The Service Sector in The Chinese Economy: A Geographic Appraisal

Eurasian Geography and Economics
ISSN: 1538-7216 (Print) 1938-2863 (Online) Journal homepage: http://www.tandfonline.com/loi/rege20
The Service Sector in the Chinese Economy: A

Geographic Appraisal
Enru Wang
To cite this article: Enru Wang (2009) The Service Sector in the Chinese Economy: A Geographic
Appraisal, Eurasian Geography and Economics, 50:3, 275-300
To link to this article: https://doi.org/10.2747/1539-7216.50.3.275
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The Service Sector in the Chinese Economy:

A Geographic Appraisal
Enru Wang1
Abstract: A U.S.-based economic geographer and observer of Chinas economy examines

the rapid expansion of the countrys largely overlooked service sector, at both the national and
regional levels. A particular focus of the authors research is on identifying regional varia-
tions in the development of services within the country and exploring some of the more
important contributing factors. Based on the findings, the paper also discusses structural shifts
that occurred in Chinas regional economies, disclosing inter alia that inequality in the contri-
Downloaded by [UNAM Ciudad Universitaria] at 07:29 04 December 2017
bution of services to GDP did not follow the same trajectory as that of employment in ser-
vices. Journal of Economic Literature, Classification Numbers: L800, O180, P230. 6 figures,
4 tables, 82 references. Key words: China, service sector, employment, GDP, FDI, regional
inequality, spatial concentration, economic base model, reform, exports, financial services,
real estate.
INTRODUCTION
T he service sector is by far the most important among the sectors in industrialized econo-
mies. According to the World Bank (2008), services now account for about 72 percent
of the total GDP and 72 percent of total employment in high-income countries, respectively
having grown from 59 and 64 percent in 1990. Over the same period, the GDP and employ-
ment shares of the industrial sector continued to shrink, from 32 percent and 30 percent,
respectively, to 26 and 25 percent (ibid). Meanwhile, in the economies of many developing
countries, the recent round of industrialization has also been accompanied by a significant
expansion of services.
As a rising economic power that has increasingly taken on the world, China is increas-
ingly identified by Western media as the most rapidly changing large economy (e.g., Elliot,
2007) The countrys astounding economic growth, accompanied by a profound structural
transformation that followed the 1978 reforms, has been reverberating around the world.
While China is now known as the worlds factory floor (Fishman, 2004) for its competi-
tiveness and capacity in manufacturing, questions naturally arise about the development of
the countrys service sector and its role in propelling economic growth and shaping the coun-
trys economic landscape.
There has been a vast outpouring of literature that examines the spatial dimensions of
Chinas economic development. Numerous studies have examined regional development,
especially regional economic inequalities (for recent examples, see Chan and Wang, 2008;
1Assistant Professor, Department of Geography, University of North Dakota, 221 Centennial Drive, Stop 9020,
Grand Forks, ND 58202-9020 (erwang@und.edu).
275
Eurasian Geography and Economics, 2009, 50, No. 3, pp. 275300. DOI: 10.2747/1539-7216.50.3.275
Copyright 2009 by Bellwether Publishing, Ltd. All rights reserved.
276 EURASIAN GEOGRAPHY AND ECONOMICS
Fan and Sun, 2008; Lu, 2008). Sectorally, manufacturing industries have been a focus of
study in the China geography literature (recent examples include He, 2007, 2008; He et al.,
2007; Wang and Lee, 2007; Yang, 2007; Yang and Hsia, 2007), and a limited but increasing
number of studies have examined the growth of specific components of the service industry,
such as retailing (see Wang and Jones, 2002; Wang and Zhang, 2006; Wang and Chan, 2007),
finance (Zhao, 2003; Zhao et al., 2004; Wang et al., 2007), and internet service (Zhang, 2006,
2008).
However, relatively little research has been focused on the service sector as a whole.
There are exceptions, however. Gongs (2002) study of 84 large cities (with a half million or
more non-agricultural population) shows that Chinas service sector became the major source
of job growth in the 1990s. The studies by Lin (2004, 2005) and Yang (2004) present similar
findings, although they focus on Guangzhou, the largest city in southern China. Commend-
ably, all of these studies have related the growth of services to evolving government policies
and highlighted the importance of state intervention. They have also attempted to compare
the Chinese experience with that in other parts of the world, but their conclusions differ.
