(Bloomberg) -- China announced a sweeping plan to boost consumption by improving the supply of services, seeking to bolster a bright spot in domestic demand as the manufacturing sector’s momentum cools.
The State Council, China’s cabinet, on Saturday issued a 20-point proposal aimed at raising the quality of services spanning restaurants, tourism, entertainment and elderly care. The measures are followed by the release of a Caixin survey on Monday showing services expanded for 19th straight months in July.
China’s post-pandemic recovery in consumer spending lost steam this year, with retail sales rising at the slowest monthly pace since December 2022 in June. A precarious job market and uncertain income outlook has deterred consumers from buying stuff, but they have proved more willing to pay for services, an area that authorities are trying to promote.
“It’s a positive development as it shows more attention being placed on supporting domestic demand,” Lynn Song, chief economist for Greater China at ING Groep NV.
But the measures are “more of a medium-term boost” as they focus on improving the supply of services, he said, adding that the lack of demand-side stimulus — such as tax benefits for individuals — means the immediate impact could be limited.
China’s top leaders pledged to make boosting consumer spending a greater policy focus and highlighted the services sector in a Politburo meeting last week. The growth in service sales has consistently outpaced goods since the government began releasing the data in July last year, underscoring a change in consumer behavior.
China’s economy has performed unevenly this year, with exports and manufacturing showing strength while consumption has been weighed down by a prolonged real estate crisis.
But rising uncertainties over global demand could threaten even the brighter part of this lop-sided growth. Official data showed China’s factory activity contracted for a third straight month in July, a sign the country’s export machine might be cooling.
The State Council document focuses on improving services products in what Chinese state media including Securities Times have called the first comprehensive plan addressing services consumption. It encourages the development of companies that provide housekeeping services, elderly care and childcare, and pledges to increase the number of entertainment performances and movies.
It also vowed to allow more companies to enter the services sector and further open up sectors like telecommunications, education and medical services to foreign players.
The services sector’s share in the Chinese economy had grown steadily in the past few decades, until in 2020 the relative decline of manufacturing alarmed authorities. Since then, Beijing has put a greater focus on developing advanced factories to enhance its self-sufficiency in technology and move up the value chain, making it the centerpiece of a strategy to transform the No. 2 economy’s growth drivers.
To Beijing, productivity gains in the manufacturing sector are easier to come by, which can also boost China’s status in the global value chain. But some economists have argued that the services sector is key to providing jobs and resolving youth unemployment issues.
The International Monetary Fund has called on China to expand the services sector, which accounts for just over 50% of the economy, much lower than the 75% average for advanced economies.
The allocation of capital and labor across firms has been increasingly less efficient in the services sector, which still faces many restrictions on domestic and foreign entry as well as regulatory hurdles, IMF staff said in an article last week.
Signs of weak domestic demand can be found among services providers. In July, average selling prices were unchanged even though costs — for things such as raw materials, labor and transportation — continued to pick up, according to the Caixin purchasing managers’ index released Monday. A gauge of business confidence was the second-lowest since March 2020, ranked just above June’s low.
“Service providers still faced sales pressure, and they had limited room to increase their service fees.” said Wang Zhe, senior economist at Caixin Insight Group, in a statement. “Market optimism was limited.”
(Updates throughout.)
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