In the news: China kicks off 2017 with strong inbound M&A, a push to simplify the national drug distribution network and develop its own digital currency

China thinning out drug distribution network

China is reportedly working to reduce the number of drug distributors from more than 10,000 to less than 3,000 in its domestic pharmaceutical market. The vast majority of its $110 billion annual pharmaceutical sales are to state-run hospitals, which depend on drug and medical equipment sales for most of their revenue. Most of these go through a convoluted network of around 13,500 distributors that has long been seen as a hotbed of bribery and anti-competitive pricing practices. The State Council has released guidelines that limit the number of invoices between drug makers and hospitals to a maximum of two, prompting market observers to predict a sharp decrease in the number of distributors. The plan is being tested in 11 provinces, with Fujian reporting that it has halved the number of distributors since it adopted the policy in 2012. Manufacturers will need to assess their business models in China in response to the new two-invoice system, particularly those that have been using a multilayer distribution network (such as medical device maker Medtronic, which was fined Rmb118 million ($17.2 million) by the NDRC in December for engaging in resale price maintenance and other vertical restraints), according to a Covington & Burling alert. The system could also trigger a new round of M&A and company integration among distributors. The implementation of this new policy will probably lead to increased transparency in resale prices because hospitals will be comparing the two sets of invoices when procuring drugs, the report said.

Move over Bitcoin, the PBOC's going digital

The People's Bank of China (PBOC) has run trials of its prototype cryptocurrency after assembling a team in 2014 and announcing last year that it would launch it “soon”. A PBOC-backed digital currency wouldn't be very different to existing online payment methods such as Alipay or WeChat Pay. However, sellers would receive digital payments directly from the buyer, meaning lower transaction fees for vendors as the process cuts out the need for a middleman. The PBOC is simultaneously increasing scrutiny of bitcoin and other private digital tenders. The move is set to revolutionize the nation's payment infrastructure—blockchain-based technology would eventually allow anyone to directly pay digital money to any individual, entity or bank in the system. The PBOC has realized it needs to keep up with the transforming economy, and its own digital currency infrastructure would allow it to trace transactions and collect real-time and authentic information on consumer spending. This is powerful data that would give the central bank an unprecedented and sweeping knowledge of the direction of the economy (as opposed to relying on business and bureau surveys and statistics) and allow it to formulate complementary monetary policies.

Inbound M&A takes flight

While overseas acquisitions by Chinese buyers are cooling after two record years, deals into the country are on the rise, with new rules making it easier for foreign direct investment (FDI). Inbound M&A has already reached $7.1 billion so far in 2017, nearly double the amount of the same period of last year and on track to beat the 2016 total of $46 billion, Thomson Reuters data showed. Outbound transactions fell more than 40% to $8.6 billion, not least because of increasing scrutiny on capital outflows. Deals in the retail and consumer sectors accounted for nearly half of the inbound activity, far outpacing the traditionally dominant real estate and financial deals. The firm leading the investment trends has pledged to focus on “high-growth sectors based on consumer trends, like health-related food and beverage products, healthcare, education, cinema or entertainment, or anything linked to kind of cultural production and content.” In sharp contrast to China's exceptionally strict outflow policies, the government's encouragement of FDI has been evident in various streamlining of administrative approval processes and market entry relaxations in once-restricted industries. Most recently in January, the State Council pledged to open up specific financial and manufacturing services sectors, abolish the minimum registered capital requirement for foreign investors to ensure a uniform system for both Chinese and overseas enterprises (though the promise of equal treatment has been on the table for a while now), and encourage MNCs to establish their regional headquarters in the PRC with the ability to centrally manage their FX funds. This renewed focus on boosting inflows is likely to stay for a while, because it suits China's efforts to globalize the renminbi and arrest a decline in its FX reserves.

China thinning out drug distribution network

China is reportedly working to reduce the number of drug distributors from more than 10,000 to less than 3,000 in its domestic pharmaceutical market. The vast majority of its $110 billion annual pharmaceutical sales are to state-run hospitals, which depend on drug and medical equipment sales for most of their revenue. Most of these go through a convoluted network of around 13,500 distributors that has long been seen as a hotbed of bribery and anti-competitive pricing practices. The State Council has released guidelines that limit the number of invoices between drug makers and hospitals to a maximum of two, prompting market observers to predict a sharp decrease in the number of distributors. The plan is being tested in 11 provinces, with Fujian reporting that it has halved the number of distributors since it adopted the policy in 2012. Manufacturers will need to assess their business models in China in response to the new two-invoice system, particularly those that have been using a multilayer distribution network (such as medical device maker Medtronic, which was fined Rmb118 million ($17.2 million) by the NDRC in December for engaging in resale price maintenance and other vertical restraints), according to a Covington & Burling alert. The system could also trigger a new round of M&A and company integration among distributors. The implementation of this new policy will probably lead to increased transparency in resale prices because hospitals will be comparing the two sets of invoices when procuring drugs, the report said.

Move over Bitcoin, the PBOC's going digital

The People's Bank of China (PBOC) has run trials of its prototype cryptocurrency after assembling a team in 2014 and announcing last year that it would launch it “soon”. A PBOC-backed digital currency wouldn't be very different to existing online payment methods such as Alipay or WeChat Pay. However, sellers would receive digital payments directly from the buyer, meaning lower transaction fees for vendors as the process cuts out the need for a middleman. The PBOC is simultaneously increasing scrutiny of bitcoin and other private digital tenders. The move is set to revolutionize the nation's payment infrastructure—blockchain-based technology would eventually allow anyone to directly pay digital money to any individual, entity or bank in the system. The PBOC has realized it needs to keep up with the transforming economy, and its own digital currency infrastructure would allow it to trace transactions and collect real-time and authentic information on consumer spending. This is powerful data that would give the central bank an unprecedented and sweeping knowledge of the direction of the economy (as opposed to relying on business and bureau surveys and statistics) and allow it to formulate complementary monetary policies.

In the news: China kicks off 2017 with strong inbound M&A, a push to simplify the national drug distribution network and develop its own digital currency

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