Services to lead China's new opening drives

When China opened a fishing hamlet bordering Hong Kong for business three decades ago, it brought foreign investors to an economy that was once among the world's poorest and most closed.

With the money foreign business brought, the economic backwater became the world's factory floor, churning out everything for everyone, everywhere.

While China's cost advantage is losing edge, investment yield is declining and some companies pulled out, a sizeable number of global investors kept on expanding, betting China's economic transition will create tens of millions of middle-class and unleash a consumption power unseen in human history.

These pecuniary aspirations will only be met if China opens the service sector, exactly as it freed up trade. November's plenary session of the Communist Party of China's central committee is expected to do just that, as part of a big package of new reforms.

The meeting is expected to work on a blueprint to convert the economy to a service and consumption driven model and open it more widely to global investors.

"The needs of American businesses will also be served if reform and continued opening happen in the ways we hope," said Greg Gilligan, American Chamber of Commerce China (AmCham) Chairman.

While a strong third quarter eased concerns of a hard landing, growth is still set to fall below the double digits of the past decades.

"The model that served China very well for 30 years is starting to show signs of age. Infrastructure-led investment and export-led growth is sort of running out of steam," Gilligan said. "The Chinese leadership has very correctly identified the need for a new model of growth, for increased participation in the economy by the private sector."

While the majority of AmCham's members are optimistic about the coming two years, recognition of China's investment environment has dwindled.

An AmCham's survey in March found only 28 percent of members felt China's investment environment was improving, substantially fewer than the 43 percent found in the previous survey, and in line with stalling growth of foreign direct investment (FDI).

"Foreign investment is peaking," said Kim Woodard, chairman and CEO of Javelin Investments, a firm specializing in investment in China. "There may be some softening over the next years. The growth rate is coming down. Conditions for investment are still pretty much the way they have been."

Woodard has been helping investors in China for years and thinks opening the service sector will boost confidence.

AmCham sees services as crucial to a vibrant economy in the next stage of development.

Global service providers circling the Chinese market find most of it closed to foreign investment.

"Restrictive policies are one of the largest hindrances to international investment," said an AmCham China report. "Barriers to market entry, market expansion, ownership, and product offerings greatly inhibit the ability of foreign companies to effectively operate in and contribute to the development of China's service sectors."

In a cluster of warehouses in the outskirts of Shanghai, the world's second largest economy is figuring out how to respond to foreign demands for access to the service sector.

At the Summer Davos Forum last month, Premier Li Keqiangsaid China's modernization could not come without reform and opening up, citing Shanghai Free Trade Zone as one of the new ways to open the economy more widely to the outside world.

In Shanghai FTZ regulation of services has been relaxed. It is like a new version of Shenzhen, the special economic zone that first got the Chinese economic juggernaut rolling.

"The free trade zone is a stress test. We're going to explore how much China can open its economy," said a person with direct knowledge of the issue.

Citi, DBS, Bank of East Asia and HSBC have been primed to open branches in the zone where China's boldest and most debated financial reforms are to be tested.

"The free trade zone can add experiences for China's future entry into a high-level of international free trade agreement," said Ma Jun, chief economist of Deutsche Bank Greater China.

"Through opening, we push forward reform," Ma said.