On right track for growth model change

One of the most fundamental changes China is going through is its determination to reduce its reliance on exports and fixed-asset investment, and to grow the economy with increased focus on domestic consumption. Aeroe agreed that must remain one of the key elements of the future Chinese economy.

Official figures show that domestic consumption accounted for 51.6 percent of China's growth last year, up from 37.3 percent in 2010.

Aeroe said that as trade grows, a country's consumption pattern evolves, particularly in a big country like China, and domestic demand can play a tremendous role in supporting new industries and new growth spots.

"Anything from computers, clothing, consumer electronics, to services. You name it," Aeroe said.

"As people get more wealthy, they want a decent product, a decent service, so that also helps sustain a new knowledge-intensive environment."

Aeroe has many years of experience working with governments, enterprises of all sizes, and trade support groups to offer trade-related technical assistance, and he explained that this has made him rethink how markets operate, often away from the models extolled by traditional schools of economics.

As China moves toward a more "sophisticated" manufacturing sector, it should also rely more and more on the growing service sector, Aeroe said.

He argues that during the recent slowdown, it was the service industry that proved to be more resilient and robust than trade in manufacturing.

"A lot of what has been manufactured today comes with a strong service component - for instance, if you buy a new car the dealer might not make a huge profit on that but he relies on what he can make from after-sales services. Today, the really sophisticated products come with service," he said.

Many companies, he adds, are now being forced to change their business models from being a seller of what they produce, to a seller of what they offer in terms of service.

One example provided by Aeroe is Rolls-Royce PLC. Historically, the company produced engines for airplanes, but now it leases engines and look after the engines for clients, which has proved to be more lucrative.

Referring to how China's manufacturing industries could become more sophisticated, more jobs will be created as products demand higher levels of R&D, he said.

He noted that while global exports of services grew by 166.3 percent between 2001 and 2011, China's exports of services grew by 448.1 percent during the period, increasing its market share in service exports from 2.2 percent in 2001 to 4.5 percent in 2011.

And even if China's manufacturers move to cheaper locations, the service part will remain.

"It might be that low cost work will move to other Asian countries, where it's cheaper now compared to China, but you will still keep the service component.

"So the design and marketing, the promotion and branding, all of them will probably stay behind, creating jobs in a more sophisticated Chinese manufacturing sector," he said.

Aeroe rejected the belief that to protect its service sector, a country should put up walls between it and the outside world.

On the contrary, he believes in competition, and he thinks competition is vital for China to improve its competitiveness in service.

"Competition is a good thing; without it, companies get stale, and can't provide good services," he said.

But he also proposed a sound regulatory framework to ensure that "you don't have one foreign service provider coming and wiping out the market (with poor service)".

"Good regulation sets up the rules of the game, on how foreign competitors and existing local companies can play together," he said.

"A mix of intelligent policies, supporting and regulating a market - that mean a well-functioned market."

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