China healthcare: government incentives for foreign investors in for-profit senior care

February 2015 | EXPERT BRIEFING | FINANCE & INVESTMENT

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In 2012, the section of China’s population aged 60 and above was 194 million. By 2025, this group is expected to reach 300 million. In response to growing urbanisation and demographic changes, the question of providing adequate senior care is posing a serious challenge to this populous country. In recent years, the Chinese government has introduced a number of reforms designed to address the shortage of healthcare facilities. Starting in 2013, the Chinese government issued a series of policies and regulations aimed at encouraging private and foreign investment to invest in the sector. The most recent announcement, on 24 November 2014, saw the Ministry of Commerce (MOFCOM) and the Ministry of Civil Affairs (MCA) jointly issue the ‘Circular on Various Issues on Foreign Investment in For-profit Senior Care Facilities’ (the Circular) which provided detailed guidelines for foreign investment in senior care business in China.

There are opportunities and advantages for first movers in this newly opened and nascent industry. However, it is advisable that foreign healthcare and financial investors conduct sufficient due diligence before rushing to invest in the market.

Market specification

On the face of it, the senior care market in China is vast, with plenty of opportunities. However, it should be noted that cultural factors have an impact on the perceived size of the country’s senior care market. Deeply influenced by the Confucian concept of filial piety, most Chinese seniors prefer to be cared for by their families at home rather than live in separate senior care facilities. The Chinese government has made provisions for this in their senior care planning. By 2015, it targets for 90 percent of seniors to be cared for at home, 7 percent to be cared for in the community, and the remaining 3 percent to be cared for at external institutions.

In terms of allocation at external institutions, the government gives priority to seniors who are in serious financial, medical or physical need over those who are of sound financial position but choose to stay at senior care facilities as a lifestyle choice. This presents a niche market opportunity for foreign investors targeting the high-end market in senior care.

The premium market offers a lot of potential for foreign investors and presents multiple channels for development. Other than building high-end residential properties and providing the necessary infrastructure, there is a serious shortage of senior care professionals in the industry, and training is required to develop expertise in this area. In addition, ancillary services such as design and construction services, logistics chains, food and catering, waste disposal and value added services such as psychological counselling would be required to complement China’s senior care facilities.

To take advantage of the opportunities in the senior care market, it is crucial that foreign investors first develop an understanding of the senior care sector and the relevant legal regulatory framework governing it.

Regulators and formalities

Elderly care has long been underfunded but there is no shortage of regulators. In a recent government notice relating to healthcare and elderly care issued in September, nine ministerial government agencies listed their names on it. It is inevitable that communication and obtaining the necessary approvals from all relevant authorities will be a lengthy process. It has been reported that foreign investors need to collect more than 100 chops before they can start construction of their healthcare facilities in China.

Foreign investment in for-profit senior care business is subject to approval by MOFCOM, licensing by MCA and registration with the State Administration of Industry and Commerce (SAIC). In practice, the sequence of these requirements is not always clear and varies across different locations. The Circular specifies that the foreign investor will first need to apply for approval from the provincial level of MOFCOM at the place of the senior care facility followed by registration of the company with the local SAIC. After the business licence is issued by SAIC, the foreign invested senior care enterprise must apply for a Senior Care Facility Establishment Permit (SCFE Permit) from MCA at the municipal or district level. Before the SCFE Permit is issued, the foreign invested senior care enterprise cannot commence operation by charging any fees or admitting any senior person into its facility.

Restrictions

Unlike many other western jurisdictions, foreign invested enterprises in China have to specify the types of business activities they plan to undertake prior to commencing operation. The agreed scope of activities will be set out in the business licence issued by the government and provides a de facto boundary for the company’s business activities. Conducting any business beyond such scope will be subject to investigation and penalty.

During the property boom of the last few years, many private and foreign investors have relied on the provision of senior care as a way to develop real estate projects. To ensure that the approved senior care investment is restricted to its intended purpose, the Circular specifically sets out restrictions through prohibiting local government from approving any subsequent change in land usage or floor space ratio granted.

Recently in China, certain major state-owned insurers have been testing reverse mortgages on a pilot basis. This allows seniors to sell their property to insurance companies or banks in return for living expenses in instalments. However, it is to be noted that foreign invested senior care facilities are prohibited from carrying out such reverse mortgage business in China.

