The time bomb of the country’s aging demographic will place a huge strain on the healthcare system, in which the government has historically underinvested, says Carl Berrisford, head of Sustainable Investing, APAC, UBS CIO Wealth Management. “Half of the global cases of cancer are now in China,” he says, “which also has the world’s biggest diabetes type II community. Meanwhile, the cost of treating non-communicable illnesses is driving medical-cost inflation up sharply. Although the Chinese government has launched an ambitious spending programme to improve the quality of healthcare and the affordability of drugs, it still has a long way to go to shape a modern, affordable and quality healthcare system that is accessible to all.”

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To try to meet these growing needs, in 2016 the government approved a blueprint entitled “Healthy China 2030” with the goal of building a more salubrious PRC by establishing an integrated healthcare and senior care system, and encouraging private investment in the healthcare and senior care sector. Foreign capital participation in this sector, it should be noted, is viewed as a key lever to achieving international-level standards and practices.

Already, non-domestic healthcare providers are enjoying increasing opportunities. Foreign senior care operators, for example, are now allowed to set up wholly foreign-owned enterprises in China, enjoying various favourable policies such as tax incentives, administrative fee exemptions and special deductions and waivers.

By 2030, if all goes according to plan, the size of China’s healthcare market is expected to reach US$2.4 trillion. This tremendous influx of capital, comprising government domestic spending and foreign investment, as well as private Chinese outbound investment, has created plenty of new opportunities for Hong Kong punters, who are able to invest in Chinese healthcare stocks (H shares) in Hong Kong, as well as those listed in Shanghai and Shenzhen through the stock connect (so-called A shares).

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Naturally, with opportunity there comes risk, but given the acute need to rapidly improve the availability and quality of healthcare, there exist some bright spots, such as the drug sector. “China aims to be self-sufficient in drugs to treat all ailments while reducing dependence on imported drugs,” says Berrisford. “It already has the world’s second-largest drug industry after the US. The key challenge is the balancing act of making drugs affordable without disincentivising the drug makers. Listed Chinese healthcare companies are predominantly drug manufacturers and some medical device makers, where,” he advises, “it pays to select carefully. The more attractive drug makers tend to be those with branded generic drugs and a strong pipeline of innovative drug patents to treat cancer, cerebro- and cardio-vascular diseases, and diabetes.”

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Equities strategist Claire Teng, executive director at JP Morgan Private Bank in Asia, agrees that the drug sector offers key investment opportunities, noting that there is also rising demand for medical services across many sub-segments. “There are good opportunities for investment due to industry consolidation, which has resulted in quality players gaining market share.”

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However, she notes that investors in the healthcare sector should be aware of a range of risks. “Government policies change very quickly and affect significantly industry dynamics; transparency for the companies is low; there are corporate governance issues; and the private insurance system remains underdeveloped,” says Teng, adding that “medical insurance supported by the government is facing a deficit and therefore government is cutting spending, which has in turn squeezed players on the supply chain.”

The private hospital sector provides another example where prospective investors should be cautious. Though it has huge growth potential, it is stymied by a lengthy approval process for hospital licences; a lack of doctors (China had just 1.5 physicians per 10,000 people in 2011 compared with 2.5 in the US, 3.2 in France and 4.1 in Sweden, according to the World Health Organization); and the fact that public sectors doctors cannot work full-time in the private sector. “Although the government is attempting to address these problems, healthcare in China is a heavily regulated sector, and regulatory risk both for drug manufacturers and healthcare service sectors will always be a challenge or risk for investing,” says Berrisford.

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Nonetheless, investors are rushing into China’s booming healthcare business with the expectation of big returns. The MSCI AC Asia Pacific ex Japan Health Care Index enjoyed an annualised return of 39.50 per cent in 2017, with China’s CSPC Pharmaceutical Group and Sino Biopharmaceutical among the top 10 constituents. Analysts expect the healthcare sector to enjoy another stellar year in 2018, though investors taking the pulse of Chinese healthcare stocks need to study the market, understand local conditions, place their bets carefully and, above all, seek medical advice from their broker.

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