentage points. The extensive privatisation of the housing stock has also contributed to savings. We estimate that saving for house purchases increased average saving rates by 3 percentage points relative to the 1990s, with the effect concentrated among households with younger household heads (that are less likely to own their dwellings).
While cross-sectional household data can help evaluate the importance of competing channels, it is less informative when saving rates have risen across the board, as is the case in urban China. If indeed rising uncertainty and the related increase in precautionary saving is an important driving force behind the trend in saving rates, the availability of panel data on household income could help quantify that uncertainty and gauge its potential impact on savings.
In a second paper (Chamon et al. 2010), we use a panel dataset from the China Health and Nutrition Survey. That survey does not provide information on consumption or savings but does have data on incomes that allows us to quantify the rise in income uncertainty and decompose the variance of income into components attributable to permanent versus temporary income shocks. We find strong trend growth in both the mean and the variance of total household income. Interestingly, the variance of permanent shocks to household income has remained relatively stable, while the variance of transitory shocks trends upwards. This result is in line with a large literature on how technological and sectoral shifts and the associated labour reallocation can generate higher transitory uncertainty even though some of these shifts themselves are permanent in nature.
Based on these results, we calibrate a simple buffer-stock/life-cycle model of savings to evaluate the implications of rising uncertainty on household saving rates. Under plausible parameter values, the rising transitory variance of income can explain about 4 percentage points of the increase in the saving rate among the households with younger heads. Households with older household heads that have already accumulated significant savings can more easily accommodate transitory shocks and this factor does not add much to their savings.
On the other hand, households with older heads are more affected by the pension reforms in 1997, which transferred urban pension obligations from employers (predominantly state-owned enterprises) to provincial governments. We estimate that a decline in the pension replacement rate from 75% to 60% of pre-retirement income (in line with estimates for the transition generation under the reform) can explain a 6-8 percentage point increase in saving rates for households with heads in their 50s. The initial effect is more muted for younger households, who have a longer time to adjust to the pension reforms. Thus, we are able to trace much of the increase in savings, concentrated among households with relatively young and relatively old household heads (the “U-shaped” pattern described above), to higher income uncertainty and pension reforms.
Our analysis based on cross-sectional and panel data sheds light on different motives that drive the saving behaviour of Chinese households. While the combined effect may be smaller than the separate estimates from the two independent approaches, the results are able to account for a substantial portion of the increase in average saving rates of urban households as well as the U-shaped age-saving profile of savings.
The views expressed in this column are those of the authors and should not be attributed to the institutions they represent.
- We find that motives of saving for precautionary purposes due to rising income uncertainty and for housing purchases explains the rising saving rates of households with young household heads.
- Pension reforms and rising medical expenditures account for much of the rise in the saving rates of households with older heads.
Baldwin, Richard (2009), The Great Trade Collapse: Causes, Consequences and Prospects, VoxEU.org, 27 November.
Chamon, Marcos, and Eswar Prasad (2010), “Why are Saving Rates of Urban Households in China Rising?”, American Economic Journal: Macroeconomics, 2(1):93-130.
Chamon, Marcos, Kai Liu, and Eswar Prasad (2011), “Income Uncertainty and Household Savings in China”, NBER Working Paper 16565.
Prasad, Eswar (2011), “Rebalancing Growth in Asia”, International Finance, forthcoming. NBER Working Paper 15169.
US, China ink $574mm in trade deals (MarketWatch)
The Short View | China's economic tightrope (FT.com)
China sovereign wealth fund to open an office in Toronto (MarketWatch)
China President Hu's Chicago visit will be trade mission, too (Crain's Chicago Business)
In US-China talks, which side has the upper hand? (Fortune)
'China factor' lures global hedge funds to Hong Kong (People's Daily)
Chinese ban on foreign real estate investment profits (Property Wire)