China's Service Sector Ready to Ripen: Economic Daily

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Last updated at: (Beijing Time) Sunday, April 28, 2002

China's Service Sector Ready to Ripen: Economic Daily

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China's service sector will develop speedily once obstacles holding back its growth are eliminated. The service sector may become the main powerhouse for economic development and the main job creator, said an article in Economic Daily.

In the latest Fortune Top 500, Wal-Mart stores ranks first, beating energy giant Exxon Mobil. This is the first time a company from the service sector has taken the lead position of the Fortune Top 500. According to experts, this change shows that the focus of the US economy has shifted to the service sector.

But China's situation differs a lot from that of the United States. The development of domestic service enterprises lags far behind their US counterparts in terms of business scale and competitiveness.

In addition, the country's economic structure also differs from the United States, said the article.

On the whole, China's economic development is still focused on the manufacturing industry. Secondary industries accounted for 46.5 per cent of gross domestic product (GDP) last year, much higher than the contribution of the service sector.

Slow growth of China's service sector

The slow development of domestic service enterprises is a cross-industry phenomenon. For a long time, the development of the service sector has not matched the growth of the national economy, leading to a fairly low proportion of service output value to GDP.

During the period of the Eighth Five-Year Plan (1991-95) and the Ninth Five-year Plan (1996-2000), China's annual economic growth averaged 12 per cent and 8.3 per cent respectively, but that of the service sector stood only at 10 per cent and 8.2 per cent.

The service sector contributed only 33.6 per cent of GDP last year, marking almost no progress from the 1991 level of 33.4 per cent. The global average exceeded 60 per cent in this regard.

China's huge population may create a large market for services but the country's service sector still faces obstacles to its development, the article noted.

Improper structures of urban and rural population has resulted in insufficient effective demand. And due to the low level of per capita incomes, the main expenditure of urban and rural people still goes on the consumption of agricultural and industrial products.

By the end of last year, China's rural residents accounted for 62.3 per cent of the nation's population, yet they practically have limited demand for such services. That means the current development of the domestic service sector is led by urban people only, who make up less than 40 per cent of the total population.

On the other hand, the relatively slow progress of reform and opening up of the service sector has restrained growth.

In some fields of the service sector - like banking, insurance, education, medical care, transportation and telecommunications - the government is just beginning to free its strict control on market entry imposed for the sake of economic security and industrial administration.

This forestalled foreign investment, non-State investment, and even participation of State-owned enterprises in other industries.

This over-protection by the government meant some domestic service enterprises under the umbrella, especially industry monopolies, felt no pressure of competition and lost their enthusiasm and motivation to develop. As a result, the country's services cannot meet people's requirement.

China's market had been a seller's market for a long time, suffering from an insufficient supply of agricultural and industrial products. Although the situation has changed now and market competition has become more fierce, most enterprises still stick to out-dated concepts, focusing on production while neglecting necessary services. They still do not treat services as a potential economic growth point.

But in developed countries, most enterprises have put their stress on providing complementary services. For example, most revenue of General Electric (GE) came from its financial service department last year. Both Fortune and Forbes have categorized GE into the service sector.

The slow development of China's service sector has impeded the country's industrial restructuring.

Urgent task to speed up development of service sector

It is urgent to speed up the development of the service sector, increase its proportion in the national economy and expand employment in this sector, urged the article.

Obstacles hindering the further development of the service sector are being eliminated gradually, pointed out the article.

Further progress of urbanization will mean a greater proportion of rural populations will move to cities. This will improve the ratio of urban to rural populations to increase the number of urban people. Consequently, an expansion of the urban population will produce more demand for services.

In the long term, the country's average income level will grow and people will spend more money on consuming services.

In past years, China's Engel coefficient - which indicates the proportion of income spent on food - has continuously fallen. In 1978, the coefficient of urban and rural residents were 57.5 per cent and 67.7 per cent respectively. But in 2000, the two figures had slumped to 39.2 per cent and 49.1 per cent. This change shows that more and more income is being spent on consumption of industrial products instead of agricultural products. Meanwhile spending on service consumption is also on the rise.

China's accession to the World Trade Organization will revitalize the service sector by opening it wider to both domestic and foreign enterprises. Although competition will become more cut-throat, the growth potential of the service sector will be tapped at the same time, said the article.

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