China’s Service Sector and the 14th FYP: Trends, Breakthroughs and Policy Outlook

Abstract:

China’s service sector has developed a lot in the 13th Five-Year Plan period, and is positioned to upgrade on all fronts in the new era. In the 14th Five-Year Plan period, China’s service sector boasts huge potentials and is expected to maintain steady growth. By 2025, the service sector is expected to account for 59.05% of total value added, 54.96% of employment, 60.51% of fixed asset investment, and 50.04% of consumption. Service labor productivity will rise from 143,400 yuan/person in 2019 to 178,400 yuan/person by 2025. It can thus be concluded that in the 14th Five-Year Plan period, China’s service sector will play a dominant role in the economy and head toward higher quality development. To achieve this goal, we must allow for the decisive role of the market and the fundamental role of the government, and open up new prospects in development of the service sector with respect to digilitalization, platform-based operations, smart technology, integration, and standardization.

Keywords:

夏杰长

service sector upgrade, digital service sector, high-quality service sector development, market-based mechanisms, policy approach

JEL Classification Codes: 011, L80

DOI: 10.19602/j.chinaeconomist.2020.11.04

The service-based economy represents a basic trend in economic and social development across the world. Since reform and opening-up in 1978 and the entry to the WTO in 2001, China’s service sector potentials have been unleashed as a result of industrial development, urbanization, globalization and technological advances, generating an increasingly service-based economy. Based on the performance of the service sector in the 13th Five- Year Plan period ( 2016- 2020), this paper estimates the key indicators of the development of China’s service sector in the 14th Five-Year Plan period (2021-2025) and identifies the pattern, key drivers and policy approach that should be adopted in order for the service sector to develop with high quality in the 14th Five-Year Plan period.

1. Service Sector in the 13th FYP: A New Stage of All-around Upgrade

2020 is the final year for China’s 13th Five-Year Plan. There has been great public interest this year in China’s fulfillment of various social and economic development indicators and the goal of building a moderately prosperous society in all respects. The service sector, which now accounts for half of China’s

economy, has come into the spotlight. So far in the 13th FYP, the development of China’s service sector has been encouraging. The expanding service sector has created more jobs, made more innovations, and delivered better quality service than ever before, positioning it for a new stage of all-around service sector development.

1.1 The Service Sector Contributes a Rising, Increasingly Dominant Share to China’s Economic Growth

According to the preliminary national economic accounting for 2019 released by the National Bureau of Statistics (NBS) in January 2020, China’s gross domestic product (GDP) stood at 99.0865 trillion yuan (14.4 trillion US dollars) in 2019, up 6.1% YoY, and its per capita GDP surpassed 10,000 US dollars for the first time. The primary, secondary and tertiary industries saw their value-added reach 7,046.7 billion yuan, 38,616.5 billion yuan and 53,423.3 billion yuan, up 3.1%, 5.7% and 6.9%, respectively. The tertiary industry recorded the fastest growth, above that of the primary industry, the secondary industry, and the overall GDP. For the whole of 2019, the tertiary industry accounted for 53.9% of China’s GDP, contributing 59.4% to GDP growth. This is a significant improvement over 2016, the first year of the 13th Five-Year Plan period. In 2016, the ratio of primary, secondary and tertiary industries was 8.6:39.8:51.6, but in 2019, it was 7.1:39.0:53.9. The primary and secondary industries dropped by 1.5 and 0.8 percentage points, respectively, while the tertiary industry grew by 2.3 percentage points (see Table 1). In 2015, for the first time, the value-added of China’s service sector was greater than half of the GDP, reaching 50.5%. Over the past few years, this percentage has been rising steadily, reaching nearly 54%. As can be seen, the service sector is playing an increasingly dominant role in China’s economy.

1.2 The Service Sector Has Become a Major Source of Jobs with a Rising Share of Employment

In 2018, China’s service sector comprised 46.3% of the total employment, up 2.8 percentage points from 43.5% in 2016, which is significantly higher than the growth rate of the sector’s share in valueadded (see Table 2 and Table 1). Employment is the most important issue concerning people’s livelihood. Yet the economic downturn and COVID-19 have made jobs scarcer. In this context, employment tops the policy agenda to “bring stability to jobs, finance, trade, foreign investment, domestic investment, and market expectations.” Judging by international experience, the service sector offers the greatest potential. In the advanced economies of Europe and North America, the service sector provides some 75% of jobs. As technology advances and industrial structure shifts, the service sector is expected to play a more dominant role in creating jobs.

