Download Structural change in China: Economic development still reliant on

February 16, 2011
Economic development still reliant on industry for now
— The global recession has revealed weaknesses in China’s growth
model, which relies on exports and investment as its drivers. By
ramping up domestic economic activity it is planned to make the
country’s expansion less reliant on global trends. This should benefit
precisely the services sectors.
Economics & politics
Research Briefing
Structural change in China
— The twelfth Five Year Plan is expected to shift the focus of economic
policy in this direction. Revaluation of the yuan, higher minimum wages
and state investment in the healthcare system could help strengthen
the tertiary sector. However, any changes in economic policy are likely
to be moderate. Especially in the Special Economic Zones, industry will
remain a vital employer.
— Consumer services should continue to catch up on business-related
services. The rising number of people participating in the country’s
prosperity, e.g. through higher minimum wages, will fuel consumer
demand.
Chinese economy hallmarked by industry
China’s economic development as measured by its gross domestic product is
still sustained primarily by industry. Exports and investment deliver the bulk of
growth – and have done so for the past four decades. However, services have
become steadily more important since the 1980s, bringing their share of
economic output close to that of the secondary sector. Only in boom periods
1
did industry temporarily widen its lead. In 2009 the secondary sector
contributed just three percentage points more towards economic output than
the tertiary sector (46% to 43%), the smallest differential since the beginning
2
of China’s reforms and new policy of openness.
Author
Philipp Ehmer
+49 69-910-31879
[email protected]
Editor
Tobias Just
The Chinese government is aiming for a services-based economy, as this
holds out the prospect of more stable growth than the present model.
Services rely more heavily on domestic demand and are less susceptible to
global economic fluctuations. The global recession has clearly highlighted the
disadvantages of export-oriented growth. What is more, with wages rising and
initial signs of stagnation in the supply of labour becoming apparent, China is
increasingly forfeiting the advantage of abundantly available cheap labour on
which its growth model rested. To make matters worse, trade partners are
putting pressure on the Chinese government to revalue its currency because
they believe the yuan is undervalued and view this as an export subsidy.
Protectionist retaliation is further jeopardising the Chinese growth model.
Technical Assistant
Sabine Berger
Deutsche Bank Research
Frankfurt am Main
Deutschland
Internet: www.dbresearch.com
E-mail: [email protected]
Fax: +49 69 910-31877
Managing Director
Thomas Mayer
1
2
A slowdown in the pace of structural change in boom periods and acceleration in
cyclically slack periods is typical of the transformation to a services society, see
Ehmer (2009). Crisis year 2009 accelerating pace of structural change in Germany. Deutsche Bank Research. Talking Point. August 20, 2009.
However, in terms of employment China’s economy still bears an agricultural
stamp. In 2009 the primary sector employed 38% of the labour force; services accounted for 34% and the secondary sector a scant 28%. The discrepancy between
economic performance and employment in the various sectors points up the productivity gains in the course of structural change.
Research Briefing
Industry-driven growth
Clear industrial focus in comparison to other emerging markets
Contribution to GDP growth, pp
53-59 60-69 70-79 80-89 90-99 00-09
Primary
Secondary
9
8
7
6
5
4
3
2
1
0
Tertiary
Source: CEIC
1
Industry-based economy
Sector shares in China, % of GDP
60
50
40
30
20
10
50
60
70
Primary
80
90
00
Secondary
10
0
Tertiary
Source: CEIC
2
Different economic structures
Sector shares, % of GDP
60
50
40
30
20
10
0
Secondary Tertiary Secondary Tertiary
BRI
C(hina)
1990-1999
2000-2009
Source: EIU
3
The Chinese economy is following the pattern of development in the
West. Here, too, industrialisation preceded the step to a service
society. Similarly, the process of tertiarisation in China only got underway as per capita incomes started to rise. However, China’s development path differs from that in other emerging markets, where
services played an important part very early on and where it was
often the case that industry at no time generated the lion’s share of
economic output. In Brazil, India and Russia, for example, in 2009
manufacturing industry accounted for a weighted average of just
30% of GDP. While the agricultural sector is similarly important to
that in China, services in these countries dominate the economy
(62%) – and have done so for more than 20 years. In contrast,
China stands for a strong industrial sector as the “workbench of the
world” and world export champion.
Why do services in China not yet enjoy the same status as
industry?
China’s economic pattern stems less from a weakness in the services sector than from the headlong pace of industrialisation. Industrial growth was fostered chiefly by the intensification in world trade
and the international division of labour triggered by globalisation.
However, over the past three decades services have caught up in
importance, expanding by an average of 19% p.a. – roughly three
percentage points faster than the secondary sector.
The marked industrial focus relative to other emerging markets can
be explained first by China’s economic policy. In the past the government prioritised the development of industry. The wide variety of
support mechanisms it used to further this aim ranged from subsidised loans for state-owned enterprises through export subsidies,
import controls and support with foreign investment to Special Economic Zones and industrial parks featuring tax or customs incentives.
