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Expert: Service Sector’s Excessive Growth Spells Trouble

Rapid growth in the service sector could be a problem if manufacturing suffers in turn.

By Xu Mouquan Updated Mar.20

China should be keenly aware of the problems that could arise from the increasing contribution of the service sector to GDP, according to Zhuo Xian, an expert at the State Council’s Development and Research Center, writing in the magazine China Development Observation.

The service sector’s rapidly increasing proportion of GDP - 51.4 percent by the end of the third quarter of 2015 - does reflect its prosperous development and the progress China has made in economic restructuring, according to Zhuo.  

Nevertheless, the rate of increase appears to be too high, Zhuo argued. Between 2002 and 2012, the proportion averaged an annual increase of 0.32 percent, but starting in 2013, it increased by nearly 2 percent every year. Meanwhile, the proportion of GDP contributed by manufacturing dropped sharply from 45 percent in 2012 to 40.6 percent in 2015. Such a rate of change is rare in the history of major global economies, Zhuo wrote. 
The excessive increase in the service sector’s share means that manufacturing growth is shrinking too rapidly. And since the emerging parts of the service sector, with relatively high productivity, cannot become the leading industry immediately, Zhuo explained, the resources will be allocated to the inefficient traditional service sector, causing economic growth to stall or even decline.
The rapid growth also hampers the service sector's upgrading process. As the major consumer of producer services, manufacturing affects the development and competitiveness of the service sector, Zhuo contended. If the manufacturing industry’s share declines too rapidly, it might in turn erode the basis for the service sector to upgrade.  

The unreasonably fast growth is bad for improving income distribution. If the industrial sector restructures too quickly, for example, many blue-collar workers and low-income white-collar workers might lose their jobs or turn to the low-end service sector, according to Zhuo.
Zhuo opined that the view that the greater the share contributed by service industries, or the quicker it increases, the better is wrong; more efforts should be made to improve the service sector’s internal structure; and the manufacturing industry plays an important supporting role in the service sector’s development.