While Gong (2002, p. 85) argued that China is more similar to developed countries (with a
time lag) than to developing countries in the path of the sectoral labor transition, Lin (2004,
2005) emphasized that the tertiarization process unfolding in China has simultaneously
accompanied industrialization and does not follow the Western model of linear, sequential,
and progressive transition from the primary to the secondary and then the tertiary sector.
By showcasing the impressive structural transformation (especially the tertiarization) of
the metropolitan economy,2 the studies by Gong, Lin, and Yang have contributed to the liter-
ature by expanding our knowledge of the spatial dimension in the development of services.
Despite the useful insights they provide, however, these studies present only a partial picture
of the development of the service sector in China. The tertiarization pattern and process in a
metropolitan economy cannot be generalized to the country as a whole, as in Chinas case the
economic structure and the extent of economic restructuring in major metropolitan centers
are noticeably different from those at the national and regional levels. More specifically, eco-
nomic tertiarization has progressed much further in Chinas large cities than in the country as
a whole. Therefore, the focus on large cities understandably leaves out certain dimensions of
service development, and thus does not reflect the situation in the entire country.
This paper examines the development of the service sector at both the national and
regional scales. By exploring the fundamental features of the development of services at
these scales, the paper supplements the studies by Gong, Lin, and Yang, and demonstrates
that a multi-scalar analysis is necessary and timely. It demonstrates that, at the national level,
the contribution of the service sector to the economy is much lower than what many would
expect, in contrast to the impression left by the metropolis-based analyses. The paper also
analyzes pertinent regional variations in service development and sheds light on the factors
that contribute to the convergence or divergence in the regional development of services.
After the introductory notes in this section, I begin with a discussion of the theoretical
background of service development and policy contexts in China, followed by a presentation
of research methods and data. The paper then proceeds with a national-level account of
2Some recent studies on Chinese cities have identified the service sector as the major locomotive driving the
urban economy and have highlighted tertiarization as a major feature of urban economic and spatial transformation
(Wei and Li, 2002; Yan et al., 2002; Zhou and Ma, 2002; Li and Wu, 2006). At the provincial level, Pannell and
Schmidt (2006) also demonstrated that tertiarization was the most dramatic aspect of structural change in Xinjiangs
economy. Nevertheless, these studies are less focused on the service sector than the studies by Gong, Lin, and Yang.
ENRU WANG 277
service development and advances some possible explanations for the observed patterns.
Another major part of analysis is devoted to the measurement and explanation of evolving
regional differences in the development of services. I conclude with a summary of some pre-
liminary findings and a discussion of policy implications of the current study as well as
potential venues for future research.
THEORETICAL AND POLICY CONTEXT
Economic Base Theory
The most prominent theory that explicitly addresses the role of services in the economy
is the economic base model. Conventional economic base theory dichotomizes the economy
into two sectors: basic (mainly agriculture and manufacturing) and nonbasic. Basic activities,
by producing goods that are consumed outside the region or country, constitute the economic
base (i.e., export base) of the regional or national economy and function as the motors of
economic growth. External markets are assumed to be the only forces driving local produc-
tion and generating income. Nonbasic activities, which have frequently been equated to ser-
vices, are relegated to an entirely passive and therefore minor role in the economy. Labeled
as secondary, residual, and even parasitic, nonbasic activities are thought to serve only
local markets (within a limited distance) and do not actually add to wealth in the economy,
although they can help to realize the value of wealth created elsewhere (Williams, 1997, p.
14; see also Tiebout, 1956; Isard, 1960; Bryson and Daniels, 1998; Kay et al., 2007).
