As China reduces its focus on manufacturing and attempts to restructure toward a service-based economy, its leadership is crafting a plan to drive the transition.
Plans to set up a 30 billion RMB fund ($4.38 billion USD) to encourage high value-added service exports were announced in Chinese newspaper Economic Information Daily on February 17 and confirmed by experts. The plan reinforces China’s current approach toward service sector reform, focusing largely on non-traditional sectors.
China’s service sector reform has been slow going in traditional areas such as public education and healthcare since the state is well entrenched in these industries, leading to issues like institutional inefficiencies, excessive regulation and overspending.
So the country has turned to nimbler sectors, such as e-commerce and technology, and flexible areas of traditional industries, like private education, to generate growth. Due to the emphasis placed on China’s services sector, the industry weighed in at 38.4 trillion RMB ($5.6 trillion USD) in 2016, making up over 50% of GDP for the second year in a row. China is aiming to get that number up to a 70-80% services sector contribution to GDP, the average for advanced countries.
High value-added exports
The new service sector fund will focus on high value-added service exports like technology and finance, with the state contributing 16.7% of the fund and non-government investors contributing the rest. The fund will be available to both state-owned and private enterprises, and is the first fund promoting service exports in China.
Boosting service exports will help China generate external demand for a sector it is trying to expand. This has been an effective growth strategy, particularly in India, which has produced a large amount of service exports in information and communications technology.
India was the first nation to root its growth in services as opposed to manufacturing, and has shown that service-based exports are sustainable where there are a skilled labor segment and sufficient government support. As foreign demand for services grows, domestic demand is boosted in turn as the sector becomes more productive and less costly.
An extension of existing reforms
The fund is an extension of existing policies in 15 pilot programs located throughout China. Beijing became the first pilot city in May 2015 and later expanded to the Beijing-Tianjin-Hebei region.
This region focused on the area’s comparative advantage in innovation. A prime example of this is the investment of foreign funded enterprises in innovation incubators, such as Microsoft's joint establishment of a "group innovation space," in this case a service platform for start-up companies to utilize the Microsoft Cloud Computing Platform.
Foreign investment is a key component of the reform plan, as China’s economic slowdown poses a challenge to private and government spending alike.
From January to November 2016, foreign investment in services amounted to 513.3 billion RMB ($74.6 billion USD), an increase of 8%. Of this, the high tech services industry amounted to 88.14 billion RMB ($12.8 billion USD). Foreign investment is highest in consulting and retail services, and helps to fill funding gaps as China's economy struggles to preserve growth.
Additional service sector reforms in October of 2016 attempted to reduce red tape and restrictions in the elder care, private education and sports services sectors. The objective of this is to ease the establishment of new elder care institutions, permit private schools to set their own fees, support the use of recreational vehicles in tourism, and ease private investment in service businesses.
Hope for the service sector?
Although the service sector fund is not enormous, there is the hope that China can maintain expansion of the service sector given potential demand from abroad. A focus on new areas within the service sector, such as e-commerce and technology, is more likely to bring about growth than a cumbersome reform of traditional sectors that are mired in regulation and underproductive.
In addition, increased employment in the services sector resulting from its expansion tends to be correlated to higher incomes, which will positively benefit China's population and lead to higher consumption.
