I. Service trade expansion represents a long-term, yet pressing strategic task.

Service trade, generally known as the tertiary trade, encompasses a wide spectrum of activities ranging from transportation and communication to entertainment and recreation. As the economy and technology make strides, changes are taking place in the content and scope of the service trade.

Since 1980s, spurred by the rapid growth of the information technology (IT), a new industrial revolution was sweeping across the developed economies, bringing profound transformations to the service trade: (1) The Internet and e-commerce have invigorated this traditional service sector, making it possible to offer its products across the world; (2) The flourishing knowledge-intensive service sector embodies the value of its products in providing its services and intellectual property rights, including computer software, information processing, R & D, testing, market survey, human resource development and commercial organization (management consultancy and employee recruitment).

In the years of the planned economy, policy discrimination against the service sector as pure consumption resulted in its tardy growth. Since reform and opening up, rapid progress followed on their heels. Yet take the service sector as a whole, it is still lagging behind. Even such trades that have matured in the developed economies after years of growth as finance, insurance, accounting and legal service are by far not sufficient in China to meet the needs of economic development, needless to say the backwardness of the newly emerging service sectors. China is on the eve of taking the third strategic step in its modernization drive. For a smooth realization of our strategic objectives in this step, we should consider the expansion of service trade as a long-term, yet pressing strategic task.

(1) Service trade development responds to the rapid economic growth.

Realization of this goal constitutes an arduous task in the Tenth Five-year Plan period (2001-2005). From the point of view of various industrial sectors, progress relies on the development of the primary, secondary and tertiary industries. The key to sustained rapid growth in this period lies in whether the service sector can grow faster than the other two. The reasons are as follows. First, rapid growth for the primary sector can hardly be possible in the next five years. Over the past decade, its growth rate has been hovering below five percent. It would be difficult for this figure in the Tenth Five-year plan to surpass 3.5% annual growth obtained in the Ninth Five-year Plan period. Second, the growth space for the secondary sector was limited. For years it has been growing faster than the other two, thus resulting in its proportion in the national economy at around 50%. When a buyer's market has taken shape, the room for its growth was restricted to a great extend.

In the developed countries the service trade has become the fastest growing sector or a new growth area, whereas in China its lagging has turned out to be a bottleneck for the economy.

Firstly, the backward service trade has retarded our capital accumulation and hampered greater efficiency in capital utilization. In a market economy, financial intermediaries are the most important medium for bridging savings and investment. Satisfactory financial services, especially in credit and securities, are the basic prerequisite to rapid accumulation. There has been a general saving tendency in China. By the end of October 2000, the total savings of urban and rural residents had hit RMB 6.3 trillion yuan. Meanwhile, the balance of the accumulated bank deposits had reached RMB 8.9 trillion yuan and outstanding loans added up to 7.4 trillion, with the differential in deposits as high as 1.5 trillion over the loans. Lack of good financial services has hindered the transfer of savings into investments, thus ending up in a waste of limited capital resources.

Secondly, the lagging of service trade has also restricted the growth of human capital. In the 21st century, human capital has increasingly become the crucial factor for determining economic growth. China is rich in work force, yet short period of schooling and weak lifelong education predetermined its insufficiency in comparison with the advanced nations. Efforts to speed up accumulation in this regard must therefore be taken on urgency.

Thirdly, the lagging of service trade has restricted the improvement of innovative capabilities, another key factor for fast growth. Inadequate education has led to shortages in innovative talents including qualified management and technological personnel. The narrow scope of financial services has increased risks in enterprise innovation and imperfect technological infrastructure has increased enterprise innovation cost. By technological infrastructure we mean the components of industrial technology shared by major players in competition, mostly enterprises in the process of innovation, such as basic technological knowledge, information highway, basic manufacturing skills and services like economic/technological databank. Compared with basic scientific research, technology infrastructure is closer to the practical needs of enterprises, serving them more directly. It is therefore a typical "public product" and constitutes an important content of government service for the enterprises. China is still backward in this respect, ranking at the bottom of the 46 countries and regions in the survey of international competitiveness conducted by the Lausanne-based International Management and Development Academy. It lags behind Korea and Singapore by 19 and 36 respectively in the order of rankings.

Finally, the lagging of service trade impedes effective market expansion. Since a buyer's market has taken shape in China, successful market development also holds the key to realizing faster economic growth. To expand markets at home or abroad requires cost reduction in distribution and improved efficiency in information transmission. Backward distribution and underdeveloped information system have proved a heavy drag on market expansion.