Explicitly or implicitly, regional policies in many countries have been anchored in the
economic base model, with the assumption that only growth in agriculture and manufactur-
ing could lead regional development, and service activities would automatically follow
(Illeris, 2005a, p. 622). In West European countries, for instance, regional policies were
established in the 1950s and 1960s primarily to stimulate manufacturing industries and influ-
ence their location (Illeris, 2005b). With increasing recognition of the importance of services
in the economy, however, the economic base theory has been subjected to criticism for its
simple dichotomization of the economy and relegation of services to a subordinate and deriv-
ative role. In a widely cited article on services, Urry (1987, p. 6) argued that it is incorrect to
view services as essentially nonbasic by contrast with supposedly basic manufacturing
industry (cited in Bryson and Daniels, 1998, p. xvi).
Illeris (1996, 2005b) has proposed that the economic base model needs to be modified in
several ways in order to remain relevant and applicable in the 21st century. First, some ser-
vice activities that are able to sell their products outside of their home region or country
should be included in the basic sector. Including, but not limited to, wholesaling, tourism,
and some producer services which can be communicated electronically at low cost (Illeris,
2005b, p. 450), such basic-sector services constitute an important component of the eco-
nomic base of a region or nation along with agriculture and manufacturing.
Second, a new category of service activities needs to be defined to form a new main sec-
tor, namely the indirectly basic sector. These services activities sell their products only
within their own region, but by creating and sustaining the linkages between production and
consumption, they constitute a necessary condition for competiveness of the basic sector.
Such services may consist of producer services that are sold to local firms, and services
activities whose products are important for the presence of certain households, whose
qualified workers again constitute a necessary condition for the competitiveness of firms
which sell outside their own region (Illeris, 2005b, p. 452).
Third, within the category of the nonbasic sector, the role of the services that serve the
households in their own region is not totally passive. Demands for such services may change,
as do supply factors, which will lead to regional changes in the non-basic sector (and thus
further affect basic sectors).
The modified economic base model outlined above has some important implications. In
the conventional economic base model, the role of services in regional economy was concep-
tualized primarily to serve the local market (as consumer services for local households),
which indicates that the size and growth of the service sector was dependent on the size and
purchasing power of the local population. It can be further derived that services locate pro-
portionately to the density of population and generally do not create differences in develop-
ment levels of regions (Stare, 2005). These assertions and implications of the conventional
model have proved to be increasingly problematic in the era of economic integration and glo-
balization. The modified model eliminates some of the restrictive assumptions and thus over-
comes their related limitations. It suggests that an increasing number of service activities,
especially the basic ones that serve external markets, may locate independently (or less
dependently) of population density (ibid.). Indeed, empirical studies repeatedly reveal that
some services, especially the knowledge-intensive business ones, display an uneven pattern
of development with a tendency toward spatial concentration (Coffey and Polese, 1989; Coe,
1998; Wernerheim and Sharpe, 2003; Jennequin, 2008). Given their increasing importance in
the economy, the spatial concentration of these services could lead to the divergent regional
development of services. This assumption will be examined in this paper, within the context
of China.
Changing Policy Context
Chinas economic policy during the Maoist period was known for its principal objective
of rapid industrialization, with a strong emphasis on the industrial sector, and particularly
heavy industry (e.g., see Lyons, 1987). Policymakers and economic planners regarded ser-
vices as non-productive activities, so that investments in services were minimized in order
to increase capital accumulation and maximize input in the industrial sector (Kirkby, 1985;
Chan, 1994). This pro-industry policy orientation, which largely resonated with the eco-
nomic base theory, had profound impacts on the structure of the socialist economy. As of
1978, industrys value-added accounted for 48 percent of Chinas total GDP, much higher
than that of low-income countries (24 percent) and the world average (37 percent) (World
Bank, 2008). Meanwhile, services contributed only 24 percent of value-added to Chinas
total GDP, much lower than the world average (56 percent) and that of low-income counties
(41 percent).
During the process of economic reform that commenced in the late 1970s, Chinas eco-
nomic development strategy has gradually shifted from the one that suppressed services in
favor of heavy industries to an approach that is more sectorally balanced. From the early
1980s, service activities began to be allowed to exist and grow for practical reasons.3 One
solution that the government adopted was to open the state-monopolized economic sectors,
especially the retail trade, to private participation (Wang and Chan, 2007). Nonetheless, the
3Largely due to the increasing demand for consumer goods and services resulting from economic growth and
rising personal incomes and the mounting unemployment pressure in Chinas cities caused by the return flow of rus-
ticated urban youths displaced earlier by the Cultural Revolution.)
