Fresh paradigm

Services are the new growth driver for Chinese companies in Africa

Medical services, financial services, telecommunications services and engineering services are an increasingly big part of the investments that Chinese companies are making in Africa.

The first Chinese medical team traveled to Africa 50 years ago. Now there are more than 1,000 professionals providing services in 42 countries, while Chinese local governments, non-profit groups and private companies are setting up small medical centers across the continent. In Tanzania, for example, the government of Jiangsu province has built a chain of clinics.

The Industrial and Commercial Bank of China, one of the "Big Four" Chinese banks, is directly involved in providing financial services across the continent thanks to its stake in Standard Bank of South Africa. ICBC is the biggest shareholder in Standard Bank, with a 20 percent stake it acquired in 2007.

In August, Ethiopia signed a $800 million deal with Chinese telecommunications firm ZTE to build a 4G mobile network in Addis Ababa and a 3G network across the rest of the county. Another Chinese company, Huawei Technologies, will be involved in the other half of the $1.6 billion project.

All these investments are part of China's push to invest in services, both overseas and at home as it seeks to shift its pattern of economic growth.

This push was visible in Qingdao, a seaside Chinese city made famous by a beer brand last month. It is in Qingdao, about half way between Beijing and Shanghai, that Wang Jianlin wants to build a world-class movie town. Thanks to his Dalian Wanda group, Wang is the richest man on the Chinese mainland for the time being.

To mark this decision, Wang brought down some of the most famous movie stars in the world. Leonardo DiCaprio and Nicole Kidman were there. Harvey Weinstein and Kate Beckinsale were there. So were Ewan McGregor, John Travolta, Zhang Ziyi, Jet Li and Tony Leung. They were mostly for decoration. Wang was really the star of this particular show.

The Dalian Wanda group is a real estate-to-entertainment conglomerate that also happens to be the largest owner of cinemas in the world after it purchased AMC Entertainment's collection of theaters in the US.

Wang brought all these celebrities to China for a big party to announce an $8 billion mega studio and theme park. The tentatively named Qingdao Oriental Movie Metropolis and its 20 film studios and theme park would add significantly to the services column in China's GDP calculation.

This year is particularly significant in that it is likely to mark a turning point in the development of the Chinese economy. For the first time in recent history, services could overtake industry. In 2012, services accounted for 44.6 percent of China's gross domestic product while industry was responsible for 45.3 percent. Numbers for 2013 are not out yet but services have been growing faster than industrial production.

"The service sector is not that mature when compared to the industrial sector," says Zhao Hong, a researcher at the East Asian Institute of the National University of Singapore. "It is still small but has potential because China is adjusting its economic structure."

Services account for a larger portion of economic output in the more developed economies. About two thirds of European output is services. In the US, it is about three quarters.

In China it is less than half, so the government is keen to expand the services sector. More services mean less reliance on manufacturing for growth. Also, services typically generate more jobs. At the same time, higher expenditures on services would signal that the Chinese consumer has stepped up to the plate.

African numbers

In Sub-Saharan Africa, services account for about 57 percent of GDP (as of 2010) but the number is skewed by the sizes of the national economies. Agriculture output, for example, accounts for about 12 percent of GDP compared with just 3 percent globally.

In South Africa, the most developed economy in the continent, services account for about 66 percent of GDP (as of 2011).

Gross domestic product is made up of the value of all goods and services produced in an economy. In simple terms, it is measured by adding consumption, investment, government purchases and net exports. The consumption category is further divided into goods and services.

Services include products such as insurance, healthcare, tourism and others. Filming a movie would be a service, as would be editing it. A typical tourist on a trip during the Chinese holiday week at the beginning of October could have bought airline or train tickets (both services) and hotel rooms (another service).

This push toward expanding the service sector was visible again about a week after the celebrity-heavy party in Qingdao. On Sept 29, the Shanghai Free Trade Zone was officially launched in much more subdued fashion. In an area of 29 square kilometers, the government plans to allow for full convertibility of the yuan, freer flow of capital, and banks that qualify will be allowed to do offshore business.

Companies will be allowed to import goods directly into the zone before going through customs, but it is service providers such as insurance companies and private hospitals that expect to see the most benefits. In theory, companies both domestic and foreign will be allowed to invest in banks, shipping, entertainment services, schools and more out of the zone. Even if there are more than 1,000 sectors that still remain off-limits to investors, the free trade zone will likely help develop the service industry, particularly if the pilot is rolled out nationwide.

A few days after the launch of the free trade zone, China went on holidays for a week to mark National Day. The holiday helped the services portion of the economy continue to grow after reaching a six-month peak in September. As it turns out, the number of tourists hit a record.

There were so many tourists that much of the feedback was negative, with many complaining that the more popular sites around the country were overcrowded, hotels were full and restaurants operating beyond capacity.

On the positive side, the growing number of tourists suggests Chinese people are willing and able to spend. It is not necessarily suggestive of a return to double-digit economic growth but it might be useful anecdotal evidence of ongoing growth.

And the latest numbers, both official and private, suggest China's services sector grew faster in September than it has in the past six months, even as growth in other areas remains slack due to weak demand at home and abroad.

The official purchasing managers' index for the non-manufacturing sector rose to 55.4 in September from 53.9 in August. It was the highest reading since March, according to the National Bureau of Statistics that compiles the numbers with the China Federation of Logistics and Purchasing. A number above 50 represents growth.

"The index reflected strong growth in consumption services represented by retail, thanks to the holiday factor in September," says Cai Jin, vice-chairman of the China Federation of Logistics and Purchasing. "It also showed the restructuring policies had boosted demand in the services sector."