1.3 Fixed Asset Investment Grew Rapidly in the Service Sector

In the 13th Five-Year Plan period, China’s service sector investment as a share of fixed asset investment was much higher than that of the primary and secondary industries. For most years, the service sector received more than 59% of total fixed asset investment in China (see Table 3). Although growth in fixed asset investment was outstripped by growth in consumption, the service sector saw a steep rise in investment with an improving investment structure. Amid sluggish fixed asset investment in 2019, the high-technology service sector saw a 16.5% increase in investment. Education, culture, sports and entertainment businesses all recorded investment growth rates above 13.9%.

1.4 Service Consumption Is Becoming the Most Vibrant Sector of Consumption for Urban and Rural Households

Investment, consumption and net export are the three drivers of economic growth. In the 13th FiveYear Plan period, relatively lethargic investment and the backlash against globalization in world trade meant that China was more dependent on domestic consumption to spur growth. In this period, China’s growth in consumption was greater than its GDP growth, and was an important factor driving economic growth. From 2016 to 2019, consumption contributed 64.6%, 58.8%, 76.2% and 57.8%, respectively, to the GDP. Despite some volatility, consumption contributed a far greater share to China’s GDP growth than investment and net export, which is partly attributable to investment volatility and trade spats. The most important factor in this growth is the rapid growth of urban and rural household disposable incomes and spending above GDP growth in the 13th Five-Year Plan period (see Table 4).

Consumption is quickly becoming a key driver of China’s economy. Increased consumption upgrade among Chinese urban and rural households is the result of quality-oriented economic development, rising household incomes, and technological advances. The increasingly larger share of service consumption is among myriad manifestations of consumption upgrade.[ According to the Statistical Communique of the People’s Republic of China on Economic and Social Development (2016-2019), from 2016 to 2019, service consumption represented 41.0%, 41.4%, 44.0% and 45.9%, respectively, of China’s per capita household consumption spending, up 4.9 percentage points in four years (see Table 4). Services led by culture, entertainment, leisure, tourism, healthcare, elderly care, sports and child education industries have emerged as the most vibrant consumption sectors among urban and rural residents.

1.5 Innovations Led to New Service Sectors and New Business Formats

Innovations provide a new driver for service sector development. New service sectors and business formats have stimulated both supply and demand, underpinning service sector growth. At the most fundamental level, service innovations are driven by technological advances. New-generation information technology has breathed life into China’s manufacturing and service sectors, giving rise to digital, network and smart operations. Big data, artificial intelligence, mobile Internet and cloud computing have blurred the boundary between manufacturing and services. “Service-based industries” coexist with “industrial services.” Manufacturing- service integration has spawned innovations in people’s ways of life and work, ecosystems and business models, boosting service productivity and competitiveness. One such innovation is e-commerce platforms, which have enabled the consumer to business (C2B) model. Unlike the planned economy where sales targets are based on production quota, C2B allows consumers to participate in R&D, design and manufacturing, i.e. customized manufacturing. By minimizing inventory and catering to bespoke needs, this new business model has gained great popularity among businessmen and consumers alike.

2. China’s Service Development Trends in the 14th FYP 2.1 Forecast of Key Service Sector Indicators

Service sector development can be forecast in many ways, including the total production function model, the input-output method, and the trend extrapolation method. Utilyzing the trend extrapolation

method, this paper forecasts China’s service sector’s size, employment, fixed asset investment and labor productivity in the 14th Five-Year Plan period, as well as presenting a sector outlook until 2025.

2.1.1 Forecast of indicators of service sector development

The COVID-19 pandemic has presented great challenges to China’s socio-economic development. Amid falling domestic consumption and more constricted external environment, both the manufacturing and the service sectors are experiencing financial hardship. Our forecast for China’s GDP growth, service sector growth and employment in the primary, secondary and tertiary industries for 2020 must take the impact of COVID-19 into full account. As it is the most effective way to curb the virus’s spread, avoiding personal contact has brought many service activities to a halt. Compared with the service sector, Chinese manufacturers will suffer a more severe and lasting impact of supply chain disruptions as they struggle to import raw materials and export finished goods.