ENRU WANG 279
service sector did not receive much policy attention in Chinas economic reforms during the
1980s (i.e., rural reforms were emphasized in the early 1980s, and urban reforms from 1984).
Entering the 1990s, urban unemployment pressure continued to mount in China, as the
government was determined to deepen the reform of state-owned enterprises (SOEs),
which resulted in massive layoffs in the secondary sector. Many of these laid-off workers
found new job opportunities in the service sector. Meanwhile, the demand for services by
both households and firms continued to expand rapidly along with strong economic growth
and rising personal incomes. The economic and social benefits of the service sector in cul-
tivating economic growth, improving peoples standards of living, and providing job
opportunities for unemployed industrial workers, urban youths, and rural migrants have
been increasingly recognized (Gong, 2002). In 1992, the Central Committee of the Com-
munist Party of China (CCP) and the State Council jointly issued Decisions on Accelerat-
ing the Development of the Tertiary Sector (the 1992 Decisions hereafter), in which the
goals, tasks, and policy measures guiding service development to the year 2000 were
listed. The document has inter alia proposed to accelerate tertiary sector growth above that
of the primary and secondary sectors during the 1990s. The 1992 Decisions in fact was the
first important policy initiative dealing with the service sector, and indicates a favorable
turn of the governments attitude toward that sector (Gong, 2002, p. 85). In the aftermath
of the 1992 Decisions, many provincial and local governments established offices devoted
to tertiary industries (Guo, 2006).
In September 1997, the concept of modern services4 first appeared in the Report to the
15 National Congress of the CCP. Three years later, developing modern services and
th
revamping traditional services became a policy goal promulgated in the 10th Five-Year Plan
and approved by the Fourth Session of the Ninth National Peoples Congress on March 15,
2001.
In the early years of the 21st century, developing an effective service sector became a pri-
ority from both an economic and a political perspective. In its circular No. 98 dated
December 20, 2001, the General Office of the State Council forwarded to ministries and pro-
vincial-level governments the Policy Suggestions on Accelerating the Development of Ser-
vices during the Tenth Five-Year Period (General Office, 2001). The document (2001
Policy hereafter), prepared by the National Planning Commission (now the National Devel-
opment and Reform Commission) on the eve of Chinas accession to the World Trade Orga-
nization (WTO) in December 2001, is the second important policy guide for the development
of the service sector (after the 1992 Decisions). The 2001 Policy set goals for service devel-
opment during 10th Five-Year Plan period (20012005), and advanced some policy recom-
mendations, which included restructuring of the service industry and promoting modern
services, improving service employment, expediting the reform of SOEs, opening more ser-
vice fields to domestic and foreign investors, and more (ibid).
In the Eleventh Five-Year Plan for National Economic and Social Development,
approved on March 14, 2006 by the Fourth Session of the Tenth National Peoples Congress,
one major chapter is devoted to listing goals, priorities, and policy recommendations for the
developing service industries. The plan endeavors to increase the shares of services in GDP
and in total employment, respectively, by 3 percent and 4 percent in five years by 2010; and
4This term, although frequently appearing in current government documents, has never been officially defined,
but was largely meant to include producer services such as finance, insurance, real estate, logistics, information and
telecommunication, accounting, and legal services.
by 2020, the value-added of the service sector is projected to account for over 50 percent of
Chinas total GDP (Xinhua News Agency, 2006). Following the directions and guidelines of
the Eleventh Five-Year Plan, the State Council issued Opinions on Expediting Development
in the Service Sector in March 2007 (State Council, 2007; 2007 Opinions hereafter). In
the 2007 Opinions, the State Council urged ministries and provincial governments to under-
take specific actions to expedite the development of service industries, including further
expansion of the sector, improvement of its structure, and implementation of policies prefer-
ential to the sector. The State Council also authorized the creation of a national leading group
to supervise and coordinate the development of the service industry (ibid). The leading group
was established in May 2007. Headed by a vice-premier, it comprised committee members
who were ranking officials of various ministries and departments of the central government.
