Recruiting in China

Nokia is holding an extraordinary shareholder meeting today, where company management expects to get the approval to sell mobile device unit to Microsoft.

This being a strong emotional issue for Finns, we can expect some sort of protest both outside and inside the meeting venue later today. But there’s a group of people already in the streets and protesting Nokia/Microsoft deal. It’s the employees of Nokia Dongguan factory in China.

Apparently they too are not happy that they are being sold to Microsoft and would like to receive some compensation in the process, like their colleagues in Vietnamese Nokia factory did. Posters saying “Do not sell us, we have dignity and human rights” (according to Google translate), could be seen among protesters.

Nokia China representative confirmed the protests, but says that operation of the plant is not affected.

Where’s the money going? The Ministry of Commerce gave a clearer picture with a press conference introducing foreign direct investment into China on Nov. 18.

First of all, China is on track for a big shift. Very soon, Chinese companies will be investing more money overseas than foreign companies bring to the mainland. In the first 10 months of the year, China nabbed $97 billion, up 5.8 percent. Meanwhile, outbound investment reached $69.5 billion, growing at a much more rapid 20 percent. “The trend for Chinese companies going abroad has just started,” said Zhang Yuliang, chairman of Greenland, a real estate developer, in a recent interview with Bloomberg News.

Who’s investing in China? The biggest surge is from the European Union, totaling $6.4 billion January through October, a 22.3 percent increase. U.S. companies, too, upped investment by 12.4 percent to reach $3 billion. And Japanese enterprises put in $6.5 billion, slightly more than the EU sum, a 6.3 percent rise. The largest amount came from Hong Kong due to its historical entrepot role; that totaled $63.5 billion, an increase of 10.5 percent.
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“We can see that foreign investment from Asian countries, the European Union, and the U.S. all kept relatively fast growth in the first 10 months,” Commerce Ministry spokesman Shen Danyang told reporters in a press briefing.

China’s service industries were the biggest draw for foreign investment, pulling in $50 billion, up about 14 percent in the first 10 months. That’s good news, with Beijing aiming to lift the proportion of its economy made up of the tertiary sector from today’s 45 percent to 47 percent by 2015.

Not surprising, given rapidly rising labor and other costs, investment in manufacturing fell by 5.2 percent, to $38 billion, making up just over two-fifths of the total. Investment in agriculture, animal husbandry, and fishery businesses dropped by 2.6 percent, to $1.4 billion.
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Eastern China continues to bring in the most investment, $81.4 billion in the first 10 months, up 6.0 percent, or about 84 percent of the total. That compares to $8.6 billion in the central part of the country, up 9.9 percent, making up 8.8 percent of total investment.

Meanwhile, western China, home to the restive Muslim region of Xinjiang, didn’t fare well—bad news for Chinese authorities who count on economic development to lessen ethnic tensions. Foreign investment of $7.1 billion was down 1.1 percent and amounted to only 7.3 percent of the total. Nine assailants and two auxiliary police officers were killed in an attack on a police station in Kashgar prefecture, Xinjiang, on Nov. 16, according to Xinhua News Agency.

China is desperate to draw foreign investment into its healthcare sector in general, and hospitals in particular. But thus far, the country’s need and ability to do so have been poorly aligned, with many observers wondering why it remains so difficult to make investments in China’s healthcare delivery infrastructure. Private equity investors, to name only one interested party, would love to see China’s hospital market fully open to foreign investment. But thus far, foreign approvals have been few and far between, and deal flow has been slower than many anticipated. This has all left industry watchers wondering what to make: why does it remain so hard to deploy capital in China’s hospital sector? Many assumed the process by which the hospital sector opened to foreign investment would follow a similar trajectory as other industries that were previously closed, but then opened to foreign direct investment (FDI). Now, questions are being raised about whether this assumption is accurate; if not, why; and, what a more realistic set of expectations should be about where foreign capital will be allowed to invest in China’s healthcare system.

In 2011, China announced its intentions to revise the country’s FDI catalog to allow for wholly foreign owned entities (WFOE) of hospitals. This move would have relaxed China’s historical stance on FDI into the hospital sector that had previously forced foreign capital into joint-venture agreements with a Chinese counterpart. Investors had long wanted to see China relax limitations on FDI into this part of the country’s healthcare system in particular. Most analysts pointed to this step as the first in a series of changes that would ultimately allow investors to make aggressive moves within China’s burgeoning private hospital space. Coming on the heels of China’s Ministry of Health making it possible for the privatization of public hospitals, it seemed the moment had finally arrived when foreign capital could go to work in the country’s hospital sector.

