Reforming China’s Service Sector

As it shifts from a manufacturing powerhouse to a service-based economy, China’s economic growth is increasingly dependent on reform in the service sector. China’s leadership has pledged to reform the services sector, but what does it actually need to do for this to happen?

The service sector comprises the tourism, health care, finance, logistics, transport, construction, and business services industries, among others. While the wholesale and retail industry incorporates many privately owned enterprises, service industries such as health care, finance, and transportation are government dominated, and continue to be relatively closed to foreign investment in practice. This despite the fact that as part of its accession to the World Trade Organization, China agreed to open up its service sector to increased foreign participation.

Via the WTO’s General Agreement on Trade in Services (GATS), China’s service sector was gradually opened in some respects, but it still contains a significant number of administrative restrictions. These restrictions have in some cases led to WTO disputes. For example, a WTO dispute settlement in 2008 regarding restrictions in the information services industry required China to sign a memorandum of understanding with the U.S. agreeing to allow foreign information services to operate within somewhat expanded parameters. Via this settlement, however, the industry was not thrust wide open, and although the service sector’s contribution to GDP has increased in recent years, trade in services has remained relatively low.

Foreign firms face a variety of barriers to entry and operation in China, even though liberalization measures have been formally approved. Market access to foreign participation in the financial and tourism industries is constrained by stringent approval and license requirements, while in transportation and logistics, operational barriers remain intact. Recent opinions released by the State Council have favored the lowering of these impediments.

Government still has a strong grip on some service sectors. The logistics, telecommunications, financial, and healthcare sectors are dominated by state-owned enterprises, which have attempted to maintain stability in these sectors of key importance. Private investment in the healthcare sector, although on the incline, has progressed more slowly than anticipated. The telecommunications sector gradually allowed private enterprises into the mobile communications resale business starting last year, but again the enterprises must pass through a long licensing process.

Preliminary moves or pledges have been made to open up the services sector further. At the Third Plenum last year, state officials pledged to increase private investment in state firms. The State Council Opinions demonstrate a true understanding of barriers to competitiveness of some service industries, and the approval processes for select industries have already taken place. The government has also committed to further reforming the financial sector. At this point, it seems that the real hurdle to greater competition in some service industries is no longer an explicit regulation banning private or foreign participation, but administrative obstacles that can be overcome with some bureaucratic changes. Competitiveness is to be addressed in coming months, if the promises of the Third Plenum and National People’s Congress continue to be applied to China’s economy.

How successful China will be in reforming its service sector depends on how quickly the reforms are put through. Success in the service sector will in turn play a main role in the restructuring process. What is needed in the service sector is not knowledge of hindrances to competitiveness, which China already possesses, but political and practical expediency in removing these hindrances and allowing market forces to play a larger role in the tertiary industry. This is an extremely challenging process, akin in many ways to the reform process China undertook in its manufacturing sector, which brought the nation to its present level of global eminence. It will be another remarkable achievement if China’s leadership can successfully manage the process over the coming years.