2019 - Insights
The report is aimed at helping policymakers enhance understanding about the policies related to the pharmaceutical and biotech industries of China and India.
China has become the third largest pharmaceutical market worldwide and gained strong research capabilities in gene testing, cell therapy, and bio-pharmacy. Nevertheless, excessive regulatory control and dilatory approval procedures have hindered the innovative technology transfer and industrialization.
Reputed as the “pharmacy of the world”, India is the world’s biggest exporter of generic drugs and vaccines. Tailoring policies related to intellectual property, price control and foreign direct investment to the need of its pharmaceutical and biotech industries, India has established a sophisticated innovation system.
- India’s loose intellectual property policy allows quick technology acquisition in the initial stage and flexibility of its patent regime contributes to the industrial development. India took advantage of loose intellectual property policy during 1970 to 2005 when domestic pharmaceutical companies mastered manufacturing technologies necessary for generic drugs. By applying a flexible TRIPS patent regime, India protects the interests of its pharmaceutical companies. Due to the lack of understanding and experience in patent law in the early 1990s, China adopted a stringent patent regime, thus less able to flexibly maneuver intellectual property policy to domestic needs.
- Incentive policies ensure the supply of advanced technology and talents. To stimulate drug innovation, the Indian government provides various tax benefits, funds, grants, etc. to entitled companies. The Chinese government has also offered a considerable amount of funds and grants to universities, research institutes and companies.
- A complete industrial chain enhances resilience to risks. India’s high dependence on certain key Chinese active pharmaceutical ingredients (APIs) puts public health and pharmaceutical companies’ survival at risk. In contrast, China has been emphasizing the sustainable supply of essential drugs, safeguarding each component in the pharmaceutical chain.
- A comprehensive and effective regulatory system is vital to the sound industrial development. To improve quality regulatory standards and increase the international competitiveness of India’s pharmaceutical and biotech industries, the Indian central government has introduced good manufacturing practices (GMP) standards for all manufacturers and bio-equivalence data for generics. The Government has also built pharmaceutical industrial parks to provide enterprises with shared testing facilities, production facilities, and environmental protection facilities. The Chinese government has kept optimizing the regulatory system by introducing stricter quality requirements in line with international standards.
- The industrial internationalization enables better integration of technology, human resources, and capital globally. With advantages in cost and English proficiency, Indian pharmaceutical companies actively engage in overseas business through product out-licensing, mergers and acquisitions. Through collaborating with multinational companies, India’s pharmaceutical companies have improved innovation skills and international business capabilities. A number of Chinese bio-pharmaceutical companies have also achieved international recognition in research and development. However, China’s industrial regulations in English are unavailable, making it difficult for foreign pharmaceutical and biotech companies to enter China.
- Medicine’s accessibility and affordability must be considered in the industrial development. Low drug price ensures affordability but discourages enterprises from investing in innovation. The Indian government adjusts the price policy, striking a balance between the interests of the public and enterprises according to its national priority. The drug price control mechanism in China is more complex involving measures of centralized procurement, social insurance reimbursement, etc.
- To optimize the regulatory system and promote regulatory communications between China and India. China should build an international and transparent regulatory system, paving the way for advanced foreign pharmaceutical products to enter the Chinese market. Smooth and close communications between the drug regulatory authorities of China and India should be set up to promote mutual learning and administrative competence. It would be helpful to establish an information sharing platform for Indian and Chinese pharmaceutical and biotech companies to understand the other country’s industrial policies and market regulations.
- To diversify trade and economic collaboration modes between China and India. The bilateral trade between the two countries in pharmaceutical and biotech areas should not be limited to APIs. Importation of India’s new advanced and sophisticated generics to China and exportation of China’s high-end medical devices to India should be encouraged to satisfy public health demands in both countries. Collaboration between Chinese and Indian pharmaceutical and biotech companies on new drug development, technology incubation and transfer, market access should be welcomed.
- To strengthen understanding and trust between China and India. Conferences and exhibitions for companies, industrial associations, universities and research institutes should be held regularly to increase mutual understanding and facilitate partnerships. More talent exchange and training programs should be developed.
