The Deloitte Research Monthly Outlook and Perspectives 2018 Prospect
12 February 2018
Market turmoil & a surging RMB call for bolder reform
The continuing strength of the RMB and global stock market turmoil have taken many of us by surprise this year. The RMB appreciated by more than 3% against the dollar this year, an increase of nearly 10% from the start of 2017. This week, however, in response to stock market gyrations across the globe (S&P and Shanghai A-shares have plunged by 5% and 10% respectively), the RMB depreciated by 0.5% against the dollar. Against this background of growing uncertainty, the questions we would like to address are: will the strength of the RMB hold? If so, what will be the impact on the Chinese economy and assets? What would be the best exchange rate policy for China in 2018?
Part of the reason for the RMB's strength lies in the weakness of the dollar. So perhaps it is useful to start by examining the most likely reasons for the dollar's weakness. First, a better-than-expected economic recovery in the Eurozone (GDP growth of 2.5% in 2017) has resulted in the appreciation of the Euro. Second, with the recovery of global trade, most Asian currencies tend to gain because of the perception that the region is more geared to global trade. Third, the market has taken the view that a stronger US economy could worsen the trade deficit. Against this backdrop, the ascent of the RMB does not seem all that surprising.
On the other hand, one could also argue that the appreciation of the RMB has been achieved by tight capital controls (for both companies and individuals). The restrictions which were introduced in the past two years on firms' overseas investments remain very much in place despite recovering foreign reserves (12 consecutive month). Restrictions on residents' overseas consumption have become even tighter in 2018. For example, the individual debit card ceiling was recently set at RMB100,000. Continued global cyclical recovery has sustained China's trade surplus ($20bn in January). This, in conjunction with a reduced demand for the dollar brought about by curtailed overseas investment and residents' buying of foreign currencies, has turned the chances of an RMB appreciation into a one-way bet. But the latter was not what policymakers had envisaged in the beginning. All that they had wanted to do was to move away from a dollar-peg into a managed float (proof of which lies in the recent sell-off of RMB, almost certainly a result of PBOC intervention).
Would further stock market turmoil force the PBOC to ease controls? The plunge of A shares last week certainly underscores the need for some kind of easing (either lower interest or less stronger RMB or both). But, at this juncture, policymakers are adamant about continuing de-leveraging of the financial sector, or, to put it more precisely, forcing banks to reduce off-balance sheet items whose risks are often being underpriced. The process of de-leveraging, in general, will push up the cost of capital and the Chinese economy is no exception to this rule. In China 10-year treasury yields are approaching 4%, a level which has not been seen in three years. The movement of this widely watched yield has tremendous implications for the economy. Could it rise to 5% in the medium term as a result of de-leveraging? If so, what would happen to cost of funding for firms? What would be the required rate of return for investors in any asset class? The sell-off on Wall Street is about profit-taking and the uncertainty on Fed's tightening. What if the Fed tightens more than 3 times this year? This is not inconceivable. Such a scenario definitely presents a few challenges to China. Can China stay on the course of de-leveraging even when the A share market, which has not had a meaningful rally in the past few years, suddenly turns bearish? Our long-held view has been that the stock market is fairly insulated from the real economy in China, so the wealth effect is often overstated. That said, equity financing could play a very constructive role in debt reduction (e.g., investors would become more optimistic if SOE reforms could be implemented). The most ideal scenario is for foreigners to increase their portfolio investment in China while steady consumers' incomes will make certain `bubbles’ (e.g., housing in certain cities) smaller over time. In order for foreigners to step up their buying of Chinese assets, the best policy combination is the following: 1) keeping credit growth at current levels (roughly in line with the nominal GDP growth rate) so that the debt/GDP ratio stabilizes and eventually starts to decrease; 2) gradually relaxing capital controls as the RMB is strong; and 3) tolerating more fluctuation of the RMB exchange rate if the Fed ratchets up Fed Fund Rates faster than expected.
Chart: Double whammy – global stock market turmoil & tighter regulation
At this year's Davos forum, Liu He, China's economic mastermind, laid out China’s top three objectives for this year: mitigating financial risks, poverty reduction and environmental protection. In addition, he pledged a faster-than-expected liberalization as the country is celebrating the 40th anniversary of economic reforms. In this regard, we hope concrete steps will be taken to liberalize the domestic financial sector and that there will be significant improvement in market access. To implement structural reform during market turmoil is certainly a more challenging job and therefore to avoid unnecessary monetary tightening is for China very important. From this perspective, a weaker RMB exchange rate should improve liquidity in a rising interest rate environment.
