By Lai Youwei

Research Report No 210, 2005

China’s service industry has maintained rapid growth since 2000. The internal structure of the service industry has also improved to some extent. Despite its fairly fast development, the service industry is still confronted with prominent problems, such as small business turnover, an irrational structure, low-level service, and weak international competitiveness. In light of these problems, the Central Committee of the Communist Party of China stated in its Proposals on the Formation of the 11th Five-Year Plan for Economic and Social Development that the development of the service industry should be sped up and the proportion and level of the service industry should be raised during the 11thFive-Year Plan period. To achieve these goals, China needs first of all to remove bottlenecks to and widen the space for the development of its service industry.

I. Systemic Problems Are Prominent Bottlenecks to the Development of the Service Industry

Compared with the manufacturing industry, many sectors of the service industry are under the strict control of governments at all levels. They are noted for high monopolization, low marketization and insufficient competition. The emphasis of system reforms lies with the central government, and the key task for the regional governments is to create a fine atmosphere for the development of the service industry. Systemic problems are mainly manifested in the following areas:

1. Economic controls are too strict

(1) Complicated examination and approval. Although the state has in recent years issued several documents to liberalize controls and reduce and even abolish examination and approval, the service industry still has to accept strict economic controls over investment and pricing. The procedures for examination and approval are still complicated. A consulting enterprise must pass examination and approval by over a dozen government departments before it can receive a qualifying certification and enter the market. These departments include the construction commission, the industrial and commercial administration, finance and the People’s Bank.

(2) Strict control. By the end of May 2005, Shanghai had 103 regional headquarters of multinational companies (54 of which had been certified) and 115 investment companies. Both the quality and level of introducing foreign investment had been improved. But now there is one practical problem confronting the city. While the financial environment in Hong Kong, Singapore and other places is very open and liberal, these multinational companies face lots of restrictions on financial operations in Shanghai. This is detrimental to attracting regional headquarters of multinational companies. For example, the settlement center of a financial institution has to operate 24 hours a day so as to exercise unified fund allocations worldwide. But in China, this business is still impossible because of strict foreign exchange controls. This has made the regional headquarters of some multinational companies unable to truly perform their duties.

(3) High threshold for market access. The unduly high thresholds for market access to some sectors of the service industry have restricted the entry of small and medium-sized enterprises and also run counter to the objective laws governing industrial development. For example, China stipulates that a logistics enterprise must employ more than 50 people and its capital must reach a certain level. Some logistics providers believe there is no need to enforce control over the number of people employed by a logistics enterprise. Some such world-famous enterprises do not have many employees, but they provide quality logistics services through resource integration.

2. Social control is inadequate

In a market economy, the government should gradually liberalize economic controls over the service industry and at the same time strengthen social controls over environmental protection, safety and quality. It should shift the focus of its controls to correctly performing government functions and protecting public interests. But the Chinese government has yet to form sound systems for social control. As a result, its regulation over some sectors of the service industry is highly random, which is harmful to the formation of a fine market competition order.

3. Government services are not up to the requirement

Many government departments in charge of industrial administration only pay attention to the early-stage examination and approval of investment projects. These procedures are complicated and the cycles are long, making the access threshold higher to the service industry. They pay little attention to subsequent services. This has made the government unable to provide efficient administration and release timely information for industries and enterprises. Some government departments have yet to shift from "controlling" to "servicing". As a result, the service function needs to be strengthened.

4. Some sectors of the service industry are highly monopolized and are not open enough to Chinese and foreign investors

In China, Chinese and foreign investors are prohibited or restricted from entering some sectors of the service industry. Therefore, these sectors are highly monopolized. The sectors such as travel agency, logistics and courier services are noted for fierce market competition,but they are currently beyond the reach of non-state capital and are not totally opened. For instance, the management of ticket office of civil aviation and travel service agency is allowed only for state capital, but not for private capital. This has, to a certain extent, reduced the vitality of market competition and impeded the development of the service industry. The under-utilization of foreign capital by the service industry has also hindered the introduction and digestion of the advanced know-how and management expertise of the service industry of foreign countries.

5. Overlapping administration and departmental segmentation

The industries of culture, logistics and information resources are all subject to overlapping administration anddepartmental segmentation. For example, administrations governing the information resources industry include the Ministry of Information Industry, the National Development and Reform Commission, the Ministry of Public Security, the Ministry of Culture, the Ministry of Science and Technology, the General Administration of Press and Publication, the State Intellectual Property Office, the State Administration of Radio, Film and Television and a host of other departments. The lack of policy and administrative coordination between government departments has resulted in the absence of a unified plan for the development of the whole industry. Overlapping development and low-level duplicate construction have become quite common with information resources projects. Besides, there are there are repetition or even contradictions in the policies formulated by various departments.

6. Lagging reform of public institutions

There are many public institutions in the service industry where reform is lagging behind. Many segments of the service industry are both public-benefit and industrial by nature. They can develop through industrialization. But so far they have been largely run as purely public-benefit and welfare undertakings. The slow progress in their market-oriented reforms has led to an underdevelopment of their service systems, and private capital has been rarely allowed to enter. Meanwhile, as a result of China’s failure to design proper systems to rationally distinguish public benefit undertakings from profit-oriented businesses, the provision of public services has been inefficient and the development of profit-oriented businesses for high-end demand has been inadequate.

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