Deficit in service sector remains a worry

Ministry of Commerce data shows that in the first five months of this year, China's trade deficit in services decreased significantly, and the proportion of knowledge-intensive trade in services continued to rise.

The sharp decline in the trade deficit in services is mainly due to a considerable decline in China's outbound tourism following the novel coronavirus outbreak. The reduced deficit in services trade has, to some extent, offset the pressure on China from a declining surplus in its trade in goods and will help the country improve its balance of payments and renminbi fundamentals. But such changes are only caused by short-term factors and China's trade deficit in the service sector will continue to exist as a challenge.

In 2019, China's trade deficit in services was $214.6 billion, the largest in the world, while the United States was the world's largest exporter of services, with a surplus of $249.2 billion. In terms of the structure of China-US trade in services, China mainly provides travel, transportation and processing services, while the US mainly provides business and personal services, intellectual property and financial services.

China's manufacturing scale has peaked, and to transform and upgrade the sector, it will focus on high-quality development, and its export volume is expected to remain relatively stable. On the other hand, oil, grain, chips and other high-end equipment and components remain in great demand in China. Moreover, the policy major countries are adopting to promote the "return of manufacturing" poses a bigger challenge to China's manufacturing exports. That means China's international balance of payments faces great changes in the future.

Therefore, China should make greater efforts to make its service industry more competitive internationally, and gradually reduce its service trade deficit to achieve the balance of trade structure. Its service sector needs transformation and upgrading in the context of consumption transformation and upgrading. Its tourism and education sectors will face a period of explosive growth, so domestic tourism should work hard to reduce costs and improve service quality. The number of duty-free shops in tourist areas should be increased to gradually help Chinese tourists who prefer overseas shopping enjoy the same services at home.

China has a huge deficit when it comes to cultural consumption. But this leaves room for it to build its soft power, enhance creativity, and expand the international promotion of local brands. Nevertheless, the fundamental way to reduce service trade deficit is to expand opening-up, gradually dovetail international rules and further promote integration with the international market.