How ethical are Traditional Chinese Medicine (TCM) stocks?

Updated: Feb 26, 2020



The on-going Coronavirus epidemic has once again put Traditional Chinese Medicine (TCM) in the spotlight. Based on a recent finding from South China Agricultural University, pangolins are deemed the likely host of COVID-19 before the virus spread to humans. China has been the biggest trafficking market of pangolins, of which its shells are often used in TCM to treat swelling and pus.


An overview of the TCM market in China


The Chinese government has been actively promoting TCM over the past few years as it’s considered an economic driver for China. According to World Finance, China exported $526 million worth of TCM to the United States alone, making up 15 percent of China’s TCM exports in 2016, while China’s overall TCM exports grew 54 percent between 2016 and 2017. The ambition of China is to register 100 TCM products and open 30 TCM centers in Belt and Road countries by 2020, based on an article from Global Trade Magazine.


In May 2019, TCM was approved for the first time to be included in the revision of the World Health Organization (WHO)’s influential International Statistical Classification of Diseases and Related Health Problems (ICD), in which 400 traditional Chinese medicine diagnoses have been added to the current volume. This has quickly sparked worries among people thinking that the move could further threaten some wildlife animals, particularly endangered ones, as their body parts are commonly used in TCMs.


What are the regulations of wild animal usage in TCMs?


Two types of protected wild animals and their body parts are currently being used in TCM, which are categorized into two levels. Level one is the highest, which includes Tiger bones, Leopard bones, Antelope horns, Sika deer antlers; Level two includes Red deer antlers, Moschus (Musk deer), Bear bile, Pangolin shells, Senso, Toad oil, Coin-like White-banded Snake, Black snake, Viper and Gekko gecko. An annual quota exists for each category of wild animals that are allowed to be traded, whilst medical companies need to seek approval each time before purchasing the animals or their body parts.


Further to that, the government also announced:

  1. Forbid the trade of Rhino horns and tiger bones; remove them from medical use and encourage medical companies to find alternative components

  2. Regulate the usage of cow bezoar; Encourage medical companies to use alternative components.

  3. Regulate the usage and protect moose and bear. Only the below 5 companies are allowed to use natural Moschus (Musk deer) and bear bile, which are:

  • Beijing Tongreng Tang

  • Shanghai Leiyun Shang, Suzhou Leiyun Shang

  • Xiamen Traditional Chinese medicine co. Ltd.

  • Zhangzhou Pientzehuang Pharmaceutical Ltd.


Due to (or thanks to) the recent Coronavirus epidemic, the National Forestry and Grassland Administration bureau has announced a strict regulation on Jan 27 2020 that there should be no more wild animal trade until the end of COVID-19. In summary, China hasn’t completely banned the medical usage of wildlife animals. According to the BBC documentary “Pangolins: The world’s most wanted animal”, most of all pangolins have been sold to Vietnam, Thailand and other South-east Asian countries and eventually ended up in China. Although the official quota for legal pangolins usage are 25 tons each year, an average of 1 out of 10 cases of pangolins international trafficking are caught. Even the volume as huge as 25 tons are very likely underestimated to the actual consumption.



Traditional Chinese Medicine companies in the stock market


In the current A share market, there are more than 60 stocks related to TCMs, with Dong-E-E-Jiao Co. Ltd (SHE:000423) known as one of the most famous TCM companies in China. Their iconic product donkey-hide gelatin is a product traditionally prepared in autumn and winter for curing different types of illnesses. E-jiao continues to raise the retail price due to donkey shortage as the number of donkey farms continue to shrink. For medical usage alone, 4 million donkeys a year would be needed to meet demand, and this demand continues to rise. However, the market demand did not decline and the stock price has continued its uptrend. But how effective is donkey gelatin in curing illnesses, this has been questioned by many experts over time.



Anther stock is Zhangzhou Pientzehuang Pharmaceutical Ltd. (SHA:600436), whose main product Pientzehuang is well known for treating liver problems, and the formula of which has been kept a secret and is protected. So far Pientzehuang only published 4 limited ingredients, including cow bezoar, snake gall, tienchi gingseng and moschus which is particularly rare. The shortage of natural moschus has brought down the gross profit but their cash flow has been increased instead. The prepaid revenue in 2018 has increased by almost 4 times comparing to 2014. The downstream market demands have been growing which push the stock price from 97 RMB to 127 RMB over last one year.


However, TCM companies who sell products using wild animal parts find it more and more difficult to go public. 9 years ago, Guizhentang Pharmaceutical company from Fujian province was preparing for IPO, whose core business is to raise bear and produce bear bile products. The live bear bile extracting process has soon sparked angers among people. Till this day, we can still easily find the previous online petitions to stop Guizhentang from going public. With the effort from the society, the IPO failed in June 2013.


Do global institutional investors invest in Traditional Chinese Medicine companies?


The short answer is yes. According to British media, some of London’s biggest investors are accused of supporting the illegal wildlife trade by investing in TCMs companies which continue to use endangered species despite efforts to end this unethical practice.


Household name fund managers including Aberdeen Standard Investments, Invesco, BlackRock, Vanguard and Norwegian and Canadian state pension funds are among companies invested in suppliers which have been found to be using leopard bone in their products.
Campaigners found one of China’s largest providers of TCMs, Beijing Tongrentang Pharmaceutical Co Ltd, advertises “medicinal wine” and pills for rheumatism that list leopard bone among their ingredients.
BlackRock Fund Advisors, Aberdeen International Fund Managers Ltd and Norges Bank Investment Management, are among the shareholders of Tongrentang’s Hong Kong-listed subsidiary, Beijing Tongrentang Chinese Medicine Co Ltd. ”.

But why do ESG complied institutional investors still invest in TCMs companies? With China A share stocks being included in the global emerging market indices, if passive funds are tracking an index, such as Heng Seng composite, Singapore stock index, etc., they would have to buy the underlying stocks proportionally. For example, Aberdeen standard has a MSCI China A share index ETF fund, where the index includes Beijing Tongren Tang. However, it is not that nothing could be done. Many passive funds choose to make customized indices to exclude certain sectors or companies due to ethical or religious reasons, e.g. tobacco, gambling, alcohols. But of course the cost to build a customized index will be higher.


Through the COVID-19 epidemic, we hope the regulation to restrict wildlife animal trade in China will be reviewed once again. We appreciate the government's ban on ivory trade in 2017 and hope the same will apply to pangolins and other endangered animals. We also hope TCMs companies will reduce or remove wild animal parts and find more effective alternatives. As for investors, please do your research, and think again before investing in TCM companies who use parts from wild animals.


Reference:

https://www.standard.co.uk/business/focus-how-britain-s-biggest-fund-managers-invest-your-money-in-china-s-trade-in-rare-animals-a4291991.html

https://www.worldfinance.com/markets/the-dark-underbelly-of-the-traditional-chinese-medicine-boom

https://www.globaltrademag.com/from-a-to-qi-the-global-rise-of-traditional-chinese-medicine/

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