An IMF country focus published on 2 August 2024 noted that reforms to further open China’s service sector can promote sustainable growth and help create jobs. The report notes that China’s growth has been rapid in recent decades and will remain resilient despite the current property sector adjustment.
However, the report notes that China has relied too much on investment and not enough on consumption. In the coming years diminishing productivity and an aging population may place limits on the rate of economic growth, which could therefore slow significantly to around 3.3% in 2029. The report suggests that a balanced policy approach is required.
China’s service sector is a potential driver of growth that is currently underexploited. By reallocating resources to services China has increased productivity in recent decades and this can continue if the correct supportive reforms are implemented. By expanding the service sector China can increase employment among the young, who tend to be disproportionately employed in service sectors such as technology and education. As carbon emissions are lower in services, the climate goals would be helped by an expansion of the sector.
The IMF’s recent report on China under Article IV of the IMF’s articles of agreement noted that the country has significant further potential for expanding services. The report noted that the service sector can be a driver of growth and can create jobs if measures are taken to promote a rebalancing of demand towards consumption. The type of measures to achieve this goal would include structurally boosting the social safety net combined with reforms to reduce entry barriers and other regulatory restrictions. The service sector’s share of value-added to the economy has increased to just over 50%, but this is still well below the average of about 75% for advanced economies, indicating that there is significant scope for development of the sector.
Company-level data indicate that the allocation of capital and labour across firms has been increasingly less efficient in the service sector. Highly productive firms have therefore been too small on average, as a consequence of difficulties in attracting new capital and labour. Less productive firms have taken too large a share of the market.
China therefore needs to prioritize reforms to improve the allocation of capital and labour in services. The service sector is burdened by more severe regulations than those applying in member states of the OECD. There are restrictions on domestic and foreign entry as well as significant regulatory hurdles. The service sector could be boosted by easing regulatory requirements, reducing local protectionism, and permitting more businesses to enter and compete in services.
The economy could be rebalanced to strengthen demand for services. Improvements to social safety nets and more progressive taxes would reduce the amount of precautionary savings needed by middle- and lower-income households and allow greater spending on services. Increased social security coverage and improved unemployment and medical benefits could further boost consumption. The report noted that this year old-age benefits have increased by 19% for rural and non-working urban residents.
The report estimates that a comprehensive package of structural reforms and enhancements to the social safety net, together with pension reforms, could raise China’s GDP by close to 20% over the next 15 years relative to the baseline. This would create around one percentage point higher potential growth per year in the medium term.
