Service sector in need of an overhaul to encourage greater competition

When most older Chinese think about the economy, business and making money, they think about making things that can be sold to governments or companies, such as ships or machinery, or to ordinary families, such as cars and household goods. They probably overlook intangible things such as banking products, telecommunications or tourism services. Perhaps that is because for many years, manufacturing has accounted for as much as half of the Chinese economy.

But the service sector, which accounted for only about one-third of the economy little more than 20 years ago, is expected to overtake manufacturing to become the largest contributor, more than 45 percent of the total, this year.

Banking, insurance, telecommunications, logistics, hospitality and tourism, and other professional services such as healthcare and law, are part of the service sector, which has grown even faster than the country's GDP. Real estate agencies are also included in the sector.

Anyone who has lived in China since 2000 knows that the booming real estate sector accounts for a large part of the growth of China's service industry. If real estate is excluded, the growth of China's service sector becomes less impressive.

When one considers that in a developed economy the service sector typically makes up between 55 percent and 60 percent of GDP, it becomes clearer that the Chinese service sector remains underdeveloped.

Services made up an important part of China's commitment when it joined the World Trade Organization in 2001. While obtaining valuable trading rights itself, China made widespread concessions in its WTO agreement to open up its service sector to foreign companies. But China included a number of limits in its WTO agreement, restricting foreign entry to certain sectors, such as banking, either geographically, by business organization (limits to foreign ownership in a joint venture), by product line or by regulation (minimum limits to the capitalization of foreign service firms operating in China).

Although China's WTO agreement has played a vital role in the country's booming growth in manufacturing and in services by increasing competition and stimulating foreign investment in China, the country now needs to go further.

In China, most of the service industries are dominated by a few large state-owned companies. The Big Four banks hold about 60 percent of the banking market. The telecommunications market, the world's largest, is shared between three state-owned firms. Chinese state-owned firms also dominate insurance and logistics.

The main banks have expanded largely by adding scale. Now they rank alongside the world's largest banks, with thousands of branches all over the country, and some overseas. Now banks are under pressure on two sides: from shareholders, to increase profitability, and from customers, to improve products and service quality.

To meet these challenges, Chinese banks have to change their business models. In the urban credit-card market, they have to switch from attracting new credit-card customers to increasing revenue per customer. They have to focus more on individual needs, and on new kinds of products, such as providing advice on global trends to high net-worth investors.

Chinese insurance companies also need to overhaul their businesses. They need to revitalize their traditional sales channels as agents and banks and expand their product mix, creating more offerings that focus on the core value proposition of life insurance: guaranteeing income for survivors. They need to put more emphasis on customer needs throughout the entire product life cycle - marketing, packaging, distribution and product design.

In fact, in all of China's service sectors, what is needed is more competition, which will stimulate new products and more consumer demand, and in turn spur economic growth. The best way to do this is for China to open up its service sector further, to allow foreign banks, insurance companies, logistics companies and particularly telecom companies to enter the market on equal terms with Chinese companies.

The first two mobile telecom operators in Britain believed that there was only room for two companies. Twenty years on, there are eight mobile operators in Britain, and the telecom market has grown to be 10 times larger than anyone could have imagined in 1990.

As China's currency continues to strengthen against its main trading partners in Europe and the United States, and as Chinese salaries continue to rise, China needs to change the way it achieves economic growth: not by adding scale, but by adding value.

The service sector, even without real estate, will have to shoulder a larger share of China's growth. This can only happen if China builds on its strong service sector foundation by opening up and encouraging more competition.

The author is a visiting professor at Guanghua School of Management, Peking University.

(China Daily European Weekly 10/25/2013 page8)