A revival in the offing after sufferings from tight supervision
In 2017, the financial industry felt the adverse impact of "supervision" as the CBRC handed out 3,452 administrative penalty decisions, amounting to RMB 2.932 billion in financial penalty and judgments against 1,547 people responsible for those indiscretions. The supervision programme has been further tightened in 2018 to implement the government work plan for "preventing financial risks", with stricter controls over financial deleveraging and regulation of conduit business (across institutions) in the asset management (AM) sector. The financial industry seems to have a noose around its neck which may be tightened a little more.
The tightening could be seen as a natural response to the accumulated risk profile arising from aggressive expansion seen in the industry over the past few years. In the short term, market liquidity will likely be negatively impacted. In the long run, however, financial institutions should be able to adapt to the new environment in which they will see an end to the "shortage of excellent assets and liabilities" and drive future growth.
Liquidity shock and change of industry pattern
On November 17, 2017, the central authorities jointly released a draft asset management guideline for public and industry comment. The core tenet of the guideline, which covers all sub-sectors including banks, securities, insurers, fund and trust companies, is to address what has been called the "rigid payment", i.e. financial institutions are not allowed to make an implicit guarantee or promise of the repayment of both investment principal and income of investment products. Such new rules could change the core of asset management and affect the entire financial landscape in China in the long term.
Firstly, any significant liquidity shock will affect the banking sector the most. China's AM sector is significant, with an estimated RMB120 trillion in assets under management. Even after excluding cross business (banks raising money by issuing Wealth Management Products (WMP) and then investing the money into mutual funds or trusts), the net amount of assets under management is still estimated to be RMB60 trillion, nearly 80% of China's GDP. The main funding source for mutual funds is WMPs, which still reached volumes estimated at RMB28.5 trillion in 2017, despite a fall back from previous years. Without guaranteed WMPs, money will potentially exit the banking sector, which, in turn, will significantly affect small banks which normally hold a proportionally larger share of WMPs. Additionally, since the concept of funding pools and term mismatch are also banned, a negative growth in the AM sector could be anticipated for 2018. Fund and Trust Companies which rely heavily on conduit business could likely face tremendous difficulty (potentially of make-or-break proportions). However, institutions with high levels of risk management capabilities could see many advantages and opportunities.
Secondly, breaking rigid payments with an implicit guarantee may have a positive impact in educating the public and investors that all investments, even WMPs, issued by big banks carry risk. Banks would no longer be able to raise funds from the public due to a more conservative approach from investors. As a result, a significant amount of funds may exit the direct banking channel. This could impact the industry in two respects. On one hand, the process of interest rate deregulation could be further developed in China should people rely on the safety of deposit, resulting in this being the primary means for banks to raise money. On the other hand, funds leaving the banking system could likely be absorbed by indirect financing channels over multi-level capital markets, such as securities, stocks and bond markets, which would enter the fast track of development. At present, China is mostly indirect financing-oriented via the banking sector (approximately 80% of total social financing). This change to the fund/capital flow will radically transform the financing structure in China in the long term.
Under deleveraging environment, the Chinese A-share market also faces deleveraging in 2018 due to both the new policies on AM sector and on stock-pledged financing to control risk. On February 9, the stock market crash in China has stunned markets. The direct reason is that stocks which are high proportion pledged to make adjustments before March 2018 when the Two Sessions (NPC and CPPCC) will be held and the new policies will official be implemented. The indirect reason is that the U.S. stock market crash has affected most stock markets in Asia-Pacific region. Financial system shrinkage, monetary tightened, in turn, asset impairment and de-leveraging take place. However, China's economy is still resilient, after the Chinese New Year, market will have room to grow. We are still optimistic for blue-chip stocks in long-term value.
Shadow banking and cross-financial products continue to ebb
Chinese banks are currently undergoing a painful process as the search for a solution to the long outstanding issues speculative price bubbles, risks accumulated over the past few years and the prevention of potential hidden risks, "gray rhinos" and "black swans" in the economy.
For the banking sector, total assets grew 8.7% in 2017, a drop of 7.1 percentage points compared to 2016. More than 100 banks shrank their balance sheets for the first time since 2010, with interbank, WMPs and off-balance sheet businesses being scaled back. In 2018, this trend is expected to continue as shadow banking and cross financial products (interbank, WMPs and off-balance sheet businesses) are the key areas being focused on.
