China's free trade zone and medical device stocks

China's free trade zone and medical device stocks (Part 1 of 2)

Must-know: Shanghai free trade zone deregulates medical equipment

Shanghai free trade zone opened October 1

As part of a commitment to loosening its grip on the economy, China has instituted a pilot free trade zone in Shanghai. The Shanghai zone has been touted as China’s greatest attempt at economic reform since the first special economic zone in Schenzen in 1980. The zone will be a testing ground for economic experiments, and rules for the zone will continue to roll out for the next three years.

The pilot FTZ (free trade zone) is approximately an 11 square mile district that includes four existing trade zones in the Pudong area. It also includes an airport.

 

Shanghai FTZEnlarge Graph

Spurning economic reform

Construction of the FTZ is part of multiple reforms by China’s Premier that focus on promoting trade, deleveraging debt, reducing financial regulation, and upgrading infrastructure in order to better allocate resources through market dynamics. There are also experimental plans to loosen the reins on the country’s currency, the yuan, allowing market forces to adjust the interest rate rather than regulators. According to Chinese media, there are four primary goals of the FTZ:

  1. To institute minimal tariffs on traded merchandise (to promote trade)
  2. To better protect intellectual property rights and improve labor, safety, and environmental standards in order to meet international levels
  3. To enhance economic and regulatory fairness (to remove preferential subsidies, support, et cetera)
  4. To fully liberalize the financial services industry (to facilitate capital investment)

In a nutshell, the pilot scheme is China’s attempt to test out the impact of liberalization and international competition in an open Chinese economy. Many sectors have opened up to free trade, including healthcare (but pharmaceuticals, and biotech won’t be allowed to participate).

This could significantly lower costs for multinationals importing medical devices into China with lower tariffs and fewer regulatory hurdles. The measure will also facilitate foreign investment by device makers investing in emerging markets. Multinational device makers already operating or investing in the area include Medtronic (MDT), GE Healthcare (GE), and Stryker (SYK).

Read more about how device makers look to benefit from the free trade zone in Part 2.

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