Li Shantong, Hou Yongzhi

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.

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