China's long-standing deficit in service trade may continue for another decade because the fledgling sector will lag behind overseas counterparts for that long, trade experts have predicted.

This is despite the country's fast-expanding general trade surplus resulting from a robust growth in merchandise exports over the past two decades.

"Given a comparatively backward service industry, it is impossible for China to reverse the trend in the short term," said Lu Yongjin, director of the Research Centre for Direct Investment at the University of International Business and Economics.

He forecast that China will not break even in service trade until around 2010.

The prediction coincided with a recent research report by the Ministry of Commerce, which estimated a widening service trade deficit this year.

In the first half of this year, China's service trade deficit jumped by 43 per cent year on year to US$6.275 billion, close to all the total for the whole of last year, which was US$6.784 billion.

Lu predicted that the deficit may hit a record high of US$10 billion this year.

China has been suffering a service trade deficit since 1997 when it first began to compile a separate trade sheet for service trade, which covers major tertiary sectors such as transport, tourism, telecommunications, construction, insurance and financial services.

Xing Houyuan, a researcher with the Academy for International Trade and Economic Co-operation, blamed this year's growing deficit mainly on a sharp drop in tourism revenues.

As a result of SARS, revenues in the tourism industry saw a year-on-year decrease of 95 per cent to US$40 million in the first six months of this year.

The tourism sector, which reaped a surplus of US$4.987 billion last year, has been earning about half of China's total revenues in service trade over the past few years.

China's soaring need for foreign transport, insurance and consultancy services as well as increased expenditure on overseas patent rights will also contribute to the expected hike in the deficit, according to Xing.

Zhu Mingchun, deputy director-general of the Department of Industrial Policy under the State Development and Reform Commission, pointed out that a number of factors helped enlarge the deficit.

First, the entire service sector in China has been experiencing sluggish development and is, thus, less competitive than the highly-developed industries in Western countries.

Data from the National Bureau of Statistics shows that China's service sector makes up for only 33.7 per cent of gross domestic product, in stark contrast with 85 per cent in the United States and an average of 48 per cent for all developing countries.

On the other hand, the wider opening-up of its service sector to the outside world is also set to pose a great challenge.

In line with its World Trade Organization (WTO) commitments, Beijing is expected to further liberalize service sectors including finance, transport, insurance, telecommunications and retailing.

"Once the five-year grace period is over, the progressive impact of China's WTO access will become much stronger," Lu Jinyong said. "With an expected influx of powerful foreign competitors into domestic service industries, China's service trade will feel greater pressure."

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