China Law Blog

It makes perfect sense for the service sector to grow. So far most of China's growth has come from an over-reliance on China's formerly cheap and unskilled labor and exploitation of natural resources.

Services are an area where the party lacks expertise in developing, and if there is an impediment, it lies in how local party organizations will treat investment in services businesses. Here is an example: party and government officials are ranked according to their performance to attract investment to their cities and provinces. This has naturally favored manufacturing which requires higher capital expenditure.

Services require much less capital expenditure, and often require almost none. Will the policies outlined in the new investment catalog be translated into a new party and government official incentive system which favors clean industries and services at the expense of high-polluting manufacturing industries? If so, how will Beijing transition to the new system?

That is the real question.

Paul Denlinger,

It does make perfect sense and it is what happens in nearly all countries, again showing China is not unique. You raise a good point though about incentives and where we really see this is in the minimum capital requirements. China's more desirable cities do not seem to understand (or care) that one can start and run a service business for much less than the minimum capital requirements in most instances.

Service outsourcing to China is already happening in engineering, biopharmaceuticals, etc., where quantitative skills are key. You probably won't find many Chinese answering your "1-800"-type telephone calls to airlines, or handling back-office commercial banking and insurance paperwork, since their English is generally not yet at that level, and India has preempted that arena for the time being. But quantitative analysis which is highly specialized and expensive to perform in the US, Europe and Japan is now making its way to China.

Any government policy aimed at services has to understand that the capital of services is not money, it's human talent.

A whole package of incentive systems need to be designed to attract key leaders and individuals to set up service companies in China. Then they need to be able to tailor-design incentives to attract their teams. If the Chinese government can address this issue in a smart way, services can take off very quickly in China.

If not, it will take much longer.

The city of Wuxi has been designed around the growth of the service sector. Design, engineering, prototyping, graphics and consumer research services etc. (the communist government is great at building cities, it just lacks the ability to create high skilled labour to fill those buildings and office suites)

The TLL incentives (taxes, leases, labour) I was offered to open a design office there a year ago were quite attractive. With its proximity to Nanjing (auto manufacturing) and Kunshan (notebook computers) it is well positioned to serve both heavily capitalized manufacturing centers.

Another area of service sector growth has already begun in the Pudong district of Shanghai.

Now... the challenge is to get Chinese business/brands to value and actually pay for services that manufacturers can and already "give away" just to get the order for 10,000 widgets.

The service gig is a tough racket now, but as china moves to a more consumer oriented economy, the demand for sophisticated innovative (services) will become more valued. Plus, try asking a chinese engineering student what they are studying these days. I can tell you it is not tool and die making.

Getting a Chinese manufacturer to invest in innovative design is like pulling teeth. They need to ween themselves off the western crack pipe of making and exporting designs(usually knock-offs) and get to producing new products for the new Chinese Consumer Society...CCS