Comments on Dr.

Jianguo Xu’s
presentation on developing the
PRC’s service sector
By Dr Donghyun Park, ADB
ADB-NSD Workshop on
“China Toward an Upper Middle Income Country:
Challenges and Policy Options”
Beijing University, 31 May –1 June 2010

The views expressed in this paper are the views of the author(s) and do not necessarily reflect the
views or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments
they represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability
of any statement, information, data, finding, interpretation, advice, opinion, or view presented, nor
does it make any representation concerning the same.
Some initial observations
 Some interesting stylized facts
 Above all, share of services in GDP and
employment has stopped growing around 2000.
 Please provide some information about structure
of services – e.g. share of financial services
 Touches upon some key constraints
 Monopolies and oligopolies in services sector
 Too many regulations and restrictions
Services and rebalancing
 Under-developed services is both a key cause
and consequence of PRC’s unbalanced economy.
 Weak domestic demand ⇒ weak demand for
services
 Under-developed services sector ⇒ heavy
dependence on exports and manufacturing
 The first chain of causation is likely to be more
important than the second.
 However, there is plenty of scope for stimulating
and accelerating the growth of services
PRC’s manufacturing-led growth
 Policymakers favored manufacturing over
services in the past.
 Well before the crisis, there was a recognition
that unbalanced growth was unsustainable.
 Global crisis has given a sense of urgency to
the need for rebalancing.
 Policymakers are now keenly aware of the
importance of a vibrant services sector.
Exchange rate policy and services
 Under-valued yuan promoted exports.
 In effect, exchange rate policy favored
manufacturing over services.
 Furthermore, weak yuan reduces household
purchasing power and consumption.
 More flexible exchange rates can thus speed
up the re-allocation of resources from
manufacturing to services, as well as boost
demand for services.
Fiscal policy and services
 Fiscal incentives also discriminated in favor of
manufacturing and against services.
 A wide range of fiscal policies can encourage
the supply of and demand for services.
 Reform the VAT system
 Boost the supply of low-cost housing
 Increase the dividend rate on SOEs
 Promoting services requires a mutually
supportive package of policies.
Lessons from the Japanese experience
 Like China today, Japan ran persistent current account
surplus in the 1970s.
 Partly in response to external pressures, the yen
appreciated sharply.
 At the same time, the government pursued fiscal policy to
boost aggregate demand.
 Unfortunately, fiscal policy did very little to promote
structural change. i.e. stop-and-go stimulus measures
 This explains why the Japanese economy failed to re-
balance --- lack of a dynamic domestic economy.
Three final thoughts on the chapter
 Re-balancing is the key to sustained growth, and a
vibrant services sector is a key ingredient of
successful re-balancing.
 Government policy is a major cause of services
under-development, and government policy will
be the key to unlocking its potential.
 Stronger domestic demand will boost services and
vice versa, and both are vital to structural change.