Small steps in service sector to make big strides in economy

Li Yi/China Daily

Further reforms needed, especially to help companies in the massive service sector

Zheng Yufei, the mother of an eight-month-old baby living in the south of Beijing, received a basket of fresh vegetables on a Monday morning after she placed an order through the messaging service platform WeChat the night before.

Liu Xin, who delivered the basket, is part of a family firm selling vegetables near Zheng's housing complex. He received 5 yuan ($0.81) extra as a delivery fee.

"The delivery service is great－I have no time to pick up vegetables at the stall downstairs as I have to stay with my baby," says Zheng.

Liu started his small-scale delivery business in April last year. The family buys its vegetables from Xinfadi, Beijing's largest agricultural products wholesale market, early in the morning each day.

"We set up the stall at 6 am and close it at 11 am, three days a week, near the gate of the housing scheme. People living here can buy their vegetables before they go to work," says Liu.

The 36-year-old, who used to be a farmer in the suburbs of the capital, opened an account on WeChat to receive orders online.

"I only deliver vegetables to people who live nearby; they place their orders a day in advance to ensure they can receive their vegetables when they want," he says.

Liu is one of hundreds of vegetable retailers benefiting from the Farmers-to-Consumers Vegetable Sale Service program, which allows retailers to buy vegetables directly from farmers for sales in residential areas, not through intermediate wholesalers.

The F2C program effectively cuts down the logistics costs and helps the municipal government keep the vegetable price growth at bay.

The F2C, initiated by the Beijing municipal government in 2010, has not only provided thousands of job opportunities to rural migrant workers but enabled retailers to cut vegetable prices to the minimum, says Ma Huiping, a sub-district office director.

"This is much more convenient for consumers, and the vegetable prices are much fairer because without having to go through wholesalers, transaction costs have been reduced," says Ma.

Liu became especially well known in the community after creating the WeChat selling model, and his sales have increased nearly 30 percent every month since.

Experts say that supporting firms in the service industry and encouraging the development of small businesses like Liu's, has become a priority for the Chinese government－a strong new source of growth at a time of persistent economic difficulties. Creating more job opportunities is also expected to be prioritized.

Wang Tao, chief economist in China at UBS AG, says targeting such areas with reforms will become crucial, "including further cuts in administrative red-tape and service sector entry barriers".

The country's senior leadership elaborated on their image of an economic "new normal" in China at the 2014 Economic Work Conference, which has now provided a framework for policy making this year.

"A transformation of the country's growth model is necessary to focus more on efficiency of resource allocation, innovation and higher productivity," says Wang.

"But such a transformation has to take place with the market playing a bigger role and the government also has to loosen policy constraints, break down internal market barriers, and foster competition."

Many more small firms, such as Liu's vegetable supply business, are expected in the coming year, especially those targeting particular niche markets and meeting specific consumer demand.

Results from the Third National Economic Census, launched by the State Council and the National Bureau of Statistics in 2013, already show the advances made by the service industry, and the rapid changes to the economic structure in the five years since 2009.

In 2013, enterprises in the service industry made up 74.7 percent of the national total, up 5.7 percentage points from five years before. Employees in the service sector accounted for 45.9 percent of the nation's total workforce, compared with 42.4 percent.

In contrast, the proportion of companies in the industrial sector shrank to 25.3 percent, down 5.7 percentage points during the same period, while the number of industrial employees dropped by 3.5 percentage points to 54.1 percent at the end of 2013, according to recent NBS figures.

The results also indicated that the contribution of the service sector to the gross domestic product had risen steadily from 44.6 percent to 46.1 percent in 2013. The contribution is expected to be 48.5 percent in 2014, predicts the Chinese Academy of Social Sciences.

In the first three quarters of 2014, the service sector expanded 7.9 percent year-on-year, outperforming the 7.4 percent overall growth in the manufacturing industry. The NBS is scheduled to release the whole year economic indicators on Tuesday.

Zhu Haibin, chief economist in China at JPMorgan Chase & Co, says this rebalancing of the service and manufacturing sectors has "notable implications for the labor market in 2014".

"In particular, as the service sector is generally more labor-intensive, such structural adjustment in the economy should support employment creation and helps stabilize the labor market, amid a gradual slowing of the overall economy," he says.

According to official data, in the first nine months of 2014, 10.82 million new jobs were created, well ahead of the government's full-year target of 10 million.

The GDP growth, however, was 7.4 percent in the first three quarters of 2014, lower than the annual target of 7.5 percent.

"The relative stability of the labor market is likely to continue supporting consumption growth in 2015," says Zhu.

The economic census also showed that at the end of 2013 there were 7.85 million small and medium-sized enterprises operating across the industrial and service sectors, accounting for 95.6 percent of all the corporate enterprises. They employed a total of 147.3 million people, accounting for 50.4 percent of the nation's workforce.

Morris Li, executive director and president of China Guangfa Bank, says that many Chinese SMEs are still too weak to survive any macroeconomic fluctuations in what is an intensely competitive market, and are waiting for more development support.

"The number of SMEs is huge in China, and they play a significant role in the country's healthy economic growth," he says.

A recent report from China Guangfa highlighted four major difficulties for Chinese small businesses: fierce industrial competition, high operational costs, low profits and heavy taxation levels.

The Ministry of Finance has already removed 42 administrative service fees for SMEs since the beginning of 2015, and more supportive measures are expected to simplify financing procedures.

Li says a better development environment for small business will help to create more job opportunities. He also expects stable growth in consumption to offset the retreat of fixed-asset investment and exports.

Zhu of JPMorgan Chase& Co predicts nominal retail sales growth to be relatively stable at about 11.7 percent this year, compared with the almost 12 percent growth in 2014, with consumer inflation easing to 1.5 percent in 2015.

Zhu expects total consumption may contribute about 3.5 percentage points to 2015 economic growth.