Easing China’s Transition to a Services Economy

But Zhang then offers a non-conventional perspective on China’s economic slowdown. His memorandum argues that both the general slowdown of China’s economic growth and the stagnation of its industrial sector are the natural consequence of China’s new status as a middle-income country. The experience of advanced economies, Zhang says, has shown that services play a more prominent role in the economy once per capita income reaches a certain level. And since productivity growth is generally lower in service-related sectors, such an economy will inevitably slow down as these sectors become engines of growth.

Zhang makes two other arguments as well: Many barriers and bottlenecks to the development of services in China remain, he says, and these obstacles are further slowing down the economy. What is more, instead of tackling these barriers, Beijing has devoted most of its attention and resources to helping the industrial sector, not services.

His underlying argument is that since the relative decline of China’s industrial sectors will be a natural consequence of continued economic development, such attempts by the government to fight this trend will unavoidably lead to distortions. That is why, for example, Beijing’s efforts to stimulate the industrial sector have resulted in low-efficiency investment and overcapacity even as credit and debt have expanded out of control.

Zhang’s memorandum builds out these arguments in four parts: First, he offers a review of the transition toward a services economy, including the mechanisms behind the rise of service-related sectors and the decline of manufacturing once a country’s per capita income reaches a certain level. Second, Zhang discusses problems and issues that have hindered China’s transition to a services economy. Third, he reviews recent government economic stimulus efforts, arguing that these stimulus programs have actually complicated and delayed China’s transition toward a services-oriented economy. Finally, he provides some policy prescriptions aimed at facilitating the transition process and making China’s economic growth more sustainable in the long run.