(2) Service trade development meets the needs for economic restructuring and industrial upgrading.
Restructuring will be the main thrust of all economic work in the Tenth Five-year Plan period. Its important aspects embrace strategic reorganization of the state economy, readjustments in industrial structure and reorganization of industrial composition.

Strategic reorganization of state economy requires state economy to withdraw from industries of general competition. This entails a complicated process involving interests redistribution among many parts. Under the market economy, it is no longer possible to force state economy to quit by mandatory means. Thus it demands extensive deliberations and consultancy to ensure a smooth withdrawal of the state economy and a strengthened control by state sector over the national economy at the same time.

Industrial restructuring, especially the readjustments in the relationship among the three industrial sectors, will be the focus of economic restructuring in the Tenth-Five-year Plan period. Expansion of the service sector and raising its GDP share come into the picture as a necessity in industrial upgrading. Furthermore, restructuring inside the primary and secondary sectors could not be separated from a burgeoning service sector. Agricultural restructuring await both policy support and a variety of services, such as technology and information services. Given the continued existence of household-based farming for a long time, markets for agriculture products will open up one after another and changes in demand are various. A smooth restructuring would be impossible without highly developed intermediary institutions and a solid bridge linking up markets and rural households. Moreover, in the process of restructuring the primary and secondary sectors, a large amount of surplus laborers will be left out. A smooth restructuring would be unthinkable without providing them with new job opportunities. Accelerated advances of the service trades will be the answer.

Furthermore, the striking irrationality of China's industrial structure presents low concentration, poor specialization and lack of competitiveness. In the face of WTO challenges, merger and reorganization of enterprises are the call of the hour. On the one hand, we should press forward association among the strong enterprises to create a number of large companies and enterprise groups, which should have their own intellectual property rights, core products and a strong central leadership. On the other hand, we should relax control over small SOEs through an array of measures. Enterprise merger and reorganization are in need of a large amount of services in accounting, auditing, asset operation and legal matters. Besides, the restructuring process will involve the gradual shedding of their original social functions by the enterprises, thereby putting forward new demands for the development of the service sector.

(3) Service trade development meets the needs for improving international competitiveness.

China's imminent WTO accession will pose intense competition on enterprises. Faced with fierce international rivalry, the weak competitiveness of various industry sectors, resulting from long-time strong protection, needs to be boosted for survival and development. A fast-growing service sector will offer more and better services to the primary and secondary sectors to improve their competition capabilities.

In the face of ever-mounting global rivalry, enterprises must exert all efforts to raise core competitiveness, reduce cost and increase efficiency through deepening division of labor, which can only be possible with an expanded service sector. In the developed economies, corporate outsourcing has been on the rise, with most of the products from the service trades. A 1997 US Purchasing Association survey shows that outsourcing has increased by 26 % for companies with annual income over USD 80 million, the outsourcing service accounts for 30 %, 16%, 14% and 11% of total purchasing in information, human resources, marketing and finance respectively. In Europe, rise in information outsourcing also tops the list, e.g. Britain, France and Italy. In Japan, a 1997 Ministry of Trade and Industry (MITI) survey indicates that major outsourcing items are job training (20.1%), information system (19.7%), production methods (17.4%), accounting and taxation (14. 0%), R&D (13.7%).

In the coming era of the knowledge economy, the level of technical innovation will determine the success or failure in competition. And higher innovative capability only comes from the education service.

At present, internet has become a crucial factor for international competitiveness, and is basically a knowledge-intensive and service-driven industry. Its development relies on offering such services as ever-present availability of information/technology, low-cost and rapid access to information, management environment giving incentive to competition and a perfect system for venture investment. While offering services to other industries on an increasingly extensive scale, expansion of the information industry in form of Internet is also creating demand on other services as well as the manufacturing industry. For example, many sectors, such as banking, telecommunication and trade, increasingly rely upon the technical equipment for information and communication, leading to more investments in such equipment, and stimulating the development of related industries. Therefore, it can also be said that expansion of the service sector shall become the driving force for new and high technology.

In the developed economies, the service trade is playing an increasingly significant role in innovations as a whole. In the member countries of Organization for Economic Co-operation and Development (OECD), the R&D spending in service trade accounts for 40% of the total R&D expenditure. The proportion is even higher in Canada and the United States.

(4) Service trade development meets the need for coping with the WTO-entry challenges.

Competition in the service sector currently represents increasingly an important aspect of international competition. Since 1980s, the development of information and telecom technology has led to a faster growth of global trade in services in comparison with that in goods. A 1997 WTO report shows that from 1980 to 1995, the annual growth for the service trade averaged 8.4%, with only 5.2 % for the latter. All signs illustrate a shift from goods to services in global competition. After access to the WTO, China will gradually open up the service sector to foreign competition, the service sector shall be confronted with the real challenge. To meet the challenge, it is necessary to devote major efforts to developing service sector.