The development of inclusive finance will be accelerated
Tightened supervision is not all bad, as seen with the flip side of supervision serving the real economy. Inclusive finance is anticipated to accelerate this year (see October 2017 article) as the central bank fully implements the targeted RRR reduction measures focused on injecting liquidity into the sector through all large and medium-sized banks, 90% of city commercial banks and 95% of rural commercial banks incentives to provide loans to micro small businesses. The Big Five banks, FinTech companies and joint-stock banks would all appear to be deploying resources to help the growth of this sector. With the aid of technology, it is anticipated that "digital" inclusive finance will become the new momentum for the improvement of the banks' credit portfolio for this sector.
Practical rules of financial opening-up are expected
Emerging potential issues associated with unregistered invisible shareholders and cross-shareholdings that could prove to be prevalent in city banks and rural commercial banks is driving the need for an official focus on enhancing corporate governance. At present, some 55% and 86% of capital respectively held in these banks is held privately. The new round of financial opening policy is expected to attract foreign investors to hold stakes in domestic small- and medium-sized institutions, which should provide a positive influence over shareholders and corporate governance behavior and expectations. Based on the timetable of the central government, we expect further practical rules to be released (see December 2017 article).
The transformation continues
Looking back at 2017, we see that the consumer-centric model of retail has been widely accepted within all sectors of the retail industry as a core ideology. A great deal of digital and channel integration, as well as innovation, took place in order to better connect with, study and serve customers. Across the board, market players have taken massive strides in terms of channel integration, service innovation and improvement in the traditional value chain, while the rapid progress of retail technology and developments in data systems have served as catalysts for a series of changes across the board. Looking ahead, 2018 will see further integration of market players and more mature technology applications. The following are three key trends for the upcoming year.
Further disappearance of industrial boundaries
At present, there is a clash between the consumer-centric system and traditional modes of doing retail. The traditional retail model which focuses on channel management gives rise to the separation of resources and management. Consequently, traditional companies can hardly work as a whole to satisfy consumers' demands. To better integrate and deploy resources, E-commerce companies, traditional retail companies and technology companies are co-operating at multiple levels to bring changes to the basic logic of the retail industry. In the future, retail will entail much more than simply developing new scenarios, channels or goods. The real battle for retail will be the battle for consumer’s attention and time. One major benchmark for market players is the penetration of their products and services (including shopping, dining, entertainment, social, finance and the like) into the life of a consumer in the 24-hour cycle. Any resource or market entity that can help market players to better satisfy specific demands of customers at different times and places and to garner more attention and attract the wallet of consumers, will be absorbed into the new retail ecosystem. Deepening integration will serve as the main theme for the upcoming year.
Technology and empowerment
Transformation efforts like Omni-channel development and operation optimization share the same pathway, namely digital technologies, data and analytics. The advance in underlying technologies such as big data, artificial intelligence, Internet of Things and the increase in analytical capability that the application of such technologies has permitted, has given market participants additional opportunities, the means to interact with customers more directly, as well as more options to reshape the value chain. E-commerce companies and technology enterprises are the main driving forces behind the development of digital retail technologies as well as practical technologies derived from underlying technologies and aiming at improving the performance of the retail industry. With the support of big data, cloud computing, Internet of Things, artificial intelligence, biometrics and other grounded technology, digital retail technology has been widely applied to optimize and enhance the value chain even though it has not yet managed to realize its full potential due largely to the immaturity of technology applications and the complexity of application scenarios. It is expected that, after years of investment and continuous trial-and-error experiments, retail technology will become more targeted and an integrated technology solution will emerge. As a result, the retail industry will benefit further from the new technologies.
Figure: Technology and analytics the foundational enabler of new retail
Return of physical retail
After experiencing a prolonged industrywide recession, traditional retailers were faced with two choices: transform proactively or collaborate with E-commerce companies. Against such a background, mainstream players began to experiment with new ideologies, new models and new experiences, starting in 2017. According to the Ministry of Commerce, physical retailers demonstrated a progressive improvement in their sales in 2017. Total sales of the 2700 typical retail companies tracked by the Ministry increased by 4.6%, a 3 percent rise in growth rate over the same period the previous year. Total profit also increased by 7.1% with a growth rate of 11% on a year-on-year basis. Format innovation, omni-channel development, supply chain restructuring, and channel sinking are the main catalysts for accelerated growth in 2017. With physical retailers being the ultimate and irreplaceable connectors with customers, the newly transformed retailers expect to attract more and younger consumers under the new consumer-centric technology-linked business model.
