Economists: Services sector upgrade key to confidence

Prioritizing the services sector's upgrade in China may be an integral step for the country to further bolster market expectations amid job creation headwinds in midrange to high-end services industries that are weighing on domestic demand, said Zhu Haibin, chief China economist at JPMorgan.

Zhu said that the Chinese economy is poised to regain momentum in the rest of the year as efforts in growth stabilization begin to bring results and household spending propensity shows signs of improvement.

These factors are expected to help China's economic growth reach 5 percent in 2023, in line with the government's annual growth target and an increase from the previous forecast of 4.8 percent, Zhu said.

"Yet such a growth figure can't be considered particularly impressive. It could be better described as a normalization of growth," Zhu said, stressing that a fine-tuning of policy is needed to further boost domestic demand.

His remarks came amid increasing signs of a momentum uptick in China's economy as official data showed that the manufacturing sector resumed expansion in September. That said, weakness in private investment and the property sector continued amid the broader gradual recovery in domestic demand.

Zhu said a primary reason for insufficient demand is job market pressures in midrange to high-end services industries. While the services sector has been a major source of job creation over the past decade, employment experienced a decline in 2022, which, according to him, was a first since the country's reform and opening-up.

"This explains the current pressures on the job market and youth employment," Zhu said, adding that employees in midrange to high-end services industries like internet, finance and education are particularly facing the pressures of pay cuts and even layoffs.

Data from the National Bureau of Statistics showed that China's overall employment has remained stable this year with the urban surveyed jobless rate standing at 5.2 percent in August, within the government's annual target of around 5.5 percent. But structural pressures linger as the unemployment rate among those aged 16 to 24 came in at 21.3 percent in June, according to the latest data.

In 2022, the number of employed people in the tertiary industry, or services sector, came in at 345.83 million across the country, a decrease of 12.85 million from 2021. Last year, the country saw a total decline in employed people of 13.01 million, according to the NBS.

Zhu said: "To stabilize expectations, the country needs more than just fiscal and monetary stimulus. Adjustments in policy direction are even more important.

"In promoting the industrial upgrade, the manufacturing sector should not be the only focus but a more supportive attitude toward the services sector is critical as well."

Without such structural policy shifts, solely amplifying monetary and fiscal stimulus, perhaps with a focus on infrastructure and investment, could worsen structural weakness in domestic demand and even exacerbate the pressure of low price growth, he said.

Echoing Zhu's sentiments, Wang Zhe, senior economist at Caixin Insight Group, said more efforts are needed to boost employment after the Caixin purchasing managers index survey pointed to softening growth momentum across China's services sector in September.

Zhu added that more easing of the housing policy in first and second-tier cities can be expected to further address the property market correction. "Bold moves" to relax the administrative restrictive measures, such as purchase and sales restrictions as well as price limits, can be considered.