By Wang Yiming 2017-7-21

Currently, the global service industry has grown rapidly, showing some new development trends and features. In China, the service industry is experiencing a business boom and a key period of all-round growth. Speeding up the development of the service industry is conducive to adapting to and leading the new normal in economic development, enhancing the supply-side structural reform, and fulfilling the target of economic restructuring and all-round social progress. The Guidelines on the Innovation-oriented Development of the Service Industry (2017-2025) proposed the strategic goals of building China into a power with a strong service industry. We need to be fully aware of the new development trends and features of global service industry, seize the opportunity to accelerate the development of service industry to a new high, advance the innovation-oriented development of service industry though reform and opening-up and lose no time in turning China’s service industry from big to strong.

I.The Global Service Industry Bears Some New Development Trends and Features

Since the economic globalization drive and the rapid development of the information and technology revolution in the 1970s and 1980s, the globalized development of service industry has gained a strong momentum and the high-income economies have accelerated the transformation towards service economies. This can be viewed as another industrial revolution in the post industrial revolution years and it is a comprehensive reform covering technological business forms, industrial organizations, management concepts, commercial modes, operation systems and development patterns. In this sense, it can be called a service revolution. With the rapid development of the tertiarization, the service industry takes up more than 60% in global economic aggregate, more than 70% in the advanced economies and about 60% in the developing countries. The transnational investment of the service industry accounts for more than 2/3 of the total global investment and the total volume of service trade amount to over 1/5 of that of the global trade. In light of those facts, the service industry has become the leading power guiding the innovation of technology and commercial modes. The global economy is transforming towards a service-oriented economy, bearing the following development trends and features.

1. Service industry has become a leading power of national economy. The tertiarization of the economic sectors has been further advanced and the service-related businesses have become the major part of the economic life. Service has become a significant means to improve the industrial competitiveness and also a key part of the economic activities. As a result, more and more enterprises have transferred their businesses from products production to service provision.

2. The manufacturing enterprises have gradually separated services such as R&D, designing, storage and marketing from their businesses and outsourced these services to professional service companies, making producer service industry an independent sector. The government has turned to purchase public services from the private enterprises and the market and the government’s role is changing from a management-based administrator to a service-oriented provider.

3. The service sector is becoming more and more intertwined and integrated with agricultural and manufacturing sectors. The business lines between products and services have become increasingly anonymous. The lump sum purchase by the customers has become consistent service provided by the producers. As a new trend, customers and producers tend to get integrated. The businesses, organizations and management of agriculture, manufacturing and service sectors tend to mix together and develop into a value-added system on the entire industrial value chain.

4. The production of enterprises has transferred to high-value ends on the value chain such as R&D, designing, standards, management of the supply chains, marketing network and brand building. The proportion of added value of producer services has gradually increased on the industrial value chain, and the innovation factors with new commercial modes such as supply chain, the service means of the marketing network and the modes of making profits have enriched innovation activities.

5. The input influence of material factors in economic activities is phasing out, while human capital including knowledge as well as expertise and the economic growth are getting more and more closely related with each other. The human capital has replaced the material capital and become the most important factor leading economic growth. The input of knowledge-oriented factors is gaining momentum and is propelling the service economy to become a production process focusing on the input of knowledge factors.

6. Enterprises have adopted the comparative advantages of the production networks and different areas by distributing the production processes on the value chain to places where the costs are the lowest and integrated the production network systematically. The separation of production processes and value chain has been further advanced and given an impetus to the deep integration of industrial chain, marketing network and service system, thereby enabling enterprises to optimize the distribution of resources in a wider range.

7. The platforms providing services have become gradually involved in people’s life through the Internet, online payment technology and modern logistics, changing the marketing modes of enterprises and the ways of people’s consumption. Consumers have become the center of production with the booming development of invidualized demand, experiencing shopping and interactive consumption, promoting the innovation of services, business forms and commercial modes.

8. The massive development of the service industry, especially the producer service industry has promoted knowledge, information and human capital to gather massively in metropolis and urban agglomerations, which have been transformed from manufacturing centers and production bases into service centers and service zones to speed up the development of the service industry.

9. The network technology and the service industry have deeply integrated and promoted the traditional labor-intensive and capital-intensive industry to be transformed into technology-intensive and knowledge-intensive industry featured by low energy consumption and emission. Therefore, the service industry boasts two prominent advantages featured by optimized industrial structure and ecological development.