Anticipate further disruptions
We live in a time of relentless change and stubborn continuity. In 2018, the tech industry will continue the exploration of new technologies and serve as a catalyst for the disruption and transformation of the ecosystems of across industries.
AI penetrating into multiple sectors
Artificial intelligence will benefit from further optimization of algorithms, record-breaking computing capabilities, and a deeper understanding of neural networks in 2018. The penetration of AI in smartphones will expand from apps to chips; the development of unmanned vehicles will continue to be dominated by technology companies and cooperation between traditional and AI technology companies will intensify. Robots will march deeper into the manufacturing industry and gradually expand to electronics manufacturing, metal manufacturing and other sectors. Likewise, financial robots will be more widely deployed by enterprises and the impact of AI on the financial industry will deepen as AI becomes increasingly involved in the investment decision-making process. In the coming years, artificial intelligence will be the underlying technology of many products and will be widely deployed across industries.
"Augmented reality"(AR) is on the cusp of becoming a "reality"
2018 is likely to be a significant year for AR, as smartphones still remain the most popular AR devices and the higher-end smartphones will all be powered by AR. We expect discrete app revenues for AR content to be a tad less than $100 million globally and one billion smartphone users will be using augmented reality content at least once in 2018. In addition, introduction of AR in architecture, support of efficient chips, enhancement of algorithms and the deployment of depth sensors on mobile operating systems will pave the way for the AR takeover. AR technology will eventually break the basic application level, and penetrate video games, social, education and other sectors.
Machine learning intensifies
In 2018, enterprises will double the number of ML (Machine Learning) pilots and deployments. By then, over two-thirds of large companies working with ML may have 10 or more implementations and a similar number of pilots. Automation tools and technologies in data science, synthetic data and migration learning technology, specialized hardware to accelerate the speed of computing, black box problem-solving neural network technology, and machine learning mobile chip and application development have helped solve problems such as the shortage of professionals, the need for massive data, regulatory restrictions and other obstacles.
Smartphones step into the era of "invisible innovation"
The smartphone’s success over the next five years is going to depend upon the introduction of an array of innovations that are largely invisible to its users but whose combined impact will be tangible. The 2023 smartphone should offer superior performance across a range of business and consumer applications, thanks to enhanced connectivity, processors, sensors, software, artificial intelligence and memory. By 2023, 5G networks should have been launched in most developed markets, offering much greater capacity and connectivity speeds. Over a billion 5G users are forecast for China alone by 2023. Dedicated artificial intelligence (AI) chips are likely to have become the standard across the smartphone spectrum by 2023 and will be most often used to assist machine-learning (ML) applications.
Fasten your seat belt, in-flight connectivity takes off
In 2018, about a quarter of all airline passengers will be on airplanes equipped with in-flight connectivity and revenue should hit close to $1 billion, most of which will come from the fees passengers pay during the flight for connectivity. Many Chinese airlines plan to lift the ban on carrying portable electronic equipment onto airplanes. China Eastern Airlines, China Southern Airlines, Hainan Airlines and Xiamen Airlines have already provided in-flight connectivity on some international routes. With the availability of flight internet services and the drop in the cost, in-flight internet services will gradually become standardized.
Switching lanes for survival
China's auto sales edged up 3% to reach 28.9 million vehicles in 2017. Sales growth of passenger vehicles, however, hit a ten-year low, dampened by a tax cut rollback. The continued popularity of SUVs, the year's only bright spot with a 13.3% year-on-year growth, helped offset declines in all other segments but 2017’s SUV sales paled when compared to the previous year's growth of 44.6%. A few leading domestic carmakers along with luxury ones have outpaced the overall market whereas foreign car brands either lagged or fell short of their sales targets.
The auto industry has entered an unprecedented era where technology breakthroughs, emerging mobility patterns as well as stringent fuel emission standards have reshaped the landscape of the industry. We expect 2018 to be a year in which all players up and down the value chain will have to summon all their resources and to carefully weigh the stakes of every strategy.
1. SUV popularity appears entrenched but may wane in 2 to 3 years. Foreign carmakers who so far had misjudged Chinese consumers’ appetite for SUVs will embark on a series of massive product launches in 2018 with SUV models in mid-to-low price range accounting for more than 60% of their upcoming new models. They also intend to block the upward movement of domestic brands who have been jostling to secure a seat in the market segment with a retail price of above RMB150,000 - a level long deemed a price ceiling for home-grown automakers. In 2017, Geely, Great Wall and GAC all took on their foreign counterparts in the high-end segment. But domestic carmakers' efforts to move into the high-end segment may run into difficulty as foreign models which are known for reliability and quality can be more appealing to Chinese consumers than domestic brands which are known mainly for their affordability. We expect that domestic carmakers who still compete in the low-price segment and don’t have a `blockbuster’ model will get edged out as competition intensifies in this sector.