Overall, most people anticipated the reform trajectory for hospital investments would look a lot like what had occurred with other industries in China: a series of gradual reforms that began by moving hospitals out of the “restricted” FDI category, then allowing Chinese-foreign joint ventures, gradually increasing the equity a foreign company could have, allowing 100% foreign ownership as long as the holding company was from somewhere like Hong Kong, Macao, etc. and then ultimately 100% foreign ownership regardless of country-of-origin. Thus far, the process of gradual opening for the hospital segment has limped along, fostered most recently by the announcement from China’s State Council in mid-October that further relaxed regulations surrounding private investment in Chinese hospitals. The most recent announcement, while reflecting the government’s ongoing aspiration to draw FDI into the market, had little new to say other than allowing greater freedom for privately owned hospitals to set their own prices and that for-profit private hospitals could apply to receive discounted tax rates. Both are helpful adjustments that add further hope to the idea that China is working to make it easier and more attractive for foreigners to invest in the country’s hospital industry.

Yet, it remains incredibly difficult to invest in China’s hospital space. Most people who have been working in the sector for the last several years will express emotions ranging from dismay to anger over how challenging it is to navigate the country’s maze of regulators and approval agencies. What keeps hold on those investors with the stamina to stick it out is the belief that western entrants will bring products, technologies, care plans and service standards that will easily capture meaningful market share, especially in China’s growing middle class. This group also happens to be the demographic cohort the Chinese government would most like to see the private sector play a more significant role helping provide healthcare for. The handful of successful privately-owned entrants in China’s hospital market prove that patience will be rewarded, and that Chinese healthcare consumers understand and value western care; however, the small number of these successful operators also point towards the painful reality that getting deals done in China remains an enormous challenge.

Some of this difficulty has nothing to do with investing specifically in Chinese hospitals, and everything to do with how rules and regulations that allow more foreign investment in any category are interpreted by local authorities. Some municipalities are eager to see foreign investment, while others may be more concerned about political risk. This is not unique to hospitals; it captures a typical frustration on the part of foreigners who do not fully appreciate that in China, “the mountains are high, and the emperor is far away,” a statement the Chinese use to point out how hard it has always been is for any government across China’s history to get local authorities to do what they want. But some of the difficulty foreigners are encountering as they navigate China’s hospital industry is also a reflection of the simple truth that healthcare in China is a politically sensitive area. As such, the government is moving deliberately and slowly, to make sure that it does not destabilize the public hospital system through a series of reforms that, while good in the short-term for private operators and investors, might cause mid-term problems for the government. During a recent conference in Shanghai, I moderated a panel and asked my fellow speakers if there was any analog industry in China that was as politically sensitive that had ultimately gone through a similar process of opening to foreign investment. Every one of the panelists shook their head “no.”

In the aftermath of this summer’s GSK scandal, this point has been made very clear to foreign investors: healthcare in China is going to be an extremely political issue. Yes, healthcare anywhere always has a political dimension to it, as this week’s back-and-forth in Washington DC over the Affordable Care Act makes all too obvious. But healthcare is even more of a touchy issue in China. For years, Chinese have absorbed terrible pollution, tainted food supplies, and contaminated water. They have done this with the knowledge that for many, the result will be cancer and cardiac disease; however, the price was one they were willing to pay. The hope was that all of these costs would be offset with a growing and vibrant economy that, among other benefits, would foster a modern healthcare and pension system. The simple and painful reality that Chinese people are coming to terms with today is that the country’s healthcare system remains badly out of sync with the demands that are already being put on it, not to mention those strains that will soon exponentially increase as China’s demographic dividend comes to an abrupt end, leaving a rapidly growing number of Chinese who need care for long-term chronic diseases.

The Chinese government understands these pressures all too well. They are equally aware, and troubled by, the realization that to-date the bulk of China’s hospital sector has been controlled by the central government. This has an obvious implication: as frustrations mount, the government is going to be the entity that people blame. This realization has no-doubt driven much of the government’s recent policy adjustments that have diligently worked to make it easier to bring FDI into the country’s healthcare delivery system. The painful reality is that China has three factors coming together that are likely to make it more difficult to fundamentally alter the quality of either healthcare outcomes or customer experience. First, the country’s economy is encountering new headwinds that, among other things, threaten to force the central government to take precious resources away from healthcare investments. Second, the government needs to pull two things off pretty much at the same time: increase capacity (as measured by new hospitals, primary care outlets, expanded national insurance coverage, new drugs, devices and diagnostics) and absorb the costs related to a rapidly aging society characterized by long-term chronic diseases. Third, China is opening its healthcare economy to foreign investment relatively late in its economic liberalization and modernization. Consequently, even though the government feels it needs to be very cautious in its approach, it has to address the chorus of voices from foreign operators who want to make investments more smoothly and quickly, alongside the frustrations of average Chinese who want more coverage and better choices now.

The reform and opening process China is engaged with in its hospital sector is not unique. The stages have thus far roughly followed the sequence of what other previously restricted sectors have gone through. What is different is the pace and timing. In the midst of China’s amazing economic successes, it has only now begun to turn its attention towards making the hospital industry more amenable to foreign investment. While China’s concerns about moving too quickly are understandable, the political and social risks attached to moving too slowly are beginning to mount. Of all the sectors China has moved to open for overseas investment, its healthcare economy in general, and hospitals especially, may need to move more quickly than the authorities would like. The balance between control and flexibility has never been easy in China, but country’s healthcare system cries out for the sort of focused, concerted and expedited effort that China has proven capable of in the past, and must be again today.

