China’s grow­ing ser­vice econ­omy hits a snag

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

Bloomberg Businessweek (North America) - - Conntents -

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, which were boosted last year by fast- grow­ing e-com­merce, are likely to suf­fer this yearear as man­u­fac­tur­ing con­tin- ues to con­tract, says An­drew Bat­son, Bei­jing-based China re­search di­rec­tor at con­sul­tant Gavekal Drago­nomics. About 60 per­cent of to­tal ser­vices, in­clud­ing real es­tate, “are closely re­lated to the in­dus­trial sec­tor,” he says. “That means ser­vices growth is go­ing to be sig­nif­i­cantly slower this year than it was last year. GDPG will also sig­nif­i­cantly slows slow down.” He’s pre­dict­ing GDP growth h could fall below 6 per­centr­cent by yearend, from 6.9 per­cent for 2015.

Reg­u­la­tory bar­ri­ers to com­pe­ti­tion in fi­nance, health care, and telecom­mu­ni­ca­tions, ar­eas dom­i­nated by govern­ment- con­nected com­pa­nies, hin­der growth in ser­vices. “So muchm of it is still state- owned,” says An­drew Polk, se­nior econ­o­mist at th the Con­fer­ence Board China Cen­ter for Eco­nom­ics and Busi­ness. “The govern­ment needs to un­leash the ser­vice sec­tor.”

China’s State Coun­cil has made it eas eas­ier for new com­pa­nies to reg­is­ter by sim­pli­fy­ing the ap­proval process and end­ing min­i­mum cap­i­tal re­quire­ments. Pol­i­cy­mak­ers have en­cour­aged in­vest­ment in tourism, health care, sports, and education in part through tax breaks. In the first 11 months of 2 2015, China reg­is­tered 3 3.9 mil­lion new com­pa­nies, up 19 per­cent, with more than four-fifths in ser­vices, ac­cord­ing to the State Ad­min­is­tra­tion for In­dus­try and Com­merce. China’s ser­vice sec­tor now em­ploys more than 300 mil­lion peo­ple, the largest share of the coun­try try’s 775 mil­lion work­ers. The fastest growth has been in low- end jobs in retail, restau­rants, ho­tels, and real es­tate. Over the last five years, education and govern­ment jobs, most of which 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, says Al­bert Park, pro­fes­sor of

eco­nom­ics at Hong Kong Univer­sity of Sci­ence and Tech­nol­ogy. “The higher- skilled sec­tors—tele­coms, in­for­ma­tion tech­nol­ogy, com­put­ers, fi­nance, and busi­ness ser­vices— are still not a large share of the to­tal ser­vice in­dus­try,” he says. “And while some are grow­ing, they aren’t grow­ing very quickly.” - Dex­ter Roberts

The bot­tom line China’s ser­vice in­dus­try grew faster than the econ­omy in 2015, but stock mar­ket tur­moil will likely hurt fi­nan­cial ser­vices.

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