The economic development of China over the last several decades has been quite remarkable. This country has witnessed rapid growth, which is likely to stay resilient at around 5 % in 2024, despite the continued property sector adjustment. Kavan Choksi Japan mentions that the service sector of China is an important but underexploited driver of growth. Over the past two decades, relocation of resources to this sector has significantly boosted productivity, and may continue doing so in the years ahead if supportive reforms are implemented.
Kavan Choksi Japan briefly sheds light on the service sector of China
Expansion in the service sector in China can help put more people to work, especially young people. Moreover, as emissions are lower in the services industry, the expansion of this sector may also help China reach its climate goals more in a more efficient manner. The country does have significant further potential for expanding services. Even though the sector’s share of value-added to the economy has increased in recent years to just over 50%, it is still pretty below the average of approximately 75 % for advanced economies.
While the service sector firms in China have been highly innovative, based on company level data, the allocation of capital and labour across firms are becoming less efficient in the sector. This basically implies that highly productive firms have been too small on average, while less productive firms were cornering too large a share of the market. Hence, China must prioritize reforms for improving the allocation of labour and capital in the services sector. This sector also is subject to several regulations, including restrictions on domestic and foreign. Enabling more businesses to enter and compete in services, further reducing local protectionism, as well as easing regulatory requirements, along with reduced trade and foreign entry restrictions, would help boost productivity and support growth.
As Kavan Choksi Japan says, it has become important for China to prioritize rebalancing the economy for the purpose of strengthening the demand for services in the country. Making taxes more progressive and improving social safety nets can help lower the need for precautionary savings, particularly in middle- and lower-income households. This shall invariably lead to greater spending on services. Better unemployment and medical benefits, and increased insurance coverage would further boost consumption as well.
Boarding speaking, the service sector in China is in a good position to create jobs and drive sustainable growth in the nation. Typically, policies for helping rebalance demands towards consumptions tend to be combined with reforms that lower barriers to entry, as well as ease other regulatory restrictions. Many of these restrictions may have prevented capital and labour from being efficiently allocated in the past. It is estimated that a comprehensive package of pension reforms, improvements to social safety net and market-based structural reforms can help raise the GDP by close to 20 %over the next 15 years relative to the baseline. Alternatively, it may help achieve about 1 percentage point higher potential growth per year over the medium term.
