- The Washington Times - Wednesday, July 7, 2010

China, which will soon surpass the United States as the world’s top manufacturing economy, has begun to focus more efforts on promoting a service-based economy.

By making slight policy changes, the communist regime in Beijing is paving the way for localities such as Shanghai to develop into diverse service-based economies to rival those of the West, but without allowing much foreign competition.

“The mainland wants to put its currency in places where it will get a good return,” said Steven Lewis, research fellow at the James A. Baker III Institute for Public Policy at Rice University. Increasingly, he said, that will come from the service sector.

The Washington Times reported in May that China is increasing taxes for manufacturing companies, while giving tax breaks to businesses in the service sector, seeking to “change the mode of its economic development.”

China and Taiwan’s signing of the Economic Cooperation Framework Agreement last week also marked one more step for China on its transition to a service economy, though a minor one, as the mainland opened up 11 service sectors to Taiwanese businesses, banking in particular.

“The mainland’s service sector is underdeveloped and starved for capital,” said Patrick Chovanec, a professor in China and former businessman, adding that China’s current banking system tends to bias the market against service businesses.

China has been export-driven for the past 30 years, and the worldwide economic recession hit its economy hard, Mr. Chovanec said, prompting the government to initiate reforms. A service-based economy would be driven more by domestic consumption, a more sustainable economic model.

Moving towards a more service-based economy has long been considered the best growth model. Currently, 43 percent of China’s GDP comes from the service sector, compared to 77 percent in the U.S., according to CIA statistics.

“To make a sweeping generalization, manufacturing tends to be more cost-sensitive, while service is tied to quality,” said Derek Scissors, research fellow for economics at the Heritage Foundation’s Asian Studies Center.

He said that service businesses are not as prone to fluctuation during hard economic times or market changes. Especially after so many strikes in factories and consequent wage increases, he added, China is looking for other avenues to keep its people employed.

According to Chinese Embassy spokesman Wang Baodong, “the mainland is accelerating adjustment of its economic growth mode,” and agreements like the Economic Cooperation Framework Agreement are meant to facilitate that transition.

What China lacks, however, is foreign competition, according to Jeremie Waterman, senior director for Greater China at the U.S. Chamber of Commerce. Instead, China is attempting to let its service companies develop on their own while limiting foreign influence, he said.

“The question is, can they become world-class without competition?” he said.

Some of China’s regulations have forced competitors out of the market, Mr. Waterman added, leading to monopolies in many cases. He said China needs to open further to fully develop.

According to Mr. Lewis, China is not developing as a unified entity. Instead, Beijing simply promotes policies favorable to service development, then largely lets localities progress on their own in competition with other localities.

“Beijing doesn’t set the trend. It’s mainly the local governments,” Mr. Lewis said, explaining that China is so large and diverse that there can be a 20- to 30-year difference in development between localities.

Some cities like Shanghai and Hong Kong already are rivaling international giants like Tokyo and Washington, he said, although the rest of the nation has some time before it can match the United States.

Mr. Lewis recently returned from a conference in Shanghai, where, he said, increasing the service sector in the city’s economy was a top concern. People there think developing service businesses and decreasing industrial pollution was the best way to “attract the best of the best professionals,” Mr. Lewis said.

“They’re trying to create a Silicon Valley,” he said.

Where China intends to go with service development, however, will be reflected in the country’s next Five-Year Plan presented at the next National People’s Congress in Beijing, Mr. Lewis said.

• Michelle Phillips can be reached at mphillips@washingtontimes.com.

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