Part of theQuick Takes
China – factory to service economy
While a COVID relief bill is stalled in Congress, even as the U.S. faces a resurgence in COVID, China is moving full speed ahead to rebuild and reorient its economy. President Xi Jinping has pledged to promote “dual circulation” at home, meaning China intends to build up domestic consumption and to seek opportunities internationally as the core of its stimulus effort. As a core part of this initiative, the Chinese are further opening its services market to competition and are testing new opportunities in services through pilot projects in Beijing. This new policy could provide significant opportunities for foreign service providers.
The former factory of the world is now the largest service economy globally. Already, services account for 54 percent of China’s GDP and 60 percent of total growth. Micro, small and medium-sized enterprises (MSMEs) in the private sector make up a significant number of firms in the sector. In turn, these MSMEs account for 80 percent of urban jobs in China, so a focus on generating growth in the service sector makes good economic sense. The government’s plan is “to establish an open system of the service industry that adheres to international standards of economic and trade by 2030.”
While much of the detail of the plans remains to be seen, recent speeches by Chinese leaders hint at the direction. At the recent China Development Forum, a Vice-Chairman of the powerful National Development and Reform Commission even committed that the sensitive internet and digital economy sectors “will be orderly expanded to outside firms.”
Foreign firms providing cloud services, payment systems, and e-commerce, to list a few, are being actively encouraged by Chinese officials to test the Chinese market. In typical Chinese fashion, once the domestic firms have been established, the government is more willing to open the door to foreign competitors. While they are not going to fully open the internet to foreign firms, officials have indicated quietly that they are seeking competitors to the increasingly powerful Chinese tech firms – Alibaba and Tencent. This marks a major change in atmosphere to when U.S. tech firms were trying to enter the market a decade ago.
Beijing is the test case
The municipality of Beijing is the testing ground for the reform in services. The country’s capital is led by two of Xi Jinping’s trusted advisors – Mayor Chen Jining and Party Secretary Cai Qi. The reform program is conducted under the watchful eye of the President’s top economic advisor, Vice Premier Liu He, who has been an advocate for significant reforms such as a break down in domestic monopolies, including the big tech companies, and for allowing the establishment of the best in class foreign firms.
In addition, Beijing is part of the Jing-Jin-Ji regional initiative and a pet project of President Xi. As China has transitioned to a more service-oriented economy, Beijing has been one of the leaders in this effort. The most recent figures show that Beijing’s service industry now accounts for 83.5 percent of its GDP, which is nearly 30 percent higher than the national total.
If these pilot projects are successful, they will be rolled out nationwide.
As part of a new pilot project announced in September, Beijing will open its services sector to foreign investment in nine sectors. These include:
Also, it has designated ten industrial zones in the city to experiment with services reform in different sectors ranging from culture, sports, and tourism to venture capital. These zones will help nurture, develop, and fund businesses that specialize in these designated sectors.
Lastly, China has said that it will issue a “negative list” for services, potentially by the end of 2020. This policy will indicate sectors where foreign investment is limited or prohibited; those services not on the list will be open nationwide.
Financial services are a model sector
The financial services sector is one of the first to open more fully to foreign firms. It is a test case for allowing more competition in other sectors viewed as critical to the Chinese economy including telecom, aerospace, digital economy, and medical services.
As part of the Phase I trade deal with the United States, China committed that foreign securities firms, fund managers, and futures firms, as well as life insurance companies, can now be wholly-owned. The Chinese central bank is approving bank card license applications for foreign payment firms and credit card companies. And, foreign banks are now allowed to purchase local banks.
These moves are part of an effort to build confidence in China’s capital markets as it diversifies away from the U.S. – and the U.S. dollar for trade. The Chinese leadership has combined this market opening with strengthening regulation, greater transparency, expediting listing, and increased enforcement. As a result, the massive outflows of capital have been halted and local firms are listing at home instead of abroad.
Will U.S. firms benefit?
Hopefully so, but it will depend on the status of U.S.-China relations. American service firms are the most competitive in the world, so this market opening should provide significant opportunities. However, the tensions in the bilateral relationship – especially concerns that the American firms are unreliable suppliers – may result in other foreign firms becoming the beneficiaries as China diversifies away from reliance on the United States.
A report by Reuters that the Administration intends to place several Chinese aerospace companies on the entity list, for example, could harm U.S. firms. Placement on the entity list means that U.S. companies are limited or banned from selling to those on the list. In the case of the aviation firms, for example, the Europeans are easily able to replace the banned sales from the U.S. These types of actions, if not well thought out, could have a negative impact on U.S. opportunities in China.