Secondly, the competitive pressure in some Chinese markets is
relatively slight by international standards as they are still dominated
3
by state enterprises. These markets lack the compulsion to operate
efficiently which elsewhere causes businesses to outsource activities that extend beyond their own core competencies, thereby shifting them into the marketplace. In other newly emerging economies
specialist service providers, for example in IT, accounting and consultancy, take over work of this kind. Such outsourcing increases the
share of value creation attributed to the tertiary sector, boosting
structural change statistically.
What is still missing for a service economy?
Higher income in urban areas
Per capita incomes in China, RMB '000
20
16
12
8
4
85
89
93
Urban
97
01
05
09
Rural
Source: CEIC
2
0
In comparison to more mature economies there is also a lack of
stimulus from the demand side. Consumer goods in more advanced
economies are characterised by market saturation, causing consumer spending to turn to services with higher saturation levels.
Although per capita incomes in China are rising exceptionally fast
particularly in urban households, there is still pent-up demand for
consumer goods among broad sections of the population, especially
4
outside the metropolitan centres.
3
4
4
For example the financial and telecommunications sectors. State enterprises enjoy
massive financial support, among other things.
See Dyck (2010). China’s provinces. Digging one layer deeper. Deutsche Bank
Research. Current Issues. Frankfurt am Main.
16 February 2011
Structural change in China
Unsaturated goods markets
Durable consumer goods per 100 urban
households in China, 2008
70
60
50
40
30
20
Coast
North
South
Centre
North-east
West
10
Sources: China Statistical Yearbook, DB Research
0
5
Low education level
Level of education completed in 2008,
% of population
No education or
primary education
Secondary education
Tertiary education
0
OECD
20
40
60
China
Sources: OECD, CEIC
6
Outlook: Service economy will still take time
The factors that drive the development of Western service societies
are also intact in China, yet for the present the People’s Republic is
likely to remain an industry-based economy. This is suggested, first,
by the extensive investment in manufacturing capacities and, second, by the people’s level of education. Whilst progress has been
made in latter years, the population in general is not yet sufficiently
educated to carve out a services sector along Western lines. There,
knowledge-intensive business services like contract logistics and
product development are extremely important, whereas in China
simple services such as in the retail trade or the hotel and restaurant
industry are still predominant.
Even so, the country’s comparative advantages are shifting. So far,
massive inflows of capital have enabled the modernisation of production plants, bringing a rapid boost to productivity. As a result
China has won out against rival emerging markets as a centre of
industry. But as per capita incomes and labour costs in the Middle
Kingdom escalate, so other countries will become more attractive as
manufacturing locations for low-end products. However, in recent
years the improvement in the general level of education has broadened the range of goods that China is able to offer. Increasingly –
often with help from foreign companies – more sophisticated, capital-intensive goods are being produced (e.g. semi-conductors).
Whilst China’s transformation to a service economy will still take
time, given the rapid pace of development in the tertiary sector it will
predictably become the economic heavyweight within the next ten
years. Going by developments over the past decade, it could even
achieve this by 2015. Owing to the global recession, however, the
importance of services relative to industry is overstated for 2009. In
2010 the pattern will presumably have reverted to a slight edge for
industry, implying that the tertiary sector may have to wait until 2020
(at the latest) before gaining ascendancy in the economy. China’s
demographic situation is working in favour of structural rebalancing,
because expenditure by older people concentrates on services –
with the healthcare system as an example.
Twelfth Five Year Plan likely to refocus economic policy
Ageing population
Shares of population in China, %
60
50
40
30
20
10
1950
1970
1990
0-19
40-59
2010
2030
0
2050
20-39
60+
Source: UN
7
But the main argument for accelerated tertiarisation is a refocus of
economic policy. The twelfth Five Year Plan covering the period
2011 to 2015 will presumably strongly prioritise the development of
5
services. This has the twin aims of making present capital-intensive
economic growth more labour-intensive and putting more people in
work, while consumption is to take over from exports and investment
as the growth driver. There are various ways of achieving this:
6
First, minimum wages were already ramped up massively last year.
A further increase is likely and should stimulate private consumption.
Second, the government has announced greater commitment to the
healthcare system. In 2011, for example, 90% of the Chinese popu7
lation are to be covered by health insurance schemes. Overall,
these measures should lower China’s extremely high savings rate.
At the same time policy-makers plan to urge companies to retain
less of their earnings and pay higher dividends, which will reduce
5
6
7
16 February 2011
See Ma et al. (2011). China: Themes and Strategy for 2011. Deutsche Bank.
Minimum wages are set decentrally. In 2010 most provinces raised minimum
wages – the capital Beijing by 20%, for example. With this move policy-makers are
looking to narrow the income differentials in the population.
See Hansakul/Huelser (2010). Reforming China’s healthcare system necessary for
growth rebalancing. Deutsche Bank Research. Talking Point. July 5, 2010.
3
Research Briefing
China revaluing since 2005
Exchange rate RMB/USD
8.5
8.0
7.5
7.0
6.5
00
02
04
06
08
10
Source: Global Insight
6.0
8
Soaring export growth
China's exports of goods, USD tr
50
60
70
80
90
00
09
Source: WTO
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
9
Third, revaluation of the currency should check the build-up of industrial capacities. A measure of this kind would heighten competitive pressure and compel industrial enterprises to improve efficiency.
