China's stunted services sector starts to stir

CHENGDU, China (Reuters) - When Chinese policy makers talk about rebalancing the economy towards consumption from exports and investment, they have people like Liu Yong in mind.

Liu Yong, a Chinese businessman, poses inside his restaurant in Chengdu, Sichuan province January 22, 2008. REUTERS/Stringer

Liu has opened five tasteful and tasty restaurants in Chengdu, the capital of Sichuan province, in the past two years, serving a fast-growing middle class with money to spend.

Business is booming and his biggest problem is finding skilled staff.

“There are not many restaurants that can cater for people who can afford to eat here,” Liu, 40, said. “But society is changing each year. The accumulation of wealth is very fast and in five years’ time a restaurant like this will be nothing special.”

Liu is doing well, but overall consumption in China is abysmal. Spending by households last year was just over 36 percent of GDP, down from 45 percent in 2001. In the United States and India, the comparable shares are around 72 percent and 60 percent, respectively.

There are plenty of reasons for the imbalance. A fiercely competitive exchange rate, cheap bank loans, subsidies and dividend policies explicitly encourage manufacturing, while a flimsy social safety net forces people to save their money for health, education and their old age.

But part of the explanation lies with China’s stunted services sector. Barry Bosworth and Susan Collins, in a National Bureau of Economic Research paper, estimate that services accounted for just 33 percent of the value added in China’s economy in 2004 compared with 50 percent in India.

A strategy paper last year by the State Council, or cabinet, said China’s services sector -- which it called an important indicator of economic development -- was just not good enough.

The range of services on offer was inadequate, competitiveness was weak and, yes, the level of service was low.

“Some localities only attach high importance to industrial development,” the author of the paper grumbled.


Financial services lie at the heart of a modern economy, yet Liu laughs when asked if a recent clampdown on bank borrowing had affected his business. Banks rarely seek the custom of small firms like his, regarding them as too risky and too much trouble compared with big state-owned enterprises.

“We all use our own capital,” Liu said. “If you have enough cash flow, you don’t need money from the bank.”

A branch of the Bank of China provided another illustration of the sector’s shortcomings -- and its potential. The bank does not change foreign currency on Saturdays, but an enterprising security guard was only too willing one recent weekend to go into a corner and do the deal at the publicly posted rates.

Luxury retailers have made it to Chengdu -- Cartier has a plum location on a square overlooked by a statue of Mao Zedong -- and Shangri-La recently opened a five-star hotel to compete with Kempinski and the Sofitel Wanda.

French retailers Auchan and Carrefour are thriving, too.

But consumers all too often still seem an afterthought in and around this city of 11 million, where the average income per head last year was 24,923 yuan ($3,380).

An attendant at the Sanxingdui museum -- entrance charge: 80 yuan, high for an ordinary Chinese -- shrugged when asked why there was not more information about its breathtaking collection of ancient bronze masks.

“Go and hire a guide,” he said.

And a memo to the owner of the Panda Inn at Wolong, the panda-breeding sanctuary nestled high in a narrow valley four hours west of Chengdu: please put the heating on in winter. And if you do go home, don’t lock up the drinks cabinet.


Poor service is all too common across China, from long queues at banks to unexplained flight delays.

Yves Wencker, the French manager of Commune by the Great Wall, a luxury hotel outside Beijing, says the problem is that Chinese historically equate service with servitude.

“It’s going to take another generation to have a completely different mentality,” Wencker said. “No one wants to be accountable or take responsibility.”

Simon Cooper, president of Ritz-Carlton, which has just opened a second hotel in Beijing, agreed. “It will be a long time before we have any home-grown competitors in China let alone internationally,” he said.

In the short term, drooping global demand for China’s manufactured goods could actually give a boost to services by forcing policy makers to focus more on the domestic economy.

“It could spur more reformist policies in Beijing such as the opening to the private sector of the services sector -- telecoms, health, education, logistics, etc,” said Stephen Green, head of China research at Standard Chartered Bank in Shanghai.

Liu, the restaurant owner, is certainly undaunted by warnings that the economy could weaken.

“I don’t think it’s going to have a big impact on me, no matter what happens,” he said. “Most businessmen have a lot of confidence in the economic future and in the leadership.”

Editing by Megan Goldin