Wednesday, Mar 29, 2017, 7:11 PM CST – China

Economy

New Growth Engine

Serve the Economy

The service sector has emerged as China’s biggest growth engine. However, the primacy of two sub-sectors, finance and property, will not last long. Opportunities lie in providing China’s growing consumer demographic with innovative new services

Workers put up posters for the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, a trial project to develop China’s high-end service sector, in Shenzhen, Guangdong Province, October 24, 2014 Photo by IC

People take photos to record changes in the skyline of the Shenzhen-Hong Kong Modern Service Industry Cooperation Zone, Guangdong Province Photo by IC

The Fourth China International Senior Services Expo, Beijing, May 8, 2015 Photo by IC

China’s official 7 percent GDP growth rate in Q1, Q2 and for the first half of 2015 as a whole, is a figure widely questioned because it aligns so precisely with the government’s stated target. Skeptics say empirical observations do not indicate such growth, arguing instead that 7 percent is a made-up figure resulting from official book-cooking.

The key question is whether China has underestimated the impact of market price fluctuations, the crucial variable in calculating an economy’s real GDP. When the price growth rate that is used is lower than the true rate, it inflates price-weighted GDP figures. Sheng Laiyun, spokesperson for China’s National Bureau of Statistics, explained at a July 15 press conference in Beijing that China calculates the added value of domestic industrial output, and that his department has factored price changes throughout the industrial supply chain into its GDP calculations. This method is different from the Western approach, which focuses on domestic spending by individuals, businesses and governments, rather than industrial output.

It therefore makes sense to look more closely at economic data covering China’s primary, secondary and tertiary industrial sectors. Growth in primary industry, which in China is mainly represented by agriculture, remains low. Tertiary industries, meanwhile, saw an overall growth rate of 8.4 percent, more rapid than the average growth recorded in secondary industry, which in China is largely represented by manufacturing and mining. Indeed, the service industry has been consolidating its position as the principal growth engine of China’s economy since it leapfrogged the secondary industrial sector in 2013. Given this, tapping the potential of the service sector will help brighten China’s growth prospects in both the short and long term.

New Stars

Within the service sector, two markets, finance and real estate, could probably take most of the credit for the government’s ability to meet its 7 percent growth target. In the first quarter of the year, the added value of the financial sector grew by 16 percent, a jump rarely seen in any sector in recent years. The financial industry contributed 30 percent to national GDP in the first half of 2015, compared with an average of 12 percent in the past. “Without such a rapid rise in the financial sector, China’s GDP could have stood at only 6.5 percent in the first quarter of the year,” noted Zhu Zhenxin, an analyst with Minsheng Securities.

In terms of the financial services sector itself, securities and insurance companies have outperformed other providers. The bull stock market in the first half of the year created a windfall for securities companies, who cashed in on being both brokers and investors in the equity market. Recent statistics disclosed by the Securities Association of China show that the country’s 125 securities companies made 373 percent more net profit in the first half of the year than they did over the same period in 2014, and the 22 listed ones, whose net profits made up more than half of the total, enjoyed a net profit increase of 358 percent.

Returns in the insurance business were also generous. According to the China Insurance Regulatory Commission, net profits in the sector soared by 204 percent in the first half of 2015. In the meantime, insurers have impressed the market with a series of high-profile mergers and acquisitions, expanding on an unprecedented scale into other services both within and outside of China. Anbang Insurance, a formerly little-known financial player, now has a presence on the board of directors of two listed Chinese banks, China Minsheng Bank and China Merchants Bank, as a result of aggressive acquisitions beginning in 2014, before also buying out Belgium’s Delta Lloyd Bank at the end of June. Then, in February, the acquisition of Baccarat Hotel & Residences New York from the US’s Starwood Capital Group by China’s Sunshine Insurance was announced.

The property market carries colossal weight in China’s economy, affecting dozens of sectors from steel and cement to furniture and home appliances. The National Bureau of Statistics estimates that every 100 yuan (US$16) of input in the real estate market could lead to a total output of 315 yuan (US$51). Though the sector’s golden age has passed, with average growth in its added value well below the overall GDP growth rate between 2011 and 2013, there were signs of recovery in the first half of the year, particularly in the second quarter. Square-footage sold in the first six months of 2015 rose by 3.9 percent compared to the same period last year, reversing the preceding downward trend thanks to three consecutive months of improved sales. As a result, more sales revenue and a crop of new mortgages replenished developer cash flow in June much more so than in May.

The boom in China’s finance and property markets has also boosted household consumption. Urban retail stock investors felt more confident to spend, and new property buyers boosted sales in new furniture and construction materials. Urban household consumption rose from 5.3 percent in the first quarter to 7.2 percent in the second.

Niche Stars

However, there is little indication that the current equity bull market or property rebound can continue in the second half of the year, let alone in the long term. The stock market has been struggling with dramatic volatility since it took a tumble in the second half of June. Consequently, securities companies have felt the pinch. In June, China’s 22 listed securities companies reported net profits just one-quarter of those declared in May. Outside first-tier cities, the outlook for the property market remains bleak, with prices either flat-lining or declining as of June. If both the stock and property markets remain lukewarm in the second half of 2015, where are the alternative sources of growth?

Besides upgrading secondary industrial sectors, mainly supply chain manufacturing, there is still great untapped potential in the service sector – even in the troubled property market. While developers are investing less, services related to property management, such as tourist resorts, are attracting capital inflow. Property giants, like Zhuhai Holding and Vanke, have recently announced or broken ground on projects for hotels, resorts or incubators for small, hi-tech business startups. In early July, China’s Hainan Airlines and Pierre & Vacances-Center Parcs Group, a French resort operator, signed a memorandum of understanding in France on a partnership to tap the markets for urban serviced apartments, nursing homes and ski resorts in China and across Asia. Leading online platforms for short-term room rentals, taking after the AirBnB model, have also attracted huge amounts of venture capital in China. Though outreach into these services does not necessarily bring more added value to the property market itself, it does create more added value in other sectors, which in turn will support economic growth as a whole.

The same is true for the auto industry. According to the China Association of Automobile Manufacturers, the industry suffered much slower year-on-year growth in sales and production, and even a decline in export, in the first six months of 2015. However, capital is flooding into auto-related services, such as auto finance and after-sales services. Companies offering app-based door-to-door car washing services, for example, have mushroomed. Didi Kuaidi, China’s Uber equivalent, has launched a designated driver business, a market estimated by leading Internet business data provider Analysys International to be worth US$440 million in 2015. As China is now the largest auto market in the world, the development of auto-related services could be a tremendous boon to the wider economy.

Indeed, the basic daily needs of consumers provide commercial opportunities that cannot be underestimated. Mobile-based services have greatly improved matchmaking between supply and demand. Analysys International recently forecasted that O2O (online-to-offline) services meeting such daily needs will ultimately create a market worth more than US$65 billion in 2015, with the food and beverage services industry securing the largest share.

All of these examples show that the development of more niche markets in China’s service sector could provide significant momentum for the country’s economy. 

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