In addition to the SCFE Permit mentioned above, additional licences from relevant governmental authorities would be required if the foreign invested senior care facility intends to provide other value added services such as medical or catering services, as part of its nursing services.

Investment strategy

Foreign investors are allowed to establish senior care facilities by themselves, or cooperate with Chinese partners. Another alternative is to acquire existing for-profit facilities. The wholly owned structure offers better control and integrated operation but leaves the foreign investor to deal with numerous stakeholders directly, which sometimes may not be preferable.

By comparison, a joint venture with a quality Chinese partner can provide valuable resources, including land, licence and professional and government relations; however, foreign investors will have to share corporate governance and operations with their Chinese partners. As a matter of law, the Chinese partner will have veto rights for certain major business decisions. In the event of an exit, the non-transferring partner will have a statutory right of first refusal.

After the foreign invested senior care enterprise is established, the foreign investor is allowed by the Circular to make other senior care related investments in China. As part of the medical care reform, foreign investors are encouraged to scale up senior care investments, develop franchises and cultivate quality senior care brands in China.

The Chinese government also encourages foreign investors to participate in the senior care business by way of collaboration, joint operation, share participation, lease and public-private-partnership (PPP). However, the Chinese government agencies are still struggling with how to implement and regulate PPP projects. Caution and innovation will be required to explore the PPP model in the senior care business.

Administrative charges, tax benefits and price control

China recently decided to allow the market to play a decisive role in allocating resources. However, before this is achieved, the Chinese government at various levels will still play a significant role in the senior care sector.

Regulation from the government brings certain advantages. Under the Circular, foreign invested senior care facilities will enjoy the same preferential treatment granted to domestic private senior care facilities, including exemption from or reduction of taxes and administrative charges. However, the Circular does not elaborate the details of such preferential treatment. The Ministry of Finance and the National Development and Reform Commission recently issued a joint notice (Cai Shui 2014 No. 77) to specify how senior care facilities can enjoy the reduction of administrative fees.

The tax benefits awarded to foreign investors remain unclear. The Chinese Government has recently launched a campaign to investigate tax benefits granted by local governments on a discretionary basis, in particular targeting tax benefits which have been approved without express authorisation of law or from the State Council. This overhaul in the tax scheme will mean that there may be less flexibility in tax benefits. However, it is anticipated that tax benefits made available to foreign invested senior care facilities will have either express legal basis or written endorsement from the State Council.

On the other hand, government intervention will, in the foreseeable future, be a lingering issue for foreign invested senior care facilities. For example, the Administration Measures of Senior Care Facilities promulgated by MCA in 2013 and a few other regulations provide that senior care services have to follow government regulation. However, no further details have been given and the Circular is silent on this point. As a practical matter, price control may be less of an issue for high-end senior care facilities, but if all or part of the service fees come from the public reimbursement program, the service charges will almost inevitably be set or guided by the government agencies.

The Chinese senior care industry is still maturing. In recent years, we have seen an increasing number of foreign investors in the market. In 2006, a Germany company Augustinum set up a Sino-foreign joint venture senior care project in Shanghai but failed two years later partially because of the murky regulatory environment back then and the failure to secure land use rights. However, there are also success stories. Back in 2011, Cascade Healthcare, the senior care arm of Seattle based Columbia Pacific, became the first foreign-owned company to receive permission from the Chinese government to build senior care facilities in China. It now has facilities in Beijing and Shanghai. In November 2014 it opened its third senior care facility, a 78-bed community in the Pudong District of Shanghai.

For now, domestic firms are not yet sophisticated enough to pose serious competition in this nascent industry, which presents good opportunities for foreign investors to invest in this market first. Compared to foreign investment in medical institutions which are subject to more regulatory restrictions, foreign investors may find it easier to establish a wholly owned senior care institution in China and apply their brand, expertise and know-how as they see appropriate.

In light of this development, we are likely to see a boom of foreign investment in the China’s senior care sector from international companies and private equity funds and the introduction of more international healthcare brands in the China market.

Jing Wang is a partner at Norton Rose Fulbright. He can be contacted on +86 (10) 6535 3138 or by email: jing.wang@nortonrosefulbright.com.

Jing Wang

Norton Rose Fulbright