10. The rapid development of the global information network and the innovation of economy and trade rules have largely strengthened the availability of tradable services. The proportion of China’s service trade in the global trade has gradually increased and the volume of outsourcing service has increased by a big margin. The transnational investment in service industry has also dramatically increased, making the cross-border transfer of service industry a significant part of the global industrial transfer and the offshore development of the service industry a new feature of globalization.

In line with the new trends and features of the service economic development, the focus of the global economy and trade rules has gradually shifted onto service economy. After the global financial crisis, the trade liberalization led by the WTO was deterred and the Doha Round of World Trade Talks fell into a dilemma. The advanced countries such as the U.S. and the European countries turned to propel the negotiations such as TISA dominated by them and expand the global economy and trade rules to cover service trades and cross-border investments. They also intensified the border measures by restricting the member countries with the aim of strengthening their dominant power of the global rules. As the restructuring of the global economy and trade rules speeds up, wide and profound influences will be exerted on the global service economy.

II.China’s Service Industry Has Entered a Key Period of Development across the Board

Through the rapid economic development in the past 30-odd years since reform and opening-up, China has equipped itself basically with the economic foundation, technological conditions and institutional environment to enable the speedy transformation of service economy. The development of the service industry has entered a key period of development across the board.

1. The swift economic growth has enabled China to stride forward from a mid-to-high-level income country towards a high-level income nation. International experience indicates that the formation and development of the service economy are closely related to people’s income. When the per capita national income enters a mid-to-high level, the proportion of the service industry in total national economy will largely increase accordingly. The accelerated growth of service industry will become a leading factor of the national economy. In 2015, China’s per capita GDP was close to US$ 8000. Calculated in terms of realizing the goal of redoubling the 2010 GDP and fulfilling the annual growth of 6.5% during the 13th Five-Year Plan period, China’s per capita GDP will reach about US$ 11,000 by 2020, a figure close to that of the high-income level economies. By then, China’s service economy will experience a period of booming development. A fact worth mentioning is that the per capita GDP in 10 provinces, districts and cities in China already exceeded US$10,000 in 2015 and the total number of permanent residents in those areas is over 500 million. This fact shows that there is a big room for the development of service industry to meet the enormous market demand.

2. The upgrading of the consumption structure has become accelerated. In light of the life-related service sectors, China has sped up the transformation of the consumption and service structures dominated by housing and transportation towards diversified, individualized and high-end modes as people’s wages increase and the middle-income class expands. Due to the constant decline of the Engel coefficients, an equal access to people’s education and an increased number of aging population, people’s demands on tourism, elder care, education and medical services have grown rapidly, of which people’s consumption takes up the lion’s share. The low-end and basic supplies will account for a dwindling volume, whereas the proportion of high-end and development-oriented consumption items such as medical care, transportation and telecommunication, education and culture will gradually increase. People’s consumption models like online shopping and information consumption have become diversified with the emerging of different business forms and channels. Viewing from the producer service industry, the enhancement of the manufacturing value chain has brought about increased producer service demand such as R&D, designing, standards, supply chain management, marketing network and logistics. The accelerated upgrading of the consumption structures gives rise to optimizing the supply structures and improving the total performance of the service industry.

3. The service industry has gradually established its leading status in China’s economy. In recent years, China’s service industry has witnessed constant progress. In 2011, the total employment of service industry ranked the first place and its added value exceeded that of the secondary industry in 2012. Its added value stood at 51.6% in the GDP in 2016, 11.8% higher than that of the secondary industry. The new technologies including the Internet of Things (IOT), big data, cloud computing, virtual reality (VR) and quantum communication have widely merged into productions and promoted the rapid development of the new business forms and services. In 2016, the total value of the online retail business exceeded 4 trillion yuan and the online medical care, education and the online car-hailing services also developed rapidly. It shows that China’s service industry has gradually established its leading status and the trend of economic tertiarization is quickly taking shape, providing strong support for the development of the service industry.

4. China’s urbanization has advanced swiftly. In 2015, the urbanization rate reached 56.1%. According to the goals proposed in the guidelines of the 13th Five-Year Plan, China’s urbanization rate will reach 60.0% by 2020. During this period (2016-2020), 100 million rural residents would transfer to cities as permanent urban residents and more efforts will be made to help the eligible population to move away from agriculture and become urban residents. As China’s urbanization moves forward, people’s demands for life-related products and public services will be greatly enlarged. As a result, it will promote the clustered development of service industry, forming a service industry-led industrial structure in mid-to-large cities in advance and spur on the industrial economy to transform into service economy.

