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Service Industry Flexes Its Muscle

China's service industry is expected to grow rapidly during the 11th Five-Year Plan (2006-2010), Jiang Xiaojuan, a senior research fellow with the Chinese Academy of Social Sciences, said.

The country's fast-growing economy and its citizens' increasing income will help create a tremendous demand for services in the coming five to 10 years, Jiang said.

"From a long-term point of view, residents' per capita income level plays a leading role in expansion of service demand," said Jiang, director of the academy's Institute of Finance and Trade Economics.

People will increase spending on service items such as tourism, education and leisure if their incomes increase, she said.

And the production of any single industrial product will be completed by several or even thousands of specialized producers, Jiang said.

"This will require many service-oriented companies to join the process to complete the product," she said.

Some manufacturing companies will begin to give up their original service functions and turn to professional companies such as law, accounting and consulting firms for commercial services.

"The efficiency of the manufacturing system will become more reliant on the whole network, including the service companies," she said.

During the past two decades, the efficiency and competitiveness of China's manufacturing industry improved considerably.

But development of the service industry lagged far behind and its efficiency is quite low.

"The slow growth of the service industry has become an important factor hindering the future development of China's economy," Jiang said.

An investigation of firms in China with multinational investors found that the under-developed service industry had damaged the competitiveness of these companies' manufacturing firms.

Over the past several years, urban residents have been spending more on large consumption items such as housing, cars and electronic devices.

This trend will continue for a long time and is expected to create large demand for services, Jiang said.

The housing sector is an important segment of the service industry, she said.

"It will also lead to the development of other service sectors such as property management and home refurbishing."

International experience also suggests the car industry contributes more to the service industry than to the manufacturing sector, Jiang said.

"Development of the service industry is also vital to the expansion of consumption demand, one of the three major forces driving the country's economy," she said.

China's low consumption ratio has been a problem for the country's economy for a long time.

It is closely related to the service industry's small contribution to the gross domestic product (GDP), she said.

Since the service industry serves as a bridge between the manufacturing sector and consumption, speeding up development of the service industry will help expand consumption.

Presently, monopolies still exist in some service sectors such as finance, telecommunications, railways, education, culture and media, Jiang said.

These sectors, some of which are believed to charge high fees for low quality services, restrict consumption and their own development.

The government has already identified the problems and decided to accelerate reforms in these sectors to allow competition.

Past experience suggests that competition helps improve service quality, lower prices and promote technical innovation, Jiang said.

The skyrocketing development of the car industry during the past two years is a good example, she said.

The service industry enjoys the highest level of globalization of all the sectors, Jiang said.

Since the 1990s, investment in the service industry has accounted for about 60 per cent of global multinational investment.

Now that China has become a member of the World Trade Organization, the country will gradually open its service industry to foreign companies in accordance with its promises.

The service industry is becoming a new "hot" area for foreign investment, Jiang said.

"Further opening-up of the service industry will help speed up development of the sector and improve its competitiveness on the international market," she said.

The service industry is mostly based in cities. Its output in urban areas accounted for about 85 per cent of its total in 2002.

As a result, urbanization has been key to development of the service industry.

From 1990 to 2001, China's cities above the prefecture level increased from 188 to 269.

In 2001, the ratio of city dwellers to total population reached 37.7 per cent, 10.3 percentage points higher than in 1990.

In the past two years, the process of urbanization has quickened, Jiang said.

In 2002, GDP achieved by cities above the county level grew 13 per cent compared with the previous year, which was 5 percentage points higher than national GDP growth in the same year.

The combined GDP of these cities accounted for about 63 per cent of China's total GDP.

"The accelerated pace of urbanization will continue to play an active role in development of the service industry," Jiang said.

The Chinese Government has made the service industry a priority since it initiated its reform and opening up policies in 1978.

But the contribution of the service industry to GDP rose by only one percentage point from 33 per cent in 1991 to 34 per cent in 2002.

It is also quite low compared with many developed and developing countries, she said.

"The government should open its mind, promote competition, regularize market behaviour, speed up the opening-up process and give proper support to further develop the industry," Jiang said.

The government must make sure the service industry helps decide the future development of the country's economy, she said.

Standards for market entry should be relaxed and more competition introduced except in service industries deemed important to State security.

Jiang also said the government needs to stick to market rules and provide proper policy support for service industries.

And it should map out preferential policies on capital, tax and land issues to support small companies capable of hiring more staff.

(China Daily February 10, 2004)

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