Shanghai greenlights foreign-owned hospitals

In December 2011, the Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) updated the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) (Guidance Catalogue). For the first time, this revision placed foreign investment in medical institutions into the restricted category, up from prohibited.

This was a clear sign that foreign investors, through a wholly foreign-owned enterprise (WFOE), would be permitted to invest in medical institutions. However, until the China (Shanghai) Free Trade Zone was announced in October and the subsequent Tentative Provisions were issued in November, there was no legal framework allowing or governing foreign investment in this area.

The absence of implementation rules made it difficult for foreign investors to enter into the medical market alone without taking the form of a joint venture (JV). “There may be many reasons for this two year gap, but it essentially shows the difficulty of liberalisation in this sector due to the resistance and opposition of the vested interest groups,” said Molly Qin, a partner with MWE Law Offices in Shanghai.

Gradual opening

The change in the Guidance Catalogue reflected the Opinion on Intensifying the Reform of the Pharmaceutical and Health System (关于深化医药卫生体制改革的意见) from 2009 and the Circular on Further Encouraging and Guiding Non-governmental funding for Medical Institutions (关于进一步鼓励和引导社会资本举办医疗机构的意见) issued in 2010, to gradually allow investment in the form of a WFOE.

In April 2012, the Ministry of Health released the Interim Measures for the Administration of Sino-foreign Equity and Cooperative Joint Venture Medical Institutions (中外合资、合作医疗机构管理办法) (the Measures) for public comments. This draft was a revision to measures issued in 2000.

The draft was interpreted as a hostile signal against foreign investors in healthcare as it required the total investment to be more than Rmb100 million ($16.5 million), up from Rmb20 million in the 2000 Interim Measures.

Despite clear signals in the Guidance Catalogue and the Measures, there was still no legal framework expressly allowing or governing foreign investment in medical institutions through WFOEs.

Hong Kong, Macau and Taiwan

Service providers from Hong Kong, Macau and Taiwan (HMT) are subject to special policies and have been able to invest in different forms of medical institutions since 2008. For example, Hong Kong and Macau service providers have been able to invest in outpatient clinics in the form of a WFOE since December 2008.

Later in 2010, HMT service providers were allowed to invest in hospitals in the form of a WFOE in Shanghai, Fujian, Guangdong, Hainan and Jiangsu. For Hong Kong and Macau, this was later extended to cover all of China in 2012.

“Strictly speaking, this is the first time in China foreign investors are permitted to invest in the form of a WFOE, but from 2008, China gradually opened the door to WFOEs to HMT investors,” said Huang Sheng, a lawyer with Jun He in Beijing.