David Deere, Business Development Officer, PaizaBio
David Deere, Business Development Officer, PaizaBio

One of the great classics of Chinese literature is the story of the Monkey King, or The Journey West, as it is known to the Chinese. It is an allegorical tale about an independently rebellious, very brave, clever, and somewhat supernatural monkey, who is ultimately pressed to serve Buddha in bringing religious texts from India to China.

Beginning February 8, China’s New Year will welcome the Year of the Red Fire Monkey.

In the Chinese horoscope, the monkey contains metal and water, two of the five earthly elements. Metal is associated with gold and water with wisdom and danger.

So the prophetic question in 2016 is whether the monkey will be outsmarted and the gold saved, or will the monkey have its way?

If the global financial markets are a harbinger of the future, 2016 could be a year with lots of “monkeying” with economic policy reforms with all of the unintended consequences reverberating throughout world economies.

With the prospect of $20 a barrel oil, political instability percolating throughout the Middle East, a belligerent Russia, and a lack of societal cohesion exhibited by the predictable push back from Europeans and Americans to what is collectively perceived as uncontrolled immigration met by a non-responsive elected political class, all serve to set the stage for what is surely a less than a stable global economy.

Nevertheless, it is the bungee jump behavior of the equity markets in China, the world’s second largest economy, and the corresponding reactionary intervention by the Chinese government that has truly spooked the markets and justifiably or not, have assigned China to blame for a historic new year’s Wall Street correction.

Kicking off 2016 a fortnight ago, the World Economic Forum held in Davos, Switzerland, a high profile, de facto barometer of global economic health, set the stage with expectations of unlimited growth and possibility, via the theme, Automation and the 4th Industrial Revolution. However, since the majority of the 2,600 attendees share the perception that China serves as the sin qua non of the world’s economic pulse, and that the current slowdown will have negative repercussions throughout the emerging markets and, eventually, developed market economies, many reported that a foreboding sense of uncertainty was never far from the surface.

A litany of the professional prognosticator class emerged from the conference ascribing Chinese culpability for the global market downturn. However, this view was far from uniform.

Leading up to Davos, in an attempt to defuse the “China Question,” Goldman Sachs via their Insight publication targeted to their high net worth clients, makes a very convincing case that the market reaction to the inevitable slowdown in the Chinese economy represents a significant overreaction because, by just about any macroeconomic metric, the United States has minimal exposure to the Chinese economy and thus will not have a meaningful impact on the U.S. economy

That said, Goldman goes on to quantitatively make a case that China is “walled in,” and the government’s strategic objective to transition their economy from a high capital investment-export driven economy, dominated in many sectors by inefficient state-owned enterprises toward a balanced, consumer-driven, domestic-oriented economy supported by a burgeoning, consumeristic middle class is going to very problematic to achieve.

Since the Chinese government is insistent on maintaining a +6-7% annual growth in GDP to achieve a doubling of GDP and per capita GDP for the 2010-2020 period, and avoid the dis-allocation of resources and jobs characteristic of such macroeconomic transitions; all while not meaningfully increasing the per capita debt ratio which is already one of the highest in the world; at some point Goldman implies, there will be a hard landing.

Throw into this economic brew, long-term problems associated with rural land use policies, restrictions on rural to urban migration and a host of social service and family dislocation matters – along with the 800-pound gorilla in the parlor – the truly bimodal nature of increasing prosperity within China; i.e. rural coastal cities have drastically increased their standard of living while interior and rural populations, which account for 600 million or almost half the population, have, by and large, not shared in the country’s rapid increase in wealth. China has monumental challenges facing the nation. This level of regional inequality would be difficult in any country, but in China, given their political philosophy, it has the potential to create a highly volatile environment which the current government administration recognizes and is moving quickly to create initiatives to address and thus avoid any major display of public discontent.

While Goldman predicts that China will be able to address these issues in the short to even mid-term, they are less sanguine about longer term.

Perhaps the most revealing quote in the report was a comment from John Hopkins SAIS Professor Pieter Bottelier and China scholar: “Anyone who speaks with great certainty {about China} needs their head examined”

However, when examining Chinese government policy and actual actions taken, one can seek direction in the universal maxim that: “The only thing in life that is certain is death and taxes.”

China’s population is aging, with absolute implications relative to birth rates and death. To that end, China just reversed its decades old and controversial policy of a “one-child family;” now allowing two.

With respect to death, while expanded maternity will require limited additional healthcare resources, a significantly underserved rural and overall aging populace will mandate significant increases in China’s healthcare expenditure. This reality, combined with the fact that increasing middle-class expectations in urban China, and certainly, pent-up aspirations in rural China must be met in that most personal of need, quality healthcare for one’s self and loved ones, it would not take much to forecast herculean changes to China’s healthcare system in the near future.

Thus, it is no surprise that the central government has undertaken major changes to reform the Chinese Healthcare system.

Overall, medical services consist largely of brick and mortar facilities and armies of health care providers, thus reforms will have to be phased in and optimized over time. However, pharmaceuticals, while a key, complex and tangible component of healthcare, remain commodity items which can be more quickly addressed.

With last year’s appointment of a new director of China’s Food and Drug Administration (CFDA) who is also a senior member of the Administration, major changes to better reform China’s drug industry have been rapidly undertaken and are poised to significantly alter the pharmaceutical industry landscape in China.

For pharmaceutical companies who offer clinically innovative products of high quality, and prudently adapt their strategies to the new realities confronting the Chinese drug market, the future in China looks very bright.

As for Goldman’s expressed reservations for the Chinese overall economy long term; a 35-year track record of delivering +10% annual growth in GDP and unprecedented growth in per capita income accounting for the second largest economy in the world and largest in purchasing price parity, well, for the long term, I will bet on 1.4 billion healthcare consumers!

Of course, in this Year of the Monkey, it would be foolish not to expect some Chinese monkey business!