Last Updated:2015-08-19
By Geoff Raby
While the current weakness in China's economic growth is attracting a lot attention, the rapid structural transformation of the economy has escaped such gaze. The world's "workshop" is rapidly becoming a services-based economy.
Data released in May shows the service sector makes up more than half of the Chinese economy now, accounting in the first quarter for 51.6 per cent of gross domestic product. Two years ago – also with little comment at the time – services overtook manufacturing to become the single biggest sector.
Even as overall economic activity cools, the structural transformation that has been occurring in the Chinese economy has been profound. Ten years ago, services accounted for just 40 per cent of GDP, while manufacturing was almost half. Agriculture's share has fallen most dramatically, comprising just 10 per cent of GDP, compared with more than 25 per cent in the early 1990s.
As economies mature, the share of services in GDP increases, reflecting rising per capita incomes and greater urbanisation. In 1995, China's urban population was just 31 per cent of the total. By 2000, it had crept up to 36 per cent but by 2013, China's city-dwellers totalled more than 53 per cent.
China has also been losing competitiveness to relatively cheaper competitors in some of its traditional low-cost, low-value-added manufactured exports.
In this, as in so many other aspects of China's economic development, notwithstanding the heavy government involvement in the economy, China seems to follow the economic textbooks. It was not many years ago that analysts were predicting serious trouble arising from rapidly growing income disparity between the coastal cities and the perceived struggling vast interior.
Instead, as wages and costs rose along the more developed eastern seaboard, industry began migrating further inland. At the same time, massive investment in transport infrastructure began to ease constraints on moving goods internally and so brought new areas – previously out of reach – into the global production chain. Whereas the early iPhones were assembled in Shenzhen on the coast, the iPad was made in remote Chengdu. As a result of industry shifting inland, incomes have been rising more rapidly in the interior provinces than in the more mature coastal provinces.
Growing faster
In 2000, Chongqing, a city-province with more than 32 million people and about 2000 kilometres inland up the Yangtze River from Shanghai, had a per capita income just 21 per cent of Shanghai's. By 2010, this was 36 per cent and 92 per cent of national per capita income, up from 80 per cent in 2000. In 2013-14, as would be expected, the GDPs of most of the large tier one cities (such as Beijing, Shanghai, Guangzhou, Tianjin) were growing slower than the national average, while many tier two and three cities were growing well above the national average.
Part of the growth in services is also attributable to the rebalancing of the economy. Last year, consumption rose by 12 per cent on the previous year, and much faster than overall GDP growth of 7.4 per cent. For the past five years, net exports have only occasionally been the main source of economic growth. Therefore, China has shifted from export-led to investment-led, towards what is likely to be an increasingly consumption-driven growth model.
Investment now accounts for about 46 per cent of GDP growth. While still high by international comparisons, it is trending down for what is still a relatively poor developing country with a per capita income in nominal terms of about $US8000 ($10,104), or about one-seventh of US nominal per capita income.
Growth of the service sector is consistent with the government's economic priorities set down most recently in Premier Li Keqiang's Work Report to the National People's Congress. The government is seeking to engineer a managed rebalancing of the economy, while maintaining growth rates at about 7 per cent.
Through targeted monetary policy easing and selective fiscal stimulus by bringing forward planned big infrastructure projects, the government is attempting to offset the headwinds from a cooling property sector. It is likely to achieve its overall GDP growth target. If it does, the net addition to global demand will still be substantial coming off an economy the size of China's. The rapid increase in the share of the services sector in the economy will assist in sustaining growth and, importantly, employment, while contributing to a more sustainable performance.
Of course, this is a good thing for Australia's economic outlook. Meanwhile, the growth in services in China, together with the considerable achievements made in access to China's services sector under the bilateral free-trade agreement, present opportunities to diversify Australia's trade with China.
Geoff Raby is Chairman and CEO of Geoff Raby & Associates and a former Australian Ambassador to China.
This article first appeared in the Australian Financial Review:
