Global Economy: Chinese Service Sector (Update: Gaining STEAM!)

Service Sector Gaining Steam in Chinese Economy

By BETTINA WASSENER

Published: November 10, 2013

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

Sports apparel retailers like Li Ning, Anta Sports Products and 361 Degrees International 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 value of nearly $100 billion.

This is China’s economy growing up, maturing into a state where services play an increasing role as the population grows richer. China’s services sector has been growing steadily, and nonmanufacturing activity now accounts for about as large a percentage of the economy as the manufacturing sector – about 45 percent. (The remainder is agriculture.)

The development is being encouraged by the policy makers 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 heavy industry, manufacturing and investment in infrastructure, which for decades were 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 about doubled its share of the Chinese economy since 1980, according to the World Bank.

“The rebalancing of the economy,” Ms. 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 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 past year, the nonmanufacturing index has held up relatively well.

The October reading, released this month, came in at 56.3. A reading above 50 signals expansion.

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

Air China, one of the country’s largest airlines, now carries more than twice as many passengers per month than it did five years ago.

Other areas have also grown.

International Sunshine Home, a day care center for children, which opened in the southeastern city of Xiamen in 2010, recently opened a second branch and is aiming to add one new branch a year over the next few years.

“The education sector is fairly recession-resistant,” said David Powell, principal of the daycare center. “Our customers think of education as an essential service.”

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.

What is unclear, analysts say, is how fast the growth of the services sector will continue to be.