- To make flexible use of patent law. Chinese pharmaceutical policy makers should do more research on the international patent regime and find ways to make it work for domestic interests. On the other hand, intellectual property protection, as a strategy to incentivize innovation and promote technology development, should be strictly enforced and defended according to current Chinese patent law.
- To optimize the innovation chain and establish a complete industrial system. It is important to build a complete and coordinated pharmaceutical and biotech innovation chain covering fundamental research, as well as technology innovation, incubation, transfer, commercialization and industrialization.
- To strike a balance between innovation incentives and public health. To encourage research and innovation, government should allow higher price and margin for new drugs and first generics, and meanwhile improve drug affordability by introducing aids and insurances.
- To encourage internationalization of enterprises and integrate global innovation resources. It is highly suggested that the local companies collaborate with multinationals in research and development to integrate international technology and talent resources and improve research and innovation capabilities.
Author: Fan Gang, President of CDI
Editor’s Note: China’s new development stage has many features: independent innovation has become a new growth pillar; the domestic consumer market has grown steadily; large city clusters have gradually formed; green development has become an inevitable trend; and private businesses urgently need to find a way out. On the whole, although China in 2019 will face even more challenges, China's economy will continue to grow in future.
China is entering a new stage of development, where the driver of growth is independent innovation, moving away from leveraging only comparative advantages to leveraging both comparative advantages and late-mover advantages. China's comparative advantage is cheap labor. Reform and opening-up introduced foreign know-how, which became part of China's knowledge pool and helped form China's late-mover advantage of saving research and development costs. However, imitation means a lack of independent innovation. As global technological barriers become more and more evident and China has gradually approached to leading positions in many fields, China is forced to enter the stage of independent innovation. We should give priority to improving the long-term mechanism for incentivizing independent innovation, gradually weaning it off from government's sponsorship and subsidies, and turning intellectual property into equity which will become a permanent incentive.
Domestic consumer market expansion
Various factors in China account for the decline of savings rate and the increase of consumption rate. GDP per capita in 2018 was close to $10,000, ushering in a stage of high consumption. In the past decade, low-income people have seen faster growth of income, leading to higher consumption. The Internet and e-commerce are highly developed today, promoting consumption tremendously. Many young people are taking out loans for consumption purposes. At the same time, consumption among senior citizens is also upgraded.
Resource efficiency and clean development
The exhaustion of resources has increasingly made improving resource efficiency a priority. Green development has become an inevitable trend. Urgent problems include smog, water shortage, etc. This represents both a challenge and a business opportunity. Companies around the world are faced with the same problems with a common prospect of transformation and upgrading. What matters is how to do better.
Large city clusters
In the past few years, the supply of real estate has been insufficient and uneven, resulting in skyrocketing housing prices in large cities and overstocking in small ones. To solve this problem, the Ministry of Land and Resources of China has announced its decision to increase land supply in large cities and allow collective land to enter the market. Housing prices will stabilize after an equilibrium of supply and demand is reached. At the same time, through upgrading transportation and public services, large, medium and small cities in a region will be able to develop in a more coordinated way to jointly form an ecosystem of metropolitan groups. With urbanization taking up speed, there will be huge opportunities.
In the future, China will see the formation of three super city clusters with a population of 100 to 200 million each, and a number of large city clusters with a population of 30 million to 50 million each. The three super city clusters are the Beijing-Tianjin-Hebei region, the Yangtze River Delta, and the Pearl River Delta. In addition, large city clusters will emerge in areas surrounding provincial capitals.
Reform to support private sector
The central government has successively introduced new measures for reform and opening-up, with new adjustments centered on the development of the private sector. If state-owned enterprises are to acquire private ones to become their largest shareholders, then the nature of the latter will be transformed into that of state-owned enterprises, which will result in them being restricted by SOE management rules, thus losing their vitality. Financial mechanisms can be leveraged or funds be established to allow the partial acquisition of the equity of private businesses and to exit after the market rebounds. This will effectively prevent private businesses from being incorporated into state-owned enterprises, so that they can finally return to the market.