(5) To alleviate employment pressures necessitates the development of service trade.

Service trade has become the main employment channel, absorbing 71.6 million people in 1990-1999, or all the 66.8 million new labor and 48 million transferred from other industries. Its average annual absorption of nearly 80 million workers equals 2.8 times the absorption capacity of the industrial and building sectors. In the Tenth Five -year Plan period, annual increase in the working-age population is expected to reach 11 million. Calculated on working participation rate of 73%, over 8 million job opportunities should be created annually, an aggregate figure surpassing that for the Ninth Five-year Plan period. That figure would be all the more staggering if the diverted and laid-off staff and workers from industrial diverted and the SOE reform and the surplus labors from urbanization and agricultural restructuring were taken into account. Service trade expansion plays an important role in alleviating the employment pressure.

In 1999, employees in the tertiary industry account for 26.9% of the total, indicating a huge gap with 60 to 80 % prevailing in the developed world. It shows the great potential of service sector for absorbing additional workers.

(6) Service trade development is necessary for improving living standards of the residents.

Continuous improvement in the material and cultural life of urban and rural residents represents the point of departure and the final aim of economic growth. The urban and rural residents will take an increasing desire for services of education, culture, tourism, medical care, housing and transportation, after the basic living standard has been reached and most people begin to live a comparatively well-off life, The spending on services has increased from 13.7 % of the total consumption in 1992 to 25.9 % in 1999, an annual rise of 1.7 percentage points, accompanied by a marked declining tendency for material products consumption. Service sector development will be a necessity for meeting the mounting demand of people and raising their living standards.

(7) Service trade development is necessary for the transition in economic system.
China's economic system is experiencing a transition from planned to market economy. During the transitional process, government functions and public undertakings must be separated from enterprises management, while the reform of the service system in enterprises and institutions will also be promoted. As a result, some economic functions formally undertaken by government, such as quality certification, and the social functions formally undertaken by enterprises, such as compulsory education and medical care, will gradually be stripped. This demands accelerated development of service sector. In addition, intermediaries, such as accounting firms, law firms, advertising companies together with their services, are indispensable for the healthy operation of a market economy. Without the developed market intermediaries, there would be no developed market economy. In the OECD countries, the added value for finance, insurance, real estate and operation services accounted for 22.2% of the GDP in 1998, whereas the corresponding figure for China was only 8.3%.

II. The gap in the development of service trade in China and the underlying factors

(I) The gap in the development of service trade in China can be seen in the following fields.

1. Low proportion of added value and employment

Compared with the initial years of reform the proportion of added value in service sector has presented a remarkable increase, soaring from 21.4% in 1980 to 33.0 % in 1999, with an increase of 11.6 percentage points. Even so, this figure is lower than the corresponding ones not only in the developed world but also in some developing nations in the same stage of development with China. In 1988, the corresponding figures in the OECD countries were roughly between 60% and 80%, with ten states obtaining 70%. In terms of purchasing power parity (PPP), China's per capita GDP is more or less similar to that of Sri Lanka and the Philippines. Yet we lag far behind them in terms of the proportion of added value in the service sector.

It is the same in terms of employment. The employment proportion in China's service sector is not only much lower than that of the developed countries, but also lower than that of some developing nations on the similar development level with China. The proportion of employment in China's service sector was 26.9% in 1999, whereas the figure of seven most advanced nations in 1998 was around 60%, with that of America and Canada hitting 70% and most OECD nations ranging from 50% to 70%. The average figures in 1992-1997 were 77%, 46%, 60% and 57% of Jordan, Egypt, Jamaica and Morocco respectively.

2. High proportion for traditional service trade

Compared with the developed countries, China has a higher proportion in traditional service trades, such as traditional distribution, catering and hotel industries.

(1) In light of the internal structure of added value, in the OECD countries, the highest proportion went to finance, insurance, real estate and operations service in 1998, with the average reaching 32%, followed by wholesale, retail, catering, hotel, education, public health and social services, with the average at 22-24%. Transportation, communication and public administration registered the smallest proportion, averaging between 10 to 11%. The situation for China in the same year was entirely different: 26% for finance, insurance and real estate, 28% for wholesale, retail, catering and hotel industries, 19% for education, public health, social services and others, 28% for transportation and communication, and 8% for public administration.