2. Sales of new energy vehicles will top 1 million with newcomers flooding the market. The dominance of Chinese carmakers in the new energy vehicle market will be challenged by foreign rivals and EV start-ups who have ramped up their production volumes. This marks the beginning of a new phase of competition where three types of companies will be competing neck to neck. In addition, the rollback of financial subsidies poses a very real threat to the growth of OEM sales. Domestic carmakers, in the hope of protecting their leading positions, have espoused various tactics. Some have poured massive amounts of money into R&D, others have invested in key technologies. The rest have chosen to form alliances either with joint ventures who are eager to earn NEV credits or with EV start-ups, to make full use of their assembly plants.
China’s driverless car era may become a reality sooner than expected. We’re definitely bullish on the prospects of China’s intelligent vehicle market in 2018. A draft strategy issued earlier this January by the NDRC, China’s top policy planner, has helped to lay out the policy and legal ground for autonomous driving. The document comes only one month after Beijing lifts the ban on the testing of self-driving cars. We expect a dozen more cities will follow suit in 2018. Moreover, key components for driverless cars are getting substantially cheaper. For instance, Lidar, an essential component of driverless car technology (Tesla which relies on high resolution cameras and radars is an exception) has seen its price halved. Second, start-ups in autonomous driving technology are flourishing in China. These companies play a key role in propelling the industry toward Level 4 autonomy (a level of self-driving system that doesn’t require human intervention in most scenarios). In addition, Chinese OEMs have been rushing to seal strategic partnerships with tier-1 suppliers as well as tech companies in the hope of sharing investment burdens and risks. We believe that the future lies in making strategic alliances that will enable companies to decide upon the best technology roadmap as well as the most fruitful path toward commercialization. However, given the many variables, OEMs should weigh their stakes carefully before jumping aboard.
Building on cleaner growth
As China's demand for energy will grow moderately at 3% per annum between 2018 and 2022, the focus will be on building `cleaner’ growth. While we are uncertain exactly how the clean energy campaign changes the general energy landscape, a few possible scenarios appear likely:
Natural gas consumption could boom as the government looks for cleaner energy
China's natural gas output increased by 8.5 percent to 147.4 billion cubic meters (bcm) in 2017 while imports soared by 27 percent to 68.57 million tons. CNPC forecasts that China's 2018 natural gas consumption will rise by 10 percent to 258.7bcm while imports will increase by 13.4 percent to 105bcm. Although the government will exercise extra caution this year in the implementation of its “natural gas replacing coal” policy which caught the market off guard in the winter of 2017, seasonal shortages will persist due to a higher demand in resident use and transportation. We will keep a close watch this year on China's engagement with the U.S. over LNG imports and on how this will affect the Sino-Russia gas deals.
M&A deals may rise in the coal and renewable sectors
The Chinese government’s increased scrutiny of outbound capital from China could pose a risk to M&A activities. But the measures appear to be motivated more by a desire to stabilize capital outflows and the exchange rate rather than by a fundamental shift in government-backed investment strategy. Outbound investments along Belt and Road countries has been on a steady rise. In terms of sectors, we expect an increasing number of M&A deals among coal mines and power and transportation companies in the domestic market. China will create several "super-large" coal mining companies through M&A by 2020 to streamline excessive capacity and improve profitability by extending the value chain. Also, we expect to see increasing activity in overseas renewable energy investment/M&A thanks to the solar/wind feed-in tariff cut in 2018. Better and cheaper solar and wind power technologies are rapidly pushing down production costs, which will result in price cuts. Downward pressure on prices will challenge manufacturers and operators and push them to expand their overseas markets. On the other hand, falling prices and rising demand for renewable energy will lure new players into the sector, including electric power and oil and gas companies.
