SHANGHAI — A new and experimental free-trade zone in Shanghai could lower costs for multinationals and facilitate imports of medical devices to China.
There are still few details of the Shanghai Free Trade Zone (FTZ), which opened officially on Sept. 30 but the new rules for offshore investment within the FTZ promises to open the door for international participation in hospitals and health insurance while creating more opportunities for multinational device companies.
Though details of the plan remain to be filled out, three areas of opportunity have emerged for companies in the healthcare space: health insurance, private hospitals and the leasing of capital equipment.

The 29-square-kilometer zone is located in the outer borough of Waigaoqiao in Pudong District, a port area one hour from downtown Shanghai. The Pudong Medical Trade Association is already located in the zone. It has been based there since 2009 because the port of Waigaoqiao is the best gateway for medical devices in the country.

There are hundreds of medical device makers already in the zone that stand to benefit from the lower tariffs which would make the importing of medical devices easier and cheaper. "There is also an opportunity to set up independent medical labs to import large medical devices such as MRIs, to provide lab test services to other hospitals," said John Cai, director of the Center for Healthcare Management and Policy at the China Europe International Business School.

The FTZ is designed to reduce taxes and administrative red tape for companies that register there and to encourage greater foreign investment in services, particularly in the financial, healthcare and communication sectors. But while many observers awaited the launch of the FTZ with anticipation, the plans have been light on details, so it is still unclear how the medical industry will benefit most.

"Many things are still in a fluid state, and most people are exploring the potential possibility," said Cai. "FTZ officials are interested in focusing on two promising industries: health care and communication."

Chinese regulators often used pilot projects in one or two areas to test out new policies before rolling them out nationwide or mothballing them if they don't work.
The city of Shenzhen is but one famous example of this practice. As was the case with Shenzhen in the early 1980s, the Shanghai testing ground will likely generate ideas that will be rolled out nationwide in the coming years. But this need for replicability has two sides, as it will likely temper some of the reforms, said Bank of America's chief economist, Ting Lu, in a research note.

More details are expected after November, when the Communist Party Congress convenes.

It is not uncommon for these pilot projects to be light on details.

"Many top-down measures to streamline approval in China have shown that they are not quite put in place as they should be," cautioned Stuart Allsopp, head of country risk and financial markets at Business Monitor International.

A wait-and-see approach may be the best, said Allsopp.

The day after the FTZ opened, the Shanghai Municipal government issued a blacklist of categories that will not be included in any preferential treatment in the zone that includes about a fifth of China's economic categories, including swaths of the biotechnology and medical industries.

Even within the zone, limits will be placed on foreign investments in a number of areas like stem cell technology, genetic testing, some vaccines and blood production. The list should be reviewed and reduced regularly.

One area that will likely see a boost is foreign investment in hospitals and that could, in turn, generate demand for new devices. In China, only 12% of hospital beds are privately owned, according to PwC, and fewer still involve foreign investors, which are allowed but effectively barred by high administrative hurdles. The only foreign private hospital in the country is Taiwanese owned.

Tax incentives are in the works to spur foreign investment in health insurance and bring innovative products to the market, which could also up the demand for devices. Recent reforms have extended health insurance to 90 percent of the population, but even with that, program costs can be high and drugs are not fully covered. L.E.K. Consultants estimated that the private health insurance market could grow 10% to 26% per year through this decade and be worth $111 billion by 2020.

The FTZ may be a wedge for these industries.

"[The FTZ] may bring in new innovations not limited to technology but also management practices in health care, which could set a model for the domestic health care sector," Cai said. "I hope this brings positive pressures on the health care sector to improve institutional arrangements and policies."

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