(2) In light of internal structure of employment, the largest proportion of OECD countries in 1998 went to wholesale, retail, catering, hotel, education, public health and social services, with the average at 26-27%, followed by the average of 14-15% for finance, insurance, real estate, operation service and public administration, with the lowest average –9%-- for transportation and communication. On the other hand, relevant figures for China in 1997 were 29% for wholesale, retail and catering businesses, 47% for education, public health and social services, 4 % for finance, insurance, and real estate, 7% for public administration and 13% for transportation and communication.

3. Low knowledge intensity

With modern technology, the higher the knowledge intensity of the service sector is, the more investment will be needed for information and telecom equipment. If the proportion of such investment in the service sector is used as a yardstick to measure the knowledge intensity, a marked gap can be seen between China and the developed countries. In 1980-1990, the relevant figure for Canada and America rose from 13% to15%, the corresponding one for China reached only 4.9%, calculated on the 1997 input-output table of China.

Besides, as mentioned above, in terms of added value and employment, the proportion of knowledge-intensive services in China, such as finance, telecommunication, operations service, is lower than that of developed countries, a reflection of low knowledge-intensity.

4. Weak linkage with other industries

In the developed countries, the linkage between the service sector and other industries has been growing steadily. In 1980-1990, a change occurred in production input with the input growth in services higher than that in goods, whereas, in China, the intermediary utility of service by industrial sector has been declining. With the exception of the mining industry, a downward spiral took place for manufacturing of consumer goods, intermediary inputs, and capital goods, dropping from 15.7% to 11.5%, 20.1% to 13.4% and 19.3% to 12.7% respectively.

5. A decreasing proportion for the added value in the service sector at constant price

A growing added value in the service sector, as a rule, usually occurs along with economic development. But China has seen the opposite since 1990s. Calculated at the 1990 constant price, the proportion decreased from 31.3% in 1990 to 28.4% in 1999. In the mean time, the proportion of industrial added value in GDP increased from 41.6% to 55.7% and that for agriculture dropped from 27.1% to 15.8%.

(II) Reasons for the lagging of service sector

1. Backward conceptions

Many fields in the service sector have been regarded as non-productive activities for years in China. Some fields that should be commercialized areas were taken as welfare undertakings for public interests. The government overstressed the public interests function of education, scientific research, culture and sports, overestimated the regulatory and ideological functions of finance, post, communication, broadcasting and television, and regarded medical care, public health, housing and urban traffic as important social welfare. Such backward concepts cause many undertakings to over depend on government input and neglect their self-generating mechanism.

2. Excessive control and low marketization

Monopoly has been commonplace inside service trades in China with excessive restraints over market access and insufficient competition. Extremely strict restriction over market access still prevails in service trades in China, such as banking, telecommunication, insurance, civil aviation and railway with non-state and foreign capital bearing the brunt. The prices for most service products are still being set and controlled by the government, a market-pricing mechanism is yet to take shape.

In general, China's service sector has low marketization or commercialization, lacks for competition. With the exception of commerce, resident service and highway transportation, the degree of marketization is still fairly low, market has modest impact on resource distribution. Much of the investment in service trades still come from the State, State-owned capital claims 57.4% of the investment in the fixed assets of the service trade in 1998, 25 percentage points higher than that invested in manufacturing. Except commerce, catering and real estate, State assets (government capital) accounted for over 70% of the investment, the highest reaching 90%. Such a single source has rendered State predominance in most service trades, some even higher than that in the primary and secondary industries.

The low marketization is also embodied in the government taking over services that should have been left for the market. Moreover, dependence on government by most market intermediary institutions has damaged their ability to operate independently, justly and objectively, thus costing their commercial reputation and market development capability.

3. Low degree of social specialization

Under the traditional planned economy, "large and inclusive" or "small and comprehensive" enterprises were quite common, they provided services for their production, thereby seriously suffocating growth of service businesses catering to production. After years of reform, such "large and all inclusive" and "small and comprehensive" enterprises have somewhat declined, but have not been erased completely, some even remain considerably strong, still restrain the development of service sector.

4. Low degree of opening to the outside world

The low level of opening of the service sector has been a barrier to the internationalization of service firms, making it impossible for them to improve competitiveness through direct competition with foreign counterparts. In 1997, the direct foreign investment in the service sector made up for only 2.7% of the total, much lower than 11.8 % in the secondary sector. With the exception of seven trades, such as retail business, commercial agency, real estate agency, hotel industry, travel service, entertainment and computer service, the proportion of foreign investments in the rest 44 major service trades was lower than 5%, with that for 20 trades below 1%. In fact, it is the service sector where the degree of openness to direct foreign investment is lowest. Weak international competitiveness of the service sector has led to increasing trade deficit on an annual basis, with the deficit shooting up from USD 1.9 billion in 1996 to USD 5.7 billion and USD 5.9 billion in 1997 and 1998 respectively.

