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Growth at the crossroads of change

Published: 25 Feb 2015 01:21:18 PST

Growth at the crossroads of change


Strong service sector will play important role in healthy economic development

China's economic transformation is at a turning point. There are increasing pressures of an economic slowdown, and China's GDP growth fell to 7.3 percent in the third quarter of this year compared with the same period last year, hitting a new low since the first quarter of 2009. But upgrades to its economic structure are taking shape. In the first three quarters of this year, the added value of the service sector accounted for 46.7 percent of GDP, a historic high.

But there are obstacles ahead. Along with time and space restraints for the economic transformation, comprehensive reform has been narrowed in view of profound and complicated changes with internal and external environments. Changing from a country with a big industrial sector to one with a big service sector by 2020 has become a historic and arduous challenge.

If the transformation proceeds as planned, China will be able to maintain 7 percent growth and become a high income country.

China is entering a new era of consumption. There is more demand for modern services than for commodities. Upgrades to the consumption structure have promoted obvious increases in service consumption. After 36 years of rapid economic growth, China has passed the subsistence phase in which food and clothing were the major concerns and is now entering a phase in which the development of the individual is the main goal.

With a rapid expansion in consumption, there is huge market potential and market space for China to become a country with a large service sector.

Since 2008, the China Institute for Reform and Development has been advocating an economic transformation from investment-driven growth to consumption-driven growth. It believed then that unleashing the potential growth in consumption would create new growth points and that a consumption-driven economy would develop the nation's service sectors. In turn, many unresolved historical issues such as overcapacity would be alleviated and the nation's economic structure would be upgraded to allow the service sector to become an engine for maintaining moderate growth rates.

Therefore, having a service-sector-led economic structure will influence China's overall economic and social transformation.

When China enters this new era, the potential consumption demand from its 1.3 billion people becomes a key advantage for China's transformation of development models. The scale and speed of unleashing the potential service consumption will determine, to a large extent, the process of readjusting economic structures and urban-rural structures. Unleashing the demand for services to transform the nation's development model will not only be a common thread of China's economic transformation over the next six years, it will be the key to its growth and reforms.

An economy with a strong service sector directly translates into strong GDP per capita. If per capita GDP rises from $6,500 to $10,000, the proportion of the service sector in GDP will increase by 10 percent, although China must meet certain conditions for its ratio of service sector to GDP to reach 55 percent by 2020.

How the service sector develops is a key indicator of whether China is economically improving because it should produce new drivers for growth.

Substantially increasing the proportion of the service sector to GDP should be a binding task in the 13th Five-Year Plan (2016-20). Successful economic transformation led by the service sector is essential for China's development for the next 10 to 20 years.

As China enters its new era, institutional innovations have become the top priority in deepening economic reform. In recent years, there has been a bottleneck in the supply of services that did not meet public demand. But the root cause of the problem in the service sector is the slow pace at which the sector opened up, not a lack of domestic capital. Currently, government monopolies and an underdeveloped service sector are hurting the country's economic transformation.

It is essential to make private capital a major funding source for the development of the service sector. Small and medium-sized enterprises should be major players. Further market reforms are vital and a better use of private capital should be a top priority.

Experience shows that the role of large enterprises is very limited because they are not very competitive in responding to changes in market demand. Small and medium enterprises, however, are more responsive to market changes and can contribute to the cultivation of the service market through fair competition. Therefore, it is necessary to lift restrictions on the use of private capital in the service sector.

Another top priority is to break up the monopolies in the service sector. Monopolies still exist in education, healthcare and finance and it has been difficult for market players to improve the capacity, quality and efficiency of supply through fair competition.

The underdevelopment of the service sector makes it difficult to make use of advanced technologies and managerial expertise from other countries, which, to some extent, restricts effective supply in the sector. The consequence is an outflow of domestic consumption in services. Therefore, we should take the establishment of multilateral and bilateral free trade zones as a core task to accelerate the opening up of service trade.

Transforming from a country with a large industrial sector to one with a large service sector means comprehensive economic transformation and upgrading. This process requires not only economic reforms, but also social, cultural, ecological and other reforms.

The service-driven transformation will not only play a decisive role in China's sustainable development over the next 10 to 20 years, it will bring great opportunities for other emerging economies and the world.

The author is president of the China Institute for Reform and Development in Hainan province. The views do not necessarily reflect those of China Daily.

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