Our forecast of China’s industrial development should, therefore, factor in COVID-19, especially for 2020. According to China’s economic performance in the 13th Five- Year Plan period, service sector growth outstripped GDP growth by 0.8 percentage points and secondary industry growth by 1.5 percentage points. The COVID-19 pandemic is expected to affect China’s manufacturing industry more powerfully than it is expected to affect the service sector. The secondary industrys share of the economy will continue to decrease. Service sector growth is also expected to drop a little but it is likely to comprise a larger share in the economy. These temporary external shocks will not change our assessment of China’s industrial outlook in the 14th Five-Year Plan period. In the long run, China’s economy is positioned to stay on an upward path.

(1) Estimated service sector value-added and share

As can be seen from Table 5, China’s industrial restructuring in the 14th Five-Year Plan period will follow the trend of the 13th Five-Year Plan period. Tertiary industry (services) will comprise a rising share of the economy while primary and secondary indusries’ share of the economy will shrink. By 2025, the service sector is projected to account for 59.05% of the total value-added, up 3.77 percentage points from 55.28% in 2020, or close to 0.8 percentage points annually. That is to say, the service sector will remain China’s biggest industry and will play an ever more dominant role in China’s socio

economic development. China’s potential growth rate is likely to decrease in the 14th Five-Year Plan period, with the real growth rate down to 4.5%-5%, which will be exceeded by service sector growth. Services based on digital applications are particularly well-positioned to drive China’s next round of growth. As a result of COVID-19’s challenges to China’s service sector, domestic consumption and the external environment, we have lowered our forecast of the rate of China’s economic growth in 2020, to some extent.

(2) Forecast of service sector employment and share

Some academics question whether value-added in services and its share in the GDP is comparable, for price accounting reasons. For this reason, the service sector’s share in total employment is often used to measure the status of a country or region’s service-based economy. NBS data suggest that while China’s service sector and agriculture sector employed similar numbers of people in 2010, service employment has exceeded agricultural employment by a growing margin since 2011. In the 13th FiveYear Plan period, the service sector as a share in employment rose sharply. Based on the forecast in Table 6, China’s service sector’s share of employment from 2019 to 2025 will continue to rise and is expected to reach 54.96% by 2025, up 7.81 percentage points from 2019. Yet even this number is an understatement. Integration is a trend of industrial development. Take the rural economy for instance, modern agriculture is increasingly integrated with industries and services. Some farmers are engaged in the tertiary sector through such as rural e-commerce, folk-culture tourism and bed and breakfast services but statisticians still count this as agricultural employment. The service sector’s employment rate is, therefore, underestimated.

(3) Forecast of service sector productivity

Labor productivity reflects the quality and efficiency of service sector development. Services are heterogeneous. Some service sectors are plagued by monopoly and imperfect competition. Taking these challenges into account, we measure labor productivity instead of total factor productivity (TFP) in services. Labor productivity is value-added created by each unit of the workforce. As can be seen from Table 7, therefore, we have estimated China’s overall and sector-specific labor productivity over the

2019-2025 period based on the forecast value-added and workforce of the service sector. China’s overall labor productivity is estimated to rise from 126,500 yuan/person in 2019 to 166,700 yuan/person in 2025. Labor productivity in the service sector is expected to increase from 143,400 yuan/person in 2019 to 179,000 yuan/person in 2025. The service sector will be more productive overall, but remains less productive than the secondary industry. Productivity in the secondary and tertiary industries will diverge instead of converge as we anticipated. In other words, the “Baumol’s cost disease” continues to exist. In the short run, IT applications and new business models may raise service sector productivity only a little. Yet, over time, technological advances will play an increasingly more important role in driving productivity in both the service and the manufacturing sectors.

(4) Forecast of fixed asset investments in primary, secondary and tertiary industries

The service sector is often regarded as comprised of asset-light industries with much smaller fixed asset investment than secondary industries. Yet modern services are increasingly dependent on many different kinds of infrastructure and cannot function without fixed-asset investment. Statistically, the transportation sector is also included in the tertiary industry. Over the years, the transportation sector has been a key priority for central and local government investment, and has attracted a great deal of private capital. National industrial policy support of the service sector and flourishing urban and rural consumer markets for services will unleash great potentials for fixed asset investment in services, whose growth rate is expected to exceed those for the primary and secondary industries. By 2025, ss can be seen from Table 8, the ratio of fixed asset investment in the primary, secondary and tertiary industries is likely to be 3.34:36.15:60.51, and the service sector’s share of total fixed asset investment will rise by 1.55 percentage points over 2020. The service sector is positioned to play a bigger role in fixed-asset investment.

(5) Forecast share of service consumption

Growth in household service consumption is subject to a multitude of factors, including income,