5. China’s human capital has been prominently enhanced. According to the overall deployment of the 13th Five-Year Plan, by 2020, China will fundamentally modernize education and form a study-oriented society backed by strong human resources. By then, the government will make 10.8-year compulsory education basically universal for working age population, realize universalization of senior high education and the number of the working age population with higher education will evidently increase. The human capital will also prominently improve and shore up factor input and service-based value creation, promote the development of the knowledge-intensive producer service industry and accelerate the transformation of industrial economy towards service economy.

6. The reform and opening-up have been accelerated. The 13th Five-Year Plan is a significant period for solving the key problems in furthering the reform and opening-up. We need to fully advance the reform with strong determination and courage and flesh out the relevant regulations and systems making the market better play its role in the allocation of resources and the government improve its administration. By 2020, China’s governance system and capacity will be enormously improved and the new-type and opening-up-oriented economic system will take initial shape. According to the overall deployment of the 13th Five-Year Plan, China will accelerate the development of modern service industry and increase access to the service sectors with optimized environment for its development. The constant improvement of the mechanisms and policies will create a more favorable environment for its further development and transformation towards a service economy.

Overall, China’s service industry will usher in a period for an all-round improvement, whereas the following problems remain to be addressed.

1. The supply of services is not in line with the changes of people’s demands. With improved incomes and upgraded consumption structures for urban and rural residents, the people are requiring more and more diversified, individualized and high-end services, and the high-end entertainment and development-oriented consumption items such as medical care, information and telecommunication, education and culture, elder care and entertainment have gradually increased. However, the supply of the services is not in line with the changes of the market demands. The high-quality life-related service industry is insufficient in market supply and the mid-to-high end producer service industry still lags behind, which has made it hard to satisfy people’s demands of upgraded service consumption structures.

2. On the whole, China’s service industry still hinges on the mid-to-low ends on the value chain. The limited proportions of producer services in China such as R&D, designing, supply chain management, logistics and human capital and the low quality and efficiency of the service industry development have restricted the improvement of the industrial value chain. Therefore, efforts need to be made to make the service industry move up to the mid-to-high ends on the value chain.

3. China’s service industry is still weak in international competition. Due to its low-quality opening up, the number of service industries and enterprises with highly competitive powers in the world market is quite limited. The proportions of knowledge-intensive and technology-intensive services are low in the total volume of the service export, while those of transportation, tourism and building service are comparatively high. The deficit and unbalanced volume of service trade is still increasing.

4. The development of China’s service industry still faces restrictions imposed by relevant policies and mechanisms. The service industry does not enjoy an equal environment for market competitions and many access limitations are still deterring its development including electricity, civil aviation, railway, petroleum, natural gas, postal services and municipal public services. The mechanisms and policies promoting the development of the service industry are inadequate and the potential of this industry has not been fully unleashed.

III.Transform China’ Service Industry from Big to Strong

Through the rapid development in the past 10 years, China’s service industry has expanded its scale and optimized its structure, making China become a large service industry country. In 2016, the added value of China’s service industry reached 38.42 trillion yuan. The service industry has constantly expanded its service fields, provided more and more abundant services and generated new business forms and modes. As a result, China has established its status with a large service industry. The coming few years will still be key strategic periods of opportunities for the development of China’s service economy. According to the goals established in the Guidelines on the Innovation Development of the Service Industry from 2017 to 2025, the added value of China’s service industry will be redoubled in the next 10 years on the basis of optimizing its structure and improving its quality and efficiency. By 2025, the added value of China’s service industry will take up 60% of the GDP, and the number of workers in service industry will account for 55% of the total employed population. To achieve the above-mentioned goals and propel China’s service industry to transform from big to strong, we need to seize the strategic opportunities, further the reform and opening-up, press forward the innovation-based service industry, fully unleash its great potential, promote the integrated development of thrice industries and turn the service industry into a stronger driver for economic restructuring and upgrading.

