China Gets More Than Ever From Services, Just Not Enough

  • China bulls see the rise as evidence of economic rebalancing
  • Bears point to the weakness in traditional growth drivers

For the first time, China last year saw service industries make up more than half of the economy as the nation’s swelling middle class demanded more in everything from entertainment to health care and financial products.

The sector accounted for 50.5 percent of gross domestic product in 2015, the most on record, government data showed Tuesday. The bad news is that the gain also reflects declines in swathes of China’s industrial complex plagued by too much expansion in previous years. Output of everything from steel to cement to electricity fell.

China’s Great Rebalancing
China’s Great Rebalancing

"The services sector is the main support for the economy," said Iris Pang, a senior economist for greater China at Natixis SA in Hong Kong. "This is extremely important because manufacturing is fading out and external trade contributed less to GDP in 2015. The only engine left for China is the services sector."

The tertiary component of the economy, as services are known, grew 8.3 percent in 2015, and Pang expects that will accelerate to 9 percent in 2016. The primary sector refers to agriculture, while secondary describes manufacturing.

China’s rebalancing would pick up even greater steam if President Xi Jinping and Premier Li Keqiang follow through on repeated commitments to shut down excess capacity. The fact that prices at the factory gate are still falling at a 5.9 percent annual pace, and have slumped continuously since early 2012, highlights the magnitude of over-supply.

The rebalancing in 2015 is "in part due to severe downward pressure on output prices as many firms in overcapacity sectors aren’t responding sufficiently to price signals, underscoring the need for bolder reform," said Louis Kuijs, head of Asia economics at Oxford Economics Ltd. in Hong Kong.

— With assistance by Kevin Hamlin, and Ailing Tan

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