Coca-Cola says it plans to invest more than $4 billion in China over three years.

David Brooks, president of Coca-Cola’s Greater China and Korea business unit, told Bloomberg earlier this week that the company plans to invest the money between 2015 and 2017 to build factories and add new products to its portfolio. The company is also investing $4 billion in China between 2012 and 2014.

Coca-Cola has been expanding in emerging markets such as Russia and China. It aims to reach $200 billion in revenue by 2020, in part by catering to the rising middle class in emerging markets.

Shares fell a penny to $39.82 in midday trading. The stock has risen 10 percent since the beginning of the year.

Cui Shufeng is a retired government worker in Beijing. She is one of the lucky homeowners who bought her place long before the housing sector galloped out of reach for the average Chinese salary worker.

"It is ridiculously high," she says pointing to apartments in her neighborhood. "These homes near the school here are CNY 70,000 (USD$11,400) per square meter. It's not even worth 7000 yuan (USD$ 1140) per square meter because it's not even good quality."

Her concern is on the radar of the central leadership that is expected to discuss economic reforms at the plenary session starting Saturday. For Chinese leaders, the property sector is an emotional and political hot potato. The dream to own a home is a far out of reach for tens of millions of Chinese citizens.

In the latest housing data, new home prices for September rose at the fastest pace in almost three years. In Beijing, new home prices were up 16%, Shanghai 17% and Shenzhen 20% from a year ago.

"The problem is Chinese people have very few investment vehicles. They've lost trust in the stock market so they turn to real estate," says Xu Si Tao, China Director of the Economist Intelligence Unit.

Xu says the central leadership needs to make bold steps in financial reforms to give citizens more options to invest their money.
One measure China is considering is to allow banks to set their own interest rates, creating more competition.

I was in Beijing two weeks ago and visited a luxury villa compound. It was a large site with tens of dozens of completed but mostly empty villas. A worker in the sales office told me the average home was priced at CNY 23 million (USD$3.8 million) and most were sold. He said half were owner-occupied (though I saw very little sign of residents) and the other half purchased as investments.

I was told the supermarket in the center of the compound was open and often used by residents. It was clearly still under construction. When I pointed this out, I was then told the grand opening would be next year. Message: The bubble is alive and growing. These villas are a pretty -- and by most appearances, empty -- place to park money.

Cui shakes her head at the dilemma facing the government. She doesn't believe recent curbs will work like a ban on third home loans in Shanghai.

"I don't think home prices will drop sharply because our economy is still doing okay," she says. "Our child bought a home in the U.S. recently. The price was about the same as a flat in Beijing, but the area is a lot bigger and the quality is much better."

The Chinese government has announced a list of professional elites that it plans to include in its talent recruitment program — the 10,000 Plan — which aims to provide financial, policy and service support to 10,000 science and technology professionals in China, reports the Hong Kong-based Wen Wei Po newspaper.

The 10,000 Plan plans to recruit 100 world-class scientists that have the potential to win coveted Nobel prizes, 8,000 professionals much needed for China's technology sectors such as innovators, entrepreneurs, philosophy and social science majors and educators, as well as 2,000 young people under the age of 35 with great potential in other areas.

The organization department of the Communist Party's Central Committee oversaw the propaganda department, the Ministry of Education and the Ministry of Science and Technology in implementing the program, which had its launch in September last year.

A number of talents have been listed in the program since July of this year, which includes six scientists, 72 technological innovators, 199 "young people with great potential," 201 technology entrepreneurs, 94 philosophy and social science specialists, 101 educators and 98 engineering experts.

Beijing plans to provide 1 million yuan (US$164,000) in financial support to each of the individuals to carry out research, freeing them from administrative hassles such as applying for grants. The central government will also provide policy and service support.

The program is a successor of the 1,000 Plan, also a recruitment program which launched at the end of 2008. The program has successfully recruited 4,000 individuals at home and abroad including 40 top scientists from developed countries.

Six high-profile scientists have been included in the 10,000 Plan: Liu Zhongfan is a researcher with the Chinese Academy of Science who has made a series of breakthroughs in his research on low-dimension carbon materials; Xue Qikun, also a member of the academy known for his research on scanning tunneling microscopy; Wang Yifang, president of the Institute of High Energy Physics of the academy; Zhou Zhonghe, a Chinese Academy of Science researcher who is an expert in bird evolution; Lu Ke, also a researcher with the academy who specializes in applying nanotechnology on metal surfaces; and Ma Yongsheng, a researcher with the Chinese Academy of Engineering who has carried out research on oil and natural gas resources and their exploration.

Chinese internet users were skeptical however that Nobel prizes could be "attacked" in this way and criticized the government for treating the awards like the country's sports program treats the Olympic Games, adding that the six scientists named on the list do not carry out their research with the sole aim of winning a Nobel. One of them, Zhou Zhonghe, said people should not focus on the prestige of winning the awards but rather the overall improvement of China's scientific skills and urged the country's society to avoid seeking the appearance of success in the short term, according to the Chinese-language Beijing Times.