How China Can Unleash its Services Sector

Customers use computers at an internet cafe in Taiyuan, Shanxi province
(Photo: Reuters)


As China’s legacy heavy industries experience slowdown and overcapacity, the leadership is looking to the country’s services sectors for future economic growth. However, China must first liberalize its services industry to unlock growth, according to a new Paulson Policy Memorandum by Gavekal Dragonomics economist Andrew Batson. Five of Batson’s key points:

  1. The recent rise of services as part of China’s GDP does not necessarily indicate that the Chinese economy is fundamentally changing, or shifting to a more sustainable pattern. The proportional rise has mostly been driven by finance and real estate, two volatile sectors fueled by government stimulus packages. The higher percentage of GDP that services now hold may therefore be short lived.
  2. Household services are comparatively underdeveloped in the Chinese economy. Household services, directly consumed by households, consist of education, healthcare and restaurants, for example. In terms of the portion of GDP they comprise, these services rank lower than other Asian economies at similar levels of development.
  3. High technology services have been growing on their own accord, and do not need government assistance. The Chinese government has designated technology services an area of high priority, but this is not necessary. The government’s resources could be better directed to encouraging expansion in sectors where growth is not as strong and regulation is more of a burden, such as healthcare.
  4. High levels of regulation and investment by state-owned enterprises have restricted the growth of China’s services sector. Firms in state dominated sectors often act like monopolies and generate less future growth than private-sector firms. This is particularly true for large sectors in household services such as healthcare and education.
  5. Quantitative targets for liberalization could be an effective way to deregulate the service sector. The simplest way to drive accountable progress would be to announce a target for the private sector’s market share in a given sector. The targets would clearly communicate government intentions and provide a source of certainty for investors.