The U.S. isn’t the only country struggling to reform its health-care system. China has a big problem on its hands: 1.3 billion people and a system that has been ignored for decades. The World Health Organization recently ranked China’s health care 144th out of 190 countries.

The country recently said it will spend $125 billion during the next three years to build hospitals and clinics in the country’s underserved rural regions. The plan will increase basic health services available for citizens and is part of an effort to extend universal coverage to citizens by 2020.

#-ad_banner-#Health-care spending in China has been low compared with other countries. The $125 billion is small relative to China’s GDP, but the Chinese government has hinted that there’s more to come.

The Chinese government hopes these moves will stimulate the economy over the long run. Officials want people to worry less about saving for medical expenses and spend more money. Chinese households save 30% of their income — that needs to come down in order for the economy to be less dependent on exports, which are slumping as a result of the global downturn.

China’s population is aging and becoming increasingly vocal about a lack of a social safety net. The government hopes to make these reforms and clamp down on dissent. Also, its younger, wealthier generation is shifting toward a Western mindset. As the Chinese become richer, diseases that plague the West caused by bad dietary habits and sedentary lifestyles will become more prominent. That means the Chinese government has to address health care soon if it wants them to keep spending.

The increase in spending and advancement of demographic trends creates an enormous opportunity for health-care companies. Experts are predicting demand for pharmaceuticals will grow by about 22% annually in the next five years and that China will be the world’s third-largest pharmaceutical market by 2013. Local drug companies control about 70% of the current $71 billion market.

As these trends advance, so should profits for these Chinese health-care companies:
 

My Favorite Picks:

Pharmaceuticals:
China’s drug consumption per capita is $53. This figure will go up as living standards rise and the population ages. Simcere Pharmaceuticals (NYSE: SCR) is the best pharmaceutical play of the group. It makes antibiotics, cancer and stroke medications — all of which should be in high demand as China develops. The company can use the cash it generates to make key acquisitions to fund future growth in the years ahead.

Biotech:
Sinovac’s (NYSE: SVA) shares have had a big run-up this year, making it an aggressive play. But this stock has some major catalysts behind it to propel future gains. The company manufactures Bilive, the only vaccine for Hepatitis A and B available in China. About 30 million Chinese have the virus. The company also markets a number of flu vaccines and has an H1N1 flu vaccine in clinical trials.

Medical Devices:
Mindray Medical (NYSE: MR) and China Medical Technologies (Nasdaq: CMED) make medical devices, which will be in high demand as China builds more hospitals and clinics. China Medical Technologies focuses on mainland China, making it the best pure play. It’s also cheap — valued at 6.6 times earnings vs. a historical P/E of 18.7.