More outsourcing would presumably increase the weighting of services relative to manufacturing industry and lead to the creation of
8
new jobs in the tertiary sector. Revaluation could also resolve the
currency dispute with the US and head off a protectionist reaction.
The Chinese government has already announced a moderate appreciation in the coming years.
The next Five Year Plan will be published this March. It is expected
to contain suitable measures to speed up structural rebalancing.
However, policy-makers will presumably make cautious use of the
instruments since overly rapid appreciation of the currency, for
example, could choke off the export-driven upswing. There also
exists a danger of subsidising low-productivity services sectors
(such as retail trade or hotels and restaurants) at the expense of
9
more productive branches of industry.
Industrialisation of the West
Transformation into a service society should make China less susceptible to fluctuations in the global economy. In terms of income
distribution, however, we do not expect any positive effect, as providers of both consumer and corporate services can be expected to
set up in what are already comparatively well developed regions.
This means new jobs will be created mainly in the urban agglomerations. By deliberately establishing industrial parks in structurally
weak regions, the government was still able to check this geographic concentration. In the past 20 years industrialisation in China
has thus developed steadily westwards.
It is, however, questionable whether service providers such as
transport operators or communications service providers can be
located effectively in the hinterland. Moreover, knowledge-intensive
services lack highly skilled staff there, as a result of which many of
the business parks created by the government will remain reliant on
basic manufacturing jobs.
Structure of Chinese
services sector
Percentage of value creation, 2009
19.6
39.4
demand for capital goods. Higher expenditure on education could
further help to put better institutional arrangements in place for the
provision of complex, knowledge-intensive services.
4.8
Secondary sector share (1990)
11.6
12.6
12.0
> 50%
Trade
Hotel and restaurant trade
Transport & telecommunications
Financial services
Real estate
Others
Source: CEIC
< 50%
< 40%
< 30%
10
Source: Deutsche Bank Research
8
9
4
n.a.
See N’Diaye (2010). Transforming China: Insights from the Japanese experience
of the 1980s. IMF Working Paper No. 10/284.
See Qin (2004). Is the rising Services Sector in the People’s Republic of China
leading to Cost Disease? Asian Development Bank. ERD Working Paper No. 50.
16 February 2011
Structural change in China
Secondary sector share (2009)
Intra-sectoral shift
Percentage of value creation, 2009
36.3
39.4
100
80
> 50%
9.8
7.6
60
12.6
12.0
40
4.8
11.6
4.8
20
19.7
19.6
21.7
1980
Source: CEIC
11
Financial services expand, ...
Average growth, % p.a.
Financial services
Real estate
Others
1980-2009
Trade
Transp. & telco.
10 15 20 25 30 35
1990-1999
2000-2009
Sources: CEIC, DB Research
12
... but growth highly volatile
Growth / standard dev., 1980-2009
Others
Transp. & telco.
Real estate
Hotels & restaurants
Financial services
Trade
0
1
< 30%
Source: Deutsche Bank Research
n.a.
Intra-sectoral structural change
Trade
Hotel and restaurant trade
Transport & telecommunications
Financial services
Real estate
Others
1980-1989
< 40%
0
2009
Hotels & restaurants
< 50%
2
Source: DB Research
3
13
What is more, structural change is altering the pattern of industry
within the tertiary sector. Over the past 30 years the financial and
real estate sectors have expanded most. In the recent past other
services, which include the state administrative, health and education sectors as well as corporate services, have been the most dynamic. In some sectors, however, the rapid growth has been extremely volatile, with particularly marked fluctuations in the retail and
wholesale trade and the financial services sector, where years of
strong growth were followed by some serious setbacks (e.g. in the
financial sector towards the end of the 1990s). State services, on
the other hand, have turned in more regular expansion.
Amid robust global economic activity and uneven income distribution, up to the end of 2007 corporate services gained in importance
over retail services. Nonetheless, services geared mainly to consumers, such as the retail trade or hotels and restaurants, are still
disproportionately strongly represented in China in comparison to a
developed economy such as Germany. Whereas these two sectors
contribute a quarter of value creation in the Chinese tertiary sector,
in Germany they account for a mere 17%. On the other hand,
knowledge-intensive corporate services in, say, IT or advertising, are
underdeveloped in China.
For the coming years we expect broad growth, from which many
services segments could benefit. With policy-makers aiming for
fairer distribution of incomes and using higher minimum wages as
one way of achieving this, an increasing number of Chinese are
likely to participate in the country’s prosperity, creating demand for
consumer services. State commitment and demographic change
suggest that the healthcare system in particular will notch up aboveaverage growth. On the whole, consumer services should gain in
importance relative to corporate services, as the additional consumer spending encouraged by rising incomes is likely to exceed
the expansion in demand for business services due to increased
outsourcing.
Philipp Ehmer (+49 69 910-31879, [email protected])
© Copyright 2011. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank
Research”.
The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do
not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ
from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and
without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the
information given or the assessments made.
In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht.
In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by
the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong
Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved
and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS)
relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.
16 February 2011
5