Author: Fan Gang, President of CDI
Editor’s Note: China and the US have achieved substantial progress following their several rounds of high-level trade talks. The two countries are striving to reach a win-win agreement. What are the causes and effects of the trade frictions? More importantly, what are the solutions to break the impasse?
What are the causes of trade imbalance between China and the US?
The U.S. has run trade deficits for years on end for the following general factors: first, low savings rate contributes to trade deficits; second, the U.S., as an issuer of the global currency, must maintain a certain level of deficits if it wants to make the currency a reserve currency or a trading currency.
Balanced trade between China and the U.S. can be achieved if both countries capitalize on their comparative advantages, for example, with 20 million shirts produced by China traded for a U.S. Boeing airliner. If China needs high-tech products, but the U.S. will not sell them to China, the already existing deficits between the two will grow. Hoping to balance China-U.S. trade by having China import more U.S. soybeans, natural gas and pork will not work, as this is not possible without both countries leveraging their comparative advantages.
What impacts do China-U.S. trade frictions have on China?
The impact that we are actually seeing now is mostly on investment. Last year, investment recovered fast in the first quarter but fell back in the second quarter as soon as trade frictions appeared. Not only China’s investment had to be held back, but foreign investment as well. Against rising uncertainties, everyone stopped and waited, causing a huge drop in investment and fluctuations in the capital market. If frictions were to continue, it would pop a bubble for the stock market.
How can China improve itself to solve China-US trade frictions?
It is not fair to put all the blame on the US, as China also contributed to trade imbalance. China has developed over four decades of reform and opening up. However, several adjustments need to be made in the process.
China does practice mercantilism to some degree and has certain policies encouraging exports. After the Trump administration reduced taxes, the tax burden for American companies was over 10 percentages less than that for their Chinese counterparts, shoring up competitiveness. But China has a policy of export tax rebate, and once taxes on exported goods are refunded, the actual tax paid by the Chinese exporter will be lower. The export rebate policy thus contributes to trade surpluses.
China joined the WTO as a developing country, therefore enjoying a 15-year transition period, after which China must scrap its protection policies and remove unequal conditions regarding labor, intellectual property rights, tariff barriers, and investment restrictions, etc. Fifteen years have passed, objectively speaking, certain protection policies are still being implemented, but the Chinese government has announced its determination to abolish such policies. Chinese companies need to foster international competitiveness with less government protection.
What opportunities have China-U.S. trade frictions brought to China?
It is important to bear in mind other markets in the world, which are increasingly diversified. Chinese exports to the US account for only 17% of its all exports. If China is able to do well in other markets, then the trade volume will not suffer much. The current industrial chain is globalized, and the transnational industrial chain makes everyone share the impact of trade frictions. If China is blocked in the US market, it only needs to look to other markets in the world and our domestic market. If China can make the pie big, then more investment will come from various parts of the world.
Aside from trade frictions, technical restrictions may also curb China's development. Now the US believes that China has stolen their knowledge and technology, and they did not expect China to learn so fast. So they deem it necessary to halt that trend. This is therefore not a short-term trend, but is here to stay for a long time. It is better for inevitable things to come earlier than later, compelling China to think about what to do in future reform and opening-up.
Author: Fan Gang, President of CDI
Editor’s Note: The current slowdown in China's economic growth, while affected by the overall global economic sluggishness, is also inseparable from a number of overheating in China's own development process.
China’s emergence as an economic powerhouse is mainly determined by its own national conditions, not by the international landscape. At present, China faces strong downward pressure on economic growth because of the increasing costs of labor or environmental protection, and more importantly, cutting overcapacity and deleveraging, which have led to tightened monetary policy and lower leverage ratio, seriously constraining the development of private businesses.
The underlying problem is over-investment when the economy is overheated, which generates huge production capacity, whereas such demand is only an illusion, thus resulting in over-capacity. Investors fail to repay debts, resulting in bad debts and increasing leverage ratio.
In the face of economic overheating, the Chinese government has strong regulatory capacity and adopts a soft landing. Its advantage is to suppress bubbles before the full establishment of the long-term mechanism, to ensure that risks do not escalate into systemic ones and maintain sustained growth. The disadvantage is that many problems remain unresolved, with the emergence of more and more zombie enterprises and bad debts.
