China?s amazing achievements on manufacturing and industry often divert attention from its services sector. The most striking part about the sector is probably the fact that it contributes much less to the GDP than what is expected from services in an economy having the size of the Chinese economy.
Services account for about 43% of the Chinese GDP. This is in marked contrast to most other emerging market economies, including the rest of the BRICS group, where services account for around two-third of the national economic output on an average. Not only do services have a relatively lower share in China?s overall economic output but they are also not produced enough at home. As a result, China has remained a net importer of commercial services, which is in sharp contrast to its status of a net exporter in merchandise trade.
The relatively sluggish growth of services in China and the sector?s comparatively low contribution to GDP has much to do with the nature of policy emphasis in China?s economic strategy. For more than two decades since China opened up, developing services, particularly modern and technology-intensive services, were never a priority in China. Augmenting agricultural production followed by expansion of manufacturing capacities were the main policy objectives. State policies were fixed accordingly. For several years, China?s industrial production has thrived on easy access to cheap credit, input subsidies, elastic supply of cheap and moderately skilled labour from the hinterland and other systemic incentives. Services, or the tertiary industry, never enjoyed such facilities simply because China never aimed to be world-beater in any of the services.
Nonetheless, services have expanded rapidly in China over the last couple of decades. They still play second fiddle to manufacturing in terms of share in GDP. But their own share in GDP has doubled over the last couple of decades. From just over 20% in the early 1990s, services have come a long way to account for more than 40% of the country?s GDP. In the process, they have compensated for the gradually declining share of agriculture in GDP.
The expansion of the tertiary industry has been a natural but unplanned outcome of China?s industrial growth. Industrial expansion, particularly export-oriented manufacturing, has generated considerable demand for complementary services such as transport, logistics, energy and storage. Rapid economic progress and integration with the world economy has increased demand for financial intermediation. And rising per capita incomes and urbanisation has increased demand for retail, hotels and real estate. These are the services currently dominating China?s tertiary industry. However, due to lack of incentives and monopolisation of service production by state enterprises, service capacities have grown ad hoc and fallen short of aggregate demands. The shortfalls are being met by more and more imports.
In spite of the gaps in domestic capacity and increasing reliance on imports, China has not shown much urgency in allowing greater market access to foreign service producers. There is foreign presence in most service industries. But such presence is subject to considerable restrictions. In most instances, foreign service providers are allowed to operate only on minority foreign equities in joint ventures that have majority ownership of Chinese resident enterprises. This is particularly evident in major scale-based services such as financial intermediation, retail trade, education and urban infrastructure development.
Interestingly, from a comparative perspective, despite restrictive regulations constraining access, China has actually opened its doors much wider to foreign suppliers than India has. Education is a case in point. Campuses set up by the universities of Nottingham and Liverpool and effective joint ventures like the China Europe International Business School are hardly visible in India. Same applies for foreign retailers like Tesco and Carrefour who have been present in China for long. Comparable extents of liberalisation (or the lack of it) are seen in terms of still relatively limited presence of foreign banks in both countries. India though has been well ahead in terms of the space and scope allowed to foreign funds in its securities market.
Services have escaped much of the restructuring which manufacturing has experienced in China. Radical reforms entailing extensive organisational restructuring including extensive lay-offs were implemented in several state-owned enterprises in the late 1990s and early years of the last decade. The reforms had produced far-reaching ownership and structural changes in China?s industrial structure. Interestingly, state-owned service enterprises producing services were hardly affected by these reforms. In this respect, China and India have shown rather remarkable similarity in allowing its state enterprises to thrive and prosper in key service segments such as banking, electricity, education and communication. But while India has allowed room for growth to domestic private enterprises in at least select segments such as communications, finance and education, China has not altered its domestic market structure for encouraging private growth. In the process, it has remained a much less competitive global producer of services in stark contrast to the sharp edge it has developed in merchandise trade.
The author is senior visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. He can be reached at amitendu@gmail.com.
These are his personal views