5. Tardy urbanization

Higher level of urbanization can create demands for service trades. The scope and structure of development of the service sector are actually based on the level and scale of urbanization. The small scale of China's service sector results from the fact that rural residents account for overwhelming majority of the population and urbanization remains at low level. The sluggish progress and backward structure have much to do with the long-term policy of discouraging urbanization and strictly restricting the development of large cities. Statistics show the positive correlation between the scope of the service sector and urbanization. In 1997, in the 668 cities surveyed, service employees accounted for 37.3% of urban staff and workers, 11.2 percentage points higher than the national average, 45.8%, 41.6%, 35.8% and 30.8% for the mega-cities, metropolises, large cities and small- and medium-sized cities respectively. In rural areas, service employees made up only 16.1% of the work force. City enlargement can create a variety of service demands, thus bringing about a more specific division of labor. The furthermore, the inner structure of the service sector is also closely related to the size of a city. The emerging high value-added production-oriented service trades tend to be linked to the size of cities. Urbanization in China lags behind other developing countries at a similar level of development and industrialization, therefore, China's service sector is unsurprisingly backward country’s backward service industries.

6. Low income, especially for rural residents

The resident's demand for service is closely related to their income. In 2000, per capita disposable income for urban residents hit RMB 6280 yuan and per capita net income for rural residents reached RMB 2253 yuan, both increasing ten times over the levels in the initial stage of reform. Even so, income of the residents as a whole are still rather low, especially the rural people. Such a low income level hardly sustain a rapid progress of the service sector.

7. Shortages in talented personnel A great number of qualified people are needed for the development of modern service trades, especially the knowledge-intensive trades, such as comprehensive distribution, e-commerce, computer software, information technology, research and development, technological testing, market survey and corporate management. But long-time discrimination against and restrictions over the service sector have led to insufficient attention to the training of qualified people. The rather serious shortage of senior talents in service sector has hindered its development.

III. Government's role in the development of service trades

In an ever-changing and open environment, it is increasingly difficult for the government to formulate and implement policies for the development of service sector. Despite the limitation, it is still possible for the government to exert its influence in various ways, for example, 1) formulating taxation and other rules and regulations; 2) working out basic plan and defining extent of competence for infrastructure construction; 3) providing or purchasing major services, such as medical care; 4) playing a major role in education, personnel training and human resources development. (See table II) Human capital is the core for the development of service industry. So the key measure should be improving the skills of workers. In the light of the current situation, we believe the government should play the following roles in the development of service industry.

(1) Reasonable regulation

As mentioned above, service trades encompass extensive fields with ever-changing content. So, different rules and regulations should be laid down for various types of service. In light of their evolution, service trades can be divided into three categories: 1) Traditional services that existed in the planned economy and have fairly developed, such as traditional distribution, catering and hotel industry; 2) Modern services that have long been existing in the developed countries, but are just emerging in China in the process of reform, such as finance, insurance, accounting, lawyer services, securities services; 3) Emerging, IT-driven, knowledge-intensive services, such as comprehensive distribution, e-commerce, Internet communication, etc..

The government has rich experience in managing the first category and has formulated a series of administration rules and regulations. The future tasks should be revising and amending these exiting rules and regulations in response to development situation and trends of the market economy, and then implement revised rules so as to ensure service quality.

The government still lacks experience in managing the second category. Some rules and regulations have been worked out, but they can't meet the needs of the service sector in the current opening environment due to their obvious vestiges left over from the planned economy. We should learn through practice how to regulate this category of service trades in the process of continuous opening up and gradually move toward international norms.

There is no mature experience in regulating the third category. We should work out rules and regulations for administering this type of service trades in a rational way by strengthening international exchanges while conducting intensive research on our own.

(2) Promoting competition

We should relax control over market access through the following ways. First, intensifying reform of those industries where monopoly still predominates by introducing market mechanism and increasing the number of major players in the market. Second, opening up all fields in the tertiary sector, to different extent, to both foreign and domestic non-state capital, with the exception of some specific, state-security-related areas, where state monopoly is indispensable. Third, adopting a fair and transparent policy based on relaxed market admission and strict administration.

To promote competition, we should build a healthy domestic market environment in order to give full play to the innovative capacity of enterprises in the following ways. First, to create an environment that encourages technological innovation (including formulating laws and regulations for protecting creativity and competitiveness), and uphold intellectual property rights. Second, to crack down local protectionism and utterly eliminate domestic trade barriers. It deserves our close attention that some localities are trying to tighten their control over inter-regional trade when the State is liberalizing trade control.