China’s economic growth rate may have slowed, but its healthcare sector is ramping up. While total GDP grew by 7.7% over the past five years, spending on healthcare grew at nearly double the rate over the same period. That momentum is expected to propel China’s healthcare market from US$640 billion in 2015 to more than US$1.1 trillion by 2020.
More important than the headline numbers, the growth of spending on healthcare in China reflects a profound structural transformation of the economy. With the country’s aging population, evolving disease profile, newfound wealth and new sources of innovation, healthcare is on the verge of becoming China’s next big market similar to internet technology ten years ago. Like the tech boom, private equity and venture capital investors have a central role to play in the healthcare market’s development. Whether seeding the industry champions who will soon define China’s nascent healthcare landscape, or backing the cutting-edge startups to be acquired by them, savvy investors have already seen many opportunities to put capital to work. StepStone has written this report to help investors understand the significance of China’s healthcare industry, the speed of its development and strategies for gaining exposure to the country’s next wave of growth.
Richer & Greyer
Understanding the future of China’s healthcare industry starts with an appreciation of the country’s demographics. After the second world war, a high birth rate and a dramatic rise in life expectancy from 40 years to 70 years led China’s population to double to more than one billion in less than 30 years — creating the world’s largest population of baby boomers by the early 1980s.
Although Deng Xiaoping ended the baby boom with the one-child policy in 1979, his market reforms were to reap the demographic dividends the boom generated. Over the next three decades, a human tidal wave was unleashed as hundreds of millions of baby boomers reached adulthood and made their way from China’s countryside to its cities. Urban residents as a percentage of the population rose from less than 20% in 1980 to more than 50% by 2010.
This unprecedented economic expansion occurred on the back of a virtually unlimited supply of labor and entrepreneurial ingenuity that founded, ran and worked in the “factory of the world.” Per capita income increased by 25 times during this period. With newfound wealth, these baby boomers have since supported a buoyant consumer economy, driving the country’s current transition away from export-led manufacturing and toward an economy led by the consumption of goods and services.
As these baby boomers turn grey, their disproportionate weight in the Chinese population means that the country will age faster than any other country. According to the United Nations, it will take China just two decades between 2017 and 2037 for the proportion of the elderly population (those aged 65 and older) to double, compared to 23 years in Japan, 60 years in Germany and the US, and 115 years in France. By 2050, China’s elderly population is expected to exceed 330 million (equal to the present population of the United States) and to account for roughly one-third of China’s total population.
As China’s baby boomers reach old age, the country’s disease profile has begun converging with the developed world, corresponding to a dramatic rise in the number of age-related and chronic ailments. Cardiovascular disease, cancer and chronic respiratory infection, not the infectious diseases of old, are the leading causes of death in China today. These and other non-communicable diseases, estimated to be behind up to 85% of deaths, are being exacerbated by diets high in salt, sugar and fat, and sedentary urban lifestyles. Tobacco and alcohol use compound the negative health effects of these trends—China accounts for one-third of all cigarettes smoked globally, with two-thirds of Chinese men reported as smokers. Outdoor air pollution, considered to be among the worst in the world, and contaminated soil, food and drinking water expose the Chinese population to other environmental carcinogens.
While the Chinese account for roughly one-fifth of the world’s population, they are annually diagnosed with almost a quarter of the world’s new cancer cases and suffer close to one-third of global cancer deaths. In addition, the World Health Organization (“WHO”) estimates that approximately 230 million Chinese suffer from cardiovascular disease, and annual cardiovascular events will increase by 50% by 2030, based on population aging and growth alone. Meanwhile, China is home to one in three diabetics globally, with approximately 130 million adults afflicted by the disease. Yet these historical statistics, sizeable as they are, do not account for the majority of China’s baby boomers who are just reaching retirement age.
Rising Healthcare Demand
China’s baby boomer generation is distinct not just for being the country’s largest, it is also wealthier than any preceding generation. Driven by baby boomers, China’s economy has already surpassed much of the world on a range of metrics: it is home to the world’s largest box office and outbound tourism market; it also has a longer high speed rail network and greater online retail volume than the rest of the planet combined. Yet given China’s previously small proportion of the elderly to the overall population, the country’s healthcare system has been a conspicuous laggard. While ten out of the top 50 companies in the US by market capitalization are healthcare companies, in China the comparable number is zero.
China spent just 6% of GDP in 2014 on healthcare, compared to an average of 10% globally, 11% in Communist Cuba, 12% among the OECD and 17% in the US. Put another way, China has to care for 22% of the world’s population with only 3% of the world’s healthcare resources.
Historical underspending in China continues to widen the gap in the quality of care between China and other more developed countries. For example, only one quarter of Chinese cancer patients go into remission, compared to 65% in developed countries; the five-year cancer survival rate was 30% in China, compared to 66% in the US. Almost 10% of Chinese are infected with hepatitis B compared to 1% in North America and Western Europe, where the virus has been preventable with a vaccine available since 1983. While close to 10% of Chinese are diabetic, accounting for one-third of cases worldwide, only 25% of Chinese diabetics
receive treatment, compared with 63% in the US and 50% in Japan.
As China’s baby boomers reach old age, they are the first generation with the resources to close the spending gap. By 2022, more than 75% of China’s urban households are expected to qualify as middle class (defined by McKinsey & Company as households earning between US$9,000 to US$34,000 a year), giving them an average income on purchasing-power-parity terms in the same range as Brazil and Italy. Since more than 600 million Chinese are expected to fall within this range by 2022, China’s middle class would qualify as the third most populous country in the world. Meanwhile, the Boston Consulting Group expects total private consumption to grow at a CAGR of 9% between 2015 and 2020, translating to a 55% increase from US$4.2 trillion to US$6.5 trillion—in line with the growth in personal incomes, and 40% higher than the rate of GDP growth.
Multiple sectors, ranging from education to entertainment, stand to benefit from China’s ongoing consumption boom. But China’s middle and upper classes have never set their sights so squarely on healthcare sector. Not only are baby boomers demanding more and better drugs, treatments and services, they are the first generation with significant numbers who can afford them. As age-related and chronic diseases continue to soar, healthcare is quickly growing its share of a growing consumer wallet. Due to inability of public health insurance to keep up with demand, at 63% China already has one of the world’s highest proportions of healthcare spending paid out-of-pocket, and that figure is only expected to grow. Pent-up demand has already prompted spending on healthcare to more than double to US$640 billion between 2010 to 2015; McKinsey & Company expects it to exceed US$1.1 trillion by the end of the decade.