The HSBC/Markit Services PMI, which came out on Oct 8, painted a slightly different picture, coming in at 52.4 for September, compared with 52.8 in August, as both manufacturers and service providers raised their prices in response to higher costs.

Subdued growth

The services sector continues to grow but the growth is increasingly subdued.

"Combined with the gradual improvement of the manufacturing PMI, the Chinese economy is still on the way to modest recovery. But a more consolidated and sustainable recovery requires structural reforms," says Qu Hongbin, chief economist for China and co-head of Asian economic research.

More than underscoring a continuous rebound in economic activity, increasing non-manufacturing activity underscores the government's efforts to change the structure of the country's economy.

For the time being, the service sector remains mostly protected across the country. Foreign players that can invest with ease in most industrial sectors have a more difficult time investing in services such as banking, accounting or legal services. The new Shanghai Free Trade Zone could mark the beginning of a change and the opening of the sector to international competition, but there have been few details of what exactly the zone would do.

"The government is aware that they need to reform. They are losing capacity in the traditional industries," says Stuart Allsopp, head of Asia country risk and financial markets at Business Monitor International, a market intelligence firm.

The free trade zone is a move in the right direction, even if details remain sketchy. For example, Allsopp says, foreigners will be able to invest in things such as schools.

The current 12th Five-Year Plan (2011-15) calls for services to contribute about 47 percent of GDP by the end of the period. That would represent a small gain of about 2 percentage points from current levels but would cement services as the biggest single contributor to the country's GDP. Zhao says the target is very reachable. Within three to five years, he says, services could account for as much as 50 percent of the economy.

China's GDP in 2012 was $8.227 trillion. Services accounted for just under 45 percent of that, a little less than $3.7 trillion, according to official figures.

But these measurements can be subjective. Measuring GDP can be a difficult thing and determining what are services and what are goods requires myriad small decisions. Somebody has to make a decision about something that is not always clear-cut. And because avoiding double counting is key to calculating GDP, somebody has to make a decision about what to count. For example, if a tourist buys a plane ticket, is the fuel that the airline buys for that trip counted as goods, or is only the purchase of the ticket counted?

Allsopp prefers to look at private consumption to track the growth of services in the economy, and private consumption accounts for about 30 percent of GDP, much less than the services tab.

"We think the private consumption data is probably more accurate," Allsopp says. "The service sector is quite underdeveloped. It's not that it is not growing but, relative to the broader economy, it is slowing."

Despite the growth and the emergence of services as the largest single contributor to the country's GDP, services remain relatively underdeveloped in China, which has long focused on manufacturing as an engine of growth.

Change ahead

But this is changing both at home and abroad. China's foreign investments are increasingly focused on the service sector. This push matches China's interest to invest more abroad but also helps countries in places such as Asia and Africa develop their own service sectors.

More countries in the region are likely to emphasize services going forward but it will be a little bit like paddling against the current, Allsopp says.

"It is not something that Asia has a comparative advantage in," says Allsopp. Nevertheless, "as economies do develop, people tend to spend more on services".

The services sector accounts for between 40 to 50 percent GDP of most ASEAN countries, according to a paper published in July by the ASEAN Secretariat. The service sector is the fastest growing in the region. Expanding the trade in services among the 10 members of ASEAN - Singapore, Malaysia, Indonesia, Cambodia, Vietnam, Laos, Thailand, Myanmar, Brunei and the Philippines - is one of the key points of the upcoming ASEAN Economic Community, slated to start in 2015.

By 2008, about half of ASEAN FDI flows, $33.5 billion, went to the service sector. Conversely, the export of services from ASEAN to the world market has grown steadily, rising from just $68 billion in 2000 to $153 billion in 2007. By 2010, ASEAN countries removed most of the restrictions for investment in four priority service sectors - air transport, e-commerce, healthcare and tourism. By the end of this year, restrictions on the trade of logistics services should be lifted and all other services should be open by 2015.

Increasing integration between ASEAN and more advanced economies such as South Korea, Japan and China will help this process along. China, in particular, is undergoing this shift toward more demand-led production of services at the same time as most ASEAN economies.

On the positive side, this will mean that economies in the region will continue to benefit from ongoing growth and reform in China. The creation of the Shanghai Free Trade Zone, which puts emphasis on the trade in services, should help matters.

On the negative side, a slowdown in China would likely spread to economies across ASEAN almost instantaneously.

"The prospects of the APEC region are increasingly linked to China's outlook," says global ratings agency Moody's Investors Service in a recent report. Any slowdown in China has an immediate impact on economies in the region, particularly those in ASEAN that are increasingly integrated.

"In recent years, China's impact on the regional economy has been deeply profound and the stabilization in the country's growth cycle could help cushion domestic demand weakness across Asia," says Rahul Ghosh, of Business Monitor International in Singapore.

Despite the fact that services account for a majority of employment in China and that growth is visible, the services sector remains relatively underdeveloped compared with economies such as the US or Europe, where services account for about 75 percent and 60 percent of GDP.

Chinese Premier Li Keqiang has been vocal in advocating the growth of services. Speaking in May, he said that increasing the availability and quality of the country's service industries "will help unleash huge potential in domestic demand, and thus offer firm support for stable economic growth and structural optimization".

"China will further open up the service industry and pilot free trade experimental zones to tap development," he says.

More than 60 movie stars, including Leonardo DiCaprio, attended the opening ceremony of the Oriental Movie Metropolis in Qingdao, eastern China, on Sept 22.  Provided to China Daily

Deng Lipu, leader of a Chinese medical aid team to Zimbabwe, checks a young patient. Xu Lingui / Xinhua

 

(China Daily Africa Weekly 10/25/2013 page1)