Rebalancing Chinese economy: why service industry?30 January, 2012, 23:42. Posted by Zarathustra
Tags: Economy, Service
All people have been talking about rebalancing the Chinese economy (or lack of it). I may have more to say with respect to rebalancing towards a more consumption driven economy, but meanwhile, there’s another rebalancing that BofA/Merill Lynch is tackling.
David Cui et al. of Bank of America Merill Lynch wrote a monster report on service industry of China. They noted that the service industry’s contribution to the Chinese economy is well below comparable emerging market economies, and way below developed countries like the US and the UK. This is one aspect of the economy that the government is keen to “rebalance”, as they noted that the 12th Five-Year Plan targets to raise service industry’s contribution to GDP by 4%.
Source: Bank of America Merrill Lynch
Why has service industry lagged behind before? They noted:
For decades, the Chinese government frowned upon the service industry as the view was that only making things contributed to the economy. It may surprise many people that, even during the early period of China’s reform program (that started in the late 1970s), buying-things-from-one-place and then selling-them-at another was considered a criminal offense. In addition, many Chinese considered serving other people socially degrading. As a result, it was not until 1985 that NBS set up a data collection system for the industry and officially viewed it as an independent sector.
Since then, the government has increasingly looked upon the sector favorably: In 1985, the government formulated the first Five-Year plan for the industry; in 1992, as part of the government’s drive to develop all aspects of the economy, the State Council published detailed guidance to support the service industry and targeted a growth rate higher than those for the agricultural and manufacturing sectors; after China entered into WTO in late 2001, it gradually opened up many service sectors to foreign investment, including financial, accounting, distribution and legal service. In recent years, the government has repeatedly emphasized the importance of the service industry and even set specific service industry related targets for local governments, e.g. a certain percentage of local GDP.
Despite the changed attitude, service industry’s contribution to GDP has been declining in recent years largely due to the rapid growth of the secondary industry.
Why China needs stronger service industry?
A new growth driver
China is already the “factory” for the world but its service industry has remained relatively underdeveloped. This provides tremendous potential growth opportunities. These opportunities are especially valuable now because many traditional drivers of growth, including export, home appliance, auto and property for the domestic market, are petering out.
A good job creator
The service industry creates many jobs as it’s generally quite labor intensive – you need at least one pair of hands for a foot massage!
In most developed countries, the service industry accounts for over 60% of their total employment, and even for many developing countries, the ratio is generally above 40%. In China, the ratio was 35% in 2010. This demonstrates the sector’s potential for job creation in China, in our opinion.
In addition, service jobs are often well-paying jobs – 8 out of the 13 service sectors had a compensation level that’s above the average in 2010, while manufacturing and agriculture’s were below.
To improve efficiency and move China up the value chain
The role of modern logistics and IT services in improving efficiency is well known, e.g. JIT and the email service (oh well, probably not this one). As China’s demographics dividend winds down, it’s absolutely critical for China to improve productivity to enjoy sustained growth. In this light, efficiency gain is important.
To de-bottleneck resources constraints
Compared to manufacturing, service is less resources intensive… in 2007, service industry contributed to 42% of China GDP but only consumed 10% of its power and 2% of its water. In addition, service industry generally uses less land and discharges less pollution.
So, as far as investing is concerned, these are the kind of things they like:
Thematically, we prefer players in non-banking financial institutions, third-party door-to-door logistics solution providers, cold chain management, R&D outsourcing, testing, retailers with scale and brand, children’s English education, overseas study prep, online travel, airport management, and hotel operations sub-sectors.