A carbon emissions trading mechanism will be established, preparing power sectors for future cycles
The NDRC launched "the National Emissions Trading Scheme for Power Generation Industry" in December 2017. It is expected to involve about 1,700 companies in the power sector, covering 3.3 billion metric tonnes of emissions and dwarfing the E.U.'s cap-and-trade scheme in scale. Under this Scheme, companies that emit less than their yearly allowance of emissions can sell their carbon credits on the market. This will provide an incentive to companies to clean up their production chain. The carbon trading mechanism along with the implementation of a nationwide electricity market will provide further incentive for the development and integration of renewable energy sources into the energy grid. One important aspect of the establishment of a carbon emissions market is pricing. A reasonable carbon price of between RMB100 and 200 per ton of CO2 will go a long way towards establishing the national carbon market and could make a big difference to the investment plans of energy companies in the coming 5-15 years. However, getting the carbon market to work is no easy task. A detailed and transparent data set is a prerequisite for the successful monitoring, enforcement and pricing of the emission trading market. But this has yet to be put in place in China.
A more efficient prospect
In 2017, China's 19th Party Congress proposed to strengthen the construction of infrastructure networks such as water conservancy, railways, highways, water transport and aviation, pipelines and logistics. This is the first time that logistics has been mentioned as a part of the infrastructure of the nation's transportation network, elevating the logistics industry to a new and far more prominent position. Looking ahead, we think the new trends in the logistics industry in 2018 are as follows:
Economic globalization and the rapid development of multinational corporations, coupled with the constant innovation of internet technologies, has prompted logistics enterprises to work together on a global scale. The global retail industry drives the consolidation of the logistics enterprises to form a global logistics network. In 2018, we expect that logistics enterprises will ride on the coattails of the 'One Belt and One Road' Initiative to aggressively seize new overseas markets.
A new ecology of logistics
In 2016, Jack Ma (the founder and executive chairman of Alibaba Group) put forward the concept of new retail and new logistics. The new logistics mode shares information among upstream and downstream enterprises across the entire industry chain. It is an important bridge linking consumers and manufacturers. In 2018, all sectors of the logistics industry will cooperate with one another to reconfigure their own social resources to jointly expand business operations and improve operational efficiency so as to maximize the benefits of joint distribution.
New logistics technologies that use artificial intelligence have been continuously emerging, driving the application of intelligent techniques such as automatic sorting, electronic waybill and so on. Artificial intelligence is penetrating each and every aspect of the realm of logistics, especially in the last-mile delivery to consumer stage. In 2018, the overall procurement and utilization of `smart equipment’ in the logistics industry will continue to rise.
Better environmental protection
As a new economic form, the sharing economy emphasizes the efficient utilization of idle resources, and its own development provides ideas for green logistics. Shared courier boxes, biodegradable green bags and non-plastic boxes have all promoted the realization of the vision of green logistics. In 2018, more green measures will be introduced, such as green packaging materials and new energy vehicles.
Life Science & Healthcare
Innovating for growth
China's Life Science and Healthcare sector recorded double-digit growth in 2017. The growth of pharmaceuticals and medical device sales exceeded 11% while the growth of total health expenditure hovered around 9%. In 2018, healthcare reform, new drug development and digital medicine will be the main engines of effective and stable growth for the entire sector.
Policymakers will focus on payment innovation and medical partnership development
Rapid growth in healthcare expenditure has led to some negative phenomena such as overpriced drugs and unnecessary and excessive treatment. One approach to ensure normal healthcare expenditure growth is to improve the medical payment system. In order to do so, the State Council plans to establish at least a 100 "single disease fee systems" in 2018, and start the pilot program of Diagnosis Related Groups (DRGs).
In addition, "medical partnership" will be another key area of healthcare reform in 2018. By October 2017, all the level-3A hospitals had kicked off their medical partnership projects. The next step will be to integrate lower level medical institutions into these partnerships. Private capital will also be encouraged to be involved in such partnerships.
Four "hot" targets for new drug investment
Given that "Asset-light" R&D strategy is a global trend, pharma and biotech giants and investment institutions are acquiring new drug pipelines by way of investment and M&A. Small- and Medium-sized biotech companies in the following four areas will attract more attention from investors in 2018: Cell immunotherapy will continue its hot streak which started in 2017, biosimilar will garner more attention as CFDA may approve the first biosimilar drug in 2018, thanks to rising demand, investment in monoclonal antibody therapy and targeted drugs will also remain robust in 2018.
Figure: Four major investment areas in drug innovation
"Technology" to "Value" transformation will be the breakthrough of digital medicine
After a boom in 2016, investment in Digital Medicine slowed in 2017, largely due to the inability of market participants to provide sufficient benefits to patients and doctors by using digital technologies. Investors and market players of Digital Medicine should focus on the transformation from "Technology" to "Value", including ways to classify patients and predict disease prognosis through their health information and incorporate their medical data into the decision making progress of treatment. For, in the long run, further innovation is the only way to revitalize this sector.