China Trumpets Its Service Economy

It accounts for half of GDP. The pay isn’t great “The more you work, the more you can make. But it’s … exhausting”

On a cold January afternoon shortly before Chinese New Year, a young worker is zigzagging on his threewheeled motorcycle through Beijing traffic. He’s rushing to deliver packages to consumers who have bought everything from socks to candelabra on Alibaba’s Tmall shopping website. He says he can make as much as 6,000 yuan ($909) a month, if he works 12-hour-plus days, seven days a week. “The more you work, the more you can make. But it’s truly exhausting,” he says.

Beijing is crawling with motorcycle-mounted deliverymen, one sign of the rapid growth of China’s service industries. Services grew 8.3 percent last year and for the first time generated more than half of gross domestic product, or 50.5 percent. Manufacturing rose only 6 percent. “If it hadn’t been for the service sector, China’s economy would be in a much worse state today,” says Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. He notes that all kinds of services have expanded quickly in recent years.

Service businesses are largely clean, unlike the factories China has long relied on. And services generate more jobs per yuan of output, an important benefit as the country shifts to a slower growth rate. The industry expands in tandem with higher household incomes as families spend more on education, insurance, restaurants, travel, and the other trappings of middle-class life. President Xi Jinping stressed in a Jan. 18 meeting with ministers and provincial officials the role of services, innovation, and household consumption as the new economic drivers.

China has a long way to go before it resembles the U.S. economy, which derives almost 80 percent of GDP from services. A large part of 2015’s gain from services came from the financial sector. It grew 15.9 percent as China’s stock markets soared in the first half of the year. “There was an enormous boom in trading volume, which had a huge impact on the growth of the services sector,” says Christopher Balding, associate professor at Peking University HSBC Business School in Shenzhen. “But it is very unlikely it will be repeatable in 2016.”

Transportation and logistics,ogistics, which were boosted last year by fast-growing e-commerce, erce, are likely to suffer this yearear as manufacturing contin- ues to contract, says Andrew drew Batson, Beijing-based China hiina research director at t consulconsuultant Gavekal Dragonomics.nomiccs. About 60 percent of f total services, including real eal estate, “are closely related to the industrial sector,” he says. “That means services ervices s growth is going g to be sig-s significantly slower er this yeary year than it was last year. GDPG GDP will also significantlycantly slows slow down.” He’s predictedicting GDP growth h could fall below 6 percentrcent by yearend, from 6.9 percent for 2015.

Regulatory barriers rs to competition etition in finance, hhealth health lth Where China Gets Its Growth Gross domestic product in yuan care, and telecommunications, areas dominated by government-connected companies, hinder growth in services. “So So muchm of it is still state-owned,” says Andrew Polk, senior economist at th the Conference Board China Center for E Economics and Business. “The gov government needs to unleash the se service sector.”

China’s State Council has made it eas easier for new companies to register by s simplifyingy ng the app approval process and ending minim minimum capital requirements. P Policymakers have encouraged investment in tourism tourism, health care, sports, a and education in partp through tax br breaks. In the first 11 months of 2 2015, China r registered 3 3.9 million n new compa panies, up 19 pe percent, with m more than four-fifths in services, according to the State Administratio tration for Industry and Comme Commerce. China’s serviceserv sector now eem employs more than 300 million pe people, the largest share of the country try’s 775 million workers. The fastest ggr growth has been in low-end jobs in r retail, restaurants, hotels, and real e estate. Over the last five years, educati cation and government jobs, most of whichw are filled by college graduates, have fallen from a little less than half ofo total service employment to a third or so. Finance’s share has also fallen fallen, says Albert Park, professor of