IN CHINA'S ECONOMY, SERVICE SECTOR GAINING STEAM

Staff Writer
Columbus CEO

c.2013 New York Times News Service

HONG KONG — China, long the world’s factory, is becoming more service-oriented.

Sports apparel retailers like Li Ning, Anta Sports and 361 Degrees have thousands of stores around the country. The Alibaba Group, founded in 1999, has swelled into an e-commerce giant with more than 20,000 employees and sales of $1.7 billion in the second quarter of this year. And Tencent, which runs Web portals and chat services, has a market capitalization of nearly $100 billion.

This reflects a maturation of China’s economy, as the country becomes a place where services play an increasingly important role as the population grows richer. Already, China’s nonmanufacturing activity accounts for nearly 45 percent of the economy, about as much as the manufacturing sector. The remainder is agriculture.

The development is being encouraged by the policymakers who are gathering in Beijing this week for a four-day meeting on how to overhaul China’s economy. Their goal is to reduce the dominance of the heavy industry, manufacturing and investment in infrastructure that were for decades the driving forces of China’s sizzling growth.

They have aimed to diversify the economy and foster more productive growth by raising the share of activity generated by the service sector, which spans areas as diverse as logistics, tourism, engineering, health care and information technology.

“The direction is pretty clear,” said Jian Chang, the China economist at the British bank Barclays. “They want to invigorate the service sector, which they see as a key source of future growth.”

China’s service sector is still small in percentage terms compared with those of Britain and the United States, where a vast array of services makes up almost 80 percent of the economy. But the sector has roughly doubled its share of the Chinese economy since 1980, according to the World Bank.

“The rebalancing of the economy,” Chang said, “is already underway.”

The swing has been driven largely by three decades of rapid economic growth that have left many of China’s 1.3 billion inhabitants able to spend more money well beyond their necessities. Much of this extra spending power has gone into cars and refrigerators. But it has also fanned demand for movies, better health care, meals at fast-food restaurants, education and tutoring.

“Manufacturing will remain a key pillar of the economy — but at the margin, future growth will come from the services industry,” said Wang Tao, the economist for China at UBS. “As people get richer, they want more quality of life.”

More recently, the economic turmoil in the West has accentuated the shift by undermining demand for the toys, shoes, machinery and other goods that are churned out by the country’s export-dependent manufacturing sector. At the same time, the new leadership’s eagerness to rein in the excess capacities that plague parts of the Chinese economy has hit sectors like steel making.

Business surveys produced by the national statistics bureau have highlighted this divergence in recent months. While the index measuring activity in the manufacturing sector has been languishing for the last year, the nonmanufacturing index has held up relatively well.

One of the biggest beneficiaries of this spending power is the tourism sector, which has exploded as China’s middle class embraces domestic and foreign travel. Visitor numbers at the Great Wall, the karst mountains around Guilin or the seaside resorts of the island of Hainan have soared in recent years — as have the flights, hotels and bars that cater to travelers.

The flurry of activity is positive not just from the point of view of rebalancing the economy, but also from the perspective of job creation, economists say.

Already, service sector companies employ more people in China than manufacturers. And the jobs generated by logistics centers, hotels, software companies and airlines tend to be not just numerous but also generally more suited to the millions who graduate from high schools and universities every year, and who are reluctant to take jobs on factory assembly lines.

Along with rising wealth, urbanization — which Beijing is pushing aggressively in a bid to raise living standards, consumption and productivity — will fan demand for services such as transportation, education, and waste and traffic management.

Growth on those fronts, however, is going to take time, analysts caution. And while bars, beauty parlors and fast-food outlets have mushroomed, growth in other areas is likely to be constrained by political concerns and by opposition from established — often state-controlled — companies.

Take health care. Rising affluence and an aging population mean that demand for hospitals and health care centers will soar, raising the pressure on the authorities to increase supply by allowing private sector entities to play a bigger role.

But the sector, said Kevin Lai, chief regional economist Daiwa Securities in Hong Kong, is dominated by state-controlled companies, so any efforts to allow more competition are likely to run into vested interests.

“They have been trying to reduce the reliance on manufacturing, but that does not mean they are willing to allow the private sector to participate in areas like education or the media,” he said.

Despite the resistance, the forces pushing for change — both from the top leadership and demands from a growing middle class — are expected to increase the service sector’s share of the economy to 57 percent or more by 2030, said Louis Kuijs, Royal Bank of Scotland’s chief China economist and a former China economist at the World Bank.

“The sector is going to be a big part of the China story going forward,” Kuijs said. “I think people will pay much more attention to it in the future.”