China's economic fluctuations are similar to those of other countries, with an average of 8% volatility, from 14% to 6%, as compared to 6% of many other countries, from 3% to minus 3%. The difference is that China’s economy is able to maintain growth.
The U.S. was at the lowest point of its economy when its market was cleared out. It arrived at that stage much earlier than China, while the latter is still in the process of digesting and clearing, tackling zombie companies, debt-for-equity swaps, and deleveraging. China has already moved from deleveraging to stabilizing leverage.
Globally, on the one hand, conflicts of interest have widened in various aspects. One important change is heightened trade conflict between the United States, the European Union, Japan and China. On the other hand, there are many uncertainties in the world, such as the U.S. stock market bubble and Brexit.
Considering the situation at home and abroad, we need to be prepared for relative downturns of China's economy. As Chinese economy nears its bottom, the government is adjusting and adopting easy monetary policies, such as lowering the reserve-deposit ratio. When the market is basically cleared towards the end of the cycle, China will enter the next round of growth.
Author: Zhang Yuge, Director, Hong Kong and Macao Research Department, CDI
Editor’s Note: The Development Plan Outline for the Guangdong-Hong Kong-Macao Greater Bay Area has been unveiled. What new attempts and practices in the Outline are worth attention?
The highly anticipated Development Plan Outline for the Guangdong-Hong Kong-Macao Greater Bay Area (hereinafter referred to as “the Outline”) has been unveiled. The new attempts and practices in the Outline can be seen in the following aspects.
Market-oriented and open development
The Guangdong-Hong Kong-Macao Greater Bay Area is characterized by “one country, two systems”, therefore a challenge it faces is that “the market connectivity needs to be further improved with effective and efficient flow of production factors”.
Both infrastructure connectivity and favorable policies for the smooth flow of production factors are essential to establishing an international innovation and technology hub and a globally competitive modern industrial system.
A free flow of various factors lies in leveraging the decisive role of markets in resource allocation. If production factors cannot flow effectively and efficiently, the role of the market will be compromised.
Progressive breakthroughs in policy innovation
innovations can be easily found in the Outline: “to progressively open up to Hong Kong and Macao the major national R&D equipments located in Guangdong”, “to enhance the cross-border management of medical data and bio-samples used for R&D cooperation projects in designated universities, institutes and laboratories in the Greater Bay Area”, “to initiate pilot projects for intellectual property securities”, “banking institutions in the Greater Bay Area may launch cross-border RMB businesses”, “enterprises in the Greater Bay Area may issue cross-border RMB bonds”, “to promote cross-border transactions of financial products in the Greater Bay Area” etc.
The implementation of a single innovation practice will effectively solve a specific problem, and even “compel” other problems to be solved. The combined effect of many innovations will facilitate progressive breakthroughs in policy innovation.
All-around high-quality development
The development goal of the Greater Bay Area is to “develop a vibrant and internationally competitive first-class bay area and world-class city cluster”, which in essence represents high-quality development. The building of the Greater Bay Area focuses growth more on quality instead of quantity.
Author: Fan Gang, President of CDI
Editor’s Note: The structural reform on the supply side and the macro control on the demand side run parallel to each other in face of economic fluctuations.
China still faces institutional defects, which necessitates institutional reform on the supply side. Supply-side structural reform is a long-term measure. In many cases where long-term structural reforms remain stagnant, short-term measures, which target the demand side, including fiscal expenditure, money supply, interest rates, tax rates, etc., need to be taken to maintain sustained development.
The structural reform on the supply side and the macro adjustment on the demand side run parallel to each other. On the one hand, reform must be pushed forward all the time, but in case of economic fluctuations, macro control measures shall be reasonably taken. In the absence of sustained growth, many reforms will find it difficult to move forward.
The adjustment on the demand side must have limits. The central government is responsible for macro control, including preventing inflation and high debt rate, while the local government does not have this responsibility. Thus the central government should be particularly careful about the control and contain local debt so that it can play its due role.