1. We need to deepen the reform and fully unleash the energy of the service industry. With higher demands of the modern market economy rules, the service industry needs an adequate, fair and open market system with an appropriate and transparent credit system. We need to make the service industry market more accessible, release restrictions on the competitive industrial businesses such as electricity, civil aviation, railway, petroleum, natural gas, postal services and municipal public services, improve the opening-up of finance, education, medical care, culture, the Internet and commercial trade and logistics, eliminate the underlying obstacles and form a market structure for effective competition. We need to go ahead with building a unified market in the whole country, gradually eliminate the local preferential policies of tax and land against the regulations and prohibit the rules restricting the cross-region development of the service enterprises and the cross-region supply of services. The regulation of negative list management should be advanced and gradually cover more sectors.

2. We need to improve the opening-up and sharpen the international competitiveness of the service industry. Covering more areas with more flexible market borders, the service industry is strongly featured by networks and the capacity of integration. We need to encourage the service enterprises to optimize the allocation of resources, actively increase their market shares in the advanced economies such as the U.S. and the European countries, and make investment in markets along the Belt and Road routes, and the emerging markets in Latin America and Africa. We need to support enterprises to establish overseas R&D centers, distribution centers, logistic centers and exhibition centers, and build cross-border service supply chains, industrial chains and value chains. We need to encourage them to actively participate in the multilateral, unilateral and regional service trade negotiations and the formulation of global service trade rules, propel the negotiations on investment treaties between China, the U.S. and the European countries and gain a bigger say in making the international service investment trade rules.

3. We need to promote innovation-driven development and strengthen the internal impetus to improve the service industry. The modern service industry is attributed to the rapid development of the information network technology and develops in line with the innovation of technology, business forms and commercial modes. We need to encourage the wide application of technological innovation and new technologies, actively propel the Internet Plus action plan and fully adopt the technical methods such as big data, IOT, cloud computing and mobile Internet to cultivate new business forms such as platform economy, sharing economy and experience economy. The development of producer service trades such as R&D and designing, logistics, procurement and marketing, exhibitions and human resources should be supported. We need to expand the outsourcing business of offshore services and center on the development of outsourcing services of software and information technology, R&D, designing, the Internet and medical care. Through innovation-based development modes, we need to give a strong boost to the producer service industry to move up towards professional and high-end on the value chains and make the life-related service industry develop in a precise and high-quality manner.

4. We need to promote an integrated development and enhance the driving force for the upgrading of service industry. The development of service industry not only includes the expansion of its scale and industrial upgrading, but also its support to the transformation and upgrading of modern agriculture and advanced manufacturing. In this way, they could form an intertwined and integrated ecological system covering the entire industrial chain. We need to cultivate the new business form of service Plus agriculture, support the integrated modes of joint agricultural management, agricultural makers’ space and platform-based agricultural enterprises. We need to encourage the production-oriented manufacturing to become production and service-oriented one and promote the manufacturing enterprises to expand their businesses towards the two ends of the industrial chain to develop creation incubation, R&D and designing, management of the supply chain and marketing network to increase the value of the services and improve the industrial value chain. We need to encourage the service enterprises to make investment in manufacturing industry and carry out adverse manufacturing and integration of resources to promote the moderate transformation and customized production of the manufacturing enterprises. The leading functions of the platform-based and hub-based service enterprises should be given fully play to cultivate the industrial clusters of platform Plus module and develop large-scale enterprise groups and industrial leagues with integrated industries and comprehensive service functions.

5. The social environment should be optimized to boost the development of the service industry, which requires better external environment, appropriate infrastructure, strict protection of intellectual property rights, smooth and safe transmission of information, adequate human capital supply and convenient transport facilities. We need to flesh out the rules and regulations protecting the intellectual property rights of the Internet, big data and e-commerce and speed up the improvement of the laws and regulations about network security, the protection of privacy and commercial secrets and the Internet information service. The investment in human capital should also be increased to attract more technicians and high-skilled talents into the service industry. We need to improve the inter-connectivity of the infrastructure and optimize the network-based systems with intelligent management. We need to enhance the building of social credit system, establish an appropriate cross-sector cooperation and coordination mechanism as well as a unified credit and information platform and strengthen the mechanism to give joint incentives to those who act in good faith and to take joint punitive actions against those who act in bad faith.

Note: Wang Yiming, Vice President, member of the Leading Party Members’ Group, Director-General of the Department of Macroeconomic Research and research fellow of DRC