Qi Yunlan

Research Report No 114, 2004

III. Forecast on Service Market and Price in Second Half of the Year and Policy Suggestions

1. Forecast on service market

Given the operating situation and development trends of the national economy in the first half of 2004, the macro economic situation in 2004 as a whole and demand for services will continue to improve. As policy factors that affect service supply still exist, it is unlikely that service supply could increase rapidly this year. It is expected that overall service prices will continue to increase stably with various factors affecting service price trends.

(1) Market demand for services will keep a relatively rapid growth

First, the income of urban and rural residents will maintain rapid growth. In the first half of 2004, GDP in China increased by 9.7%. It is expected that the figure will be around 9% over the year, exceeding the target of 7% set at the beginning of this year. The rapid growth of the economy will lead to the rapid growth of the income of urban and rural residents, this is especially so since this year the government has concentrated its efforts on issues concerning agriculture, the countryside and farmers, and has made great achievements. As a result, the income of the farmers has further increased. According to the National Bureau of Statistics of China, in the first half of this year alone, the tax burden of the farmers has dropped RMB 4.3 per capita, decreasing by 27.2%. The transfer income reaches RMB 67 yuan, increasing by 15.2%. Meanwhile, the large increase of grain price and production enables the income of the farmers coming from selling agricultural products to grow significantly. Second, as the consumption structure improves, the residents expect greater service quality. Third, the process of urbanization accelerates, thus, promoting the demand for services. By the end of 2003, the urbanization rate in China reached 40.53%. If the urbanization rate in 2004 increases by 1.5%, another 8 million rural population will flow into cities and towns, which means the rise of service demand for inter-city transportation, inner-city transportation, communication as well as rented accommodation. In general, the demand for services will remain its current trend of rapid increase.

(2) The rising trend of such living services price as clothes processing, household services, maintenance service, personalized service, etc tends to remain stable

The competition is quite fierce in residents lifestyle service markets such as clothes processing, family and maintenance service, and personalized service. Given the fact that the factors that drive the price rise still exist, it is anticipated that the price for living services in the latter half of this year will continue to grow in a stable way. In the process of upgrading and adjusting the consumption structure, consumers will be more demanding on the quality of service products. On the other hand, under the pressure of market competition, service enterprises have to continuously improve their service quality and create more service projects. The combination of these two forces, to some degree, will lead to the increase of service prices.

(3) It is not very likely for service prices for medical care, transportation, communication, culture & entertainment, miscellaneous study matters, nursery and kindergartens to increase

To ensure the all-year price adjustment target, the National Development and Reform Commission issued a notice on April 23, requiring price departments at all levels to strictly control price-rises. The notice stipulates that if the price of each province (autonomous region, municipality directly under the Central Government) from the second quarter rises by (or reaches) 1% on a month-on-month basis, or up by (or reaches) 4% year on year for three months in a row, the province (autonomous region, municipality directly under the Central Government) should stop approving price-rise items for three months. In the light of this, it is only possible to adjust the price of the related local service projects in the second half of this year for medical care, transportation, communication, culture & entertainment, miscellaneous study matters, nursery and kindergarten within the price control’s upper limit, because the price of these projects falls within the range of government-set or government indices. It is not very likely for the price of related services to go up sharply, as the State strengthens its macro-control of it.

(4) The price of communication services is largely dependant on the effects of the policy implementation

On the basis of the price competition situation in the communication service market in the first half of this year, the Ministry of Information Industry and the National Development and Reform Commission jointly issued Notice on Further Strengthening the Supervision of the Telecom Rates for the six major operators, to strictly control the implementation of telecom rates. The document explicitly stipulates that the telecom enterprises at all levels are not allowed to promulgate and implement the adjustment scheme of telecom rates without approval or filing. The focuses of this action include: local fixed phone basic month rental and call charges, mobile phone basic month rental, call charges, roaming fee & domestic long distance call, airtime fee for international and Hong Kong, Macao, Taiwan long-distance call, etc. According to the Notice, the telecom enterprises at all levels need to submit their proposals for filing and provide the written permission of the group or company they belong to if they are going to involve in such three types of rate program as short-term promotion, rate package, large client offer, user scoring, mobile phone lease, etc. Otherwise, telecom-administrating and price department will not take it into consideration, which means that the decision-making power of the telecom enterprises at all levels is subject to more constraints, and that it is not likely for the telecom service price to decrease in the near future.

2 Conclusions and policy suggestions

By and large, the service price rises in the first half of this year are a normal phenomenon during the process of resident consumption structure adjustment and under the existing service regulation in China. At the same time, it is a normal market reaction that part of the service price rises, driven by the rising costs of resources. As a result, government does not need to intervene too much in service price setting.

First, as the current service price fluctuation is a normal phenomenon, it is not wise for the government to excessively intervene in the process. They should properly and cautiously adjust those service prices that are under the control of the government. As to the competitive conducts that truly exist in the enterprise operation, particularly the price fluctuation due to competition, the government does not need to get involved in it, especially to reduce executive intervention to company market behavior. This is because price alteration still falls within the normal range, and has not had much effect on consumption. Meanwhile, the final beneficiary of competition is the consumer.

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