Provincial governments were urged to establish corresponding leading groups to guide the
development of local services.
In addition to the above policy documents, which provided general policy guidelines,
the central government also has formulated some specific measures to promote the service
sector. In December 2007, the Ministry of Finance (MOF) established a special fund to sup-
port the development of the service sector, consisting of government reward funds, interest-
subsidized loans, and direct subsidies. The special fund provides support for service indus-
tries concerned with peoples livelihoods (e.g., community services, food distribution, etc.),
service industries that support agriculture and rural communities, commercial trade services
including third-party logistics and supply-chain distribution, business services, producer ser-
vices (including outsourcing, e-commerce, etc.), and other key services that require support
(MOF, 2007).
The State Council is clearly concerned about fulfillment of goals of the service sector set
forth in the Eleventh Five-Year Plan and the 2007 Opinions, as it has repeatedly urged local
governments to follow and implement decisions of the central government targeting the sec-
tor. More recently, on March 13, 2008, the General Office of the State Council issued a circu-
lar entitled Implementing Opinions on Several Policy Measures for Accelerating the
Development of the Service Industry. In the circular, the State Council urged provincial
governments and various ministries and agencies to formulate or revise plans for developing
the service industry and adjust industrial policies to deepen the reform of the sector by relax-
ing entry barriers and speeding up the reform of state-owned service enterprises. It further
directed to open the service sector to foreign investors and encourage service outsourcing, to
cultivate leading enterprises and brand names and to encourage innovations, to increase cap-
ital investment in the service sector, and to create a policy environment supportive of the
development of service industries (General Office, 2008).
To summarize, the service sector is now receiving the intense attention of the govern-
ment. The increasing emphasis on services from policymakers, especially the ones at the
central-government level, reflects both a rediscovery of the importance of services in eco-
nomic development and a perception of their present low status in the economy. In light of
the above, it is not unreasonable to suggest that we can expect to see even more government-
designed policies and measures in the future aimed at stimulating the growth of the sector.
While it may be too early to assess the effect of recent policy initiatives, this study attempts
to contribute to a deeper understanding of the trends observed in the development of the sec-
tor.
ENRU WANG 281
RESEARCH METHODS AND DATA
As noted above, this study complements the existing research on Chinas service sector
by providing a multi-scalar analysis and examining relevant trends at both the national and
regional levels. The expansion of the service industry at the national level and its status in the
national economy are examined first, using longitudinal data and a comparison with other
countries in the world. The analysis then turns to regional trends in the development of ser-
vices, and more specifically, to the 31 provincial-level administrative units in Mainland
China. Indicators of development include the shares of total regional employment and GDP
registered by the services sector. Inter-provincial variations in service development are mea-
sured using a variety of spatial statistical methods that include the coefficients of variation
and localization, as well as the location quotient. The coefficient of variation (CV) is a ratio
index of dispersion that has been widely used to measure inequalities in regional develop-
ment, and is simply calculated as the standard deviation divided by the mean (see, for
instance, Lu and Wang, 2002; Yu and Wei, 2003; Stare, 2005; Ye and Wei, 2006; Chan and
Wang, 2008; Fan and Sun, 2008). Ranging from 0 to 1, a larger value of CV indicates a
higher degree of inequality in regional development.
Another index used to measure the trend in overall regional variations in service devel-
opment is the coefficient of localization (CL). A type of Gini coefficient, the CL measures
the overall spatial concentration of a phenomenon of interest (employment or GDP in this
study) in relation to that of a base magnitude (Joseph, 1982; Ford and Smith, 2008).5 It is cal-
culated by summing the positive deviations of the regional percentage of employment/GDP
in the service sector from the regions overall share of national employment/GDP and divid-
ing the total by 100. Similar to the CV, CL values range from 0 to 1. The lower the index, the
less concentrated the sector; thus a value of 0 would indicate that the sector is distributed
among regions in the same way as total employment or total GDP. Similarly, higher CL val-
ues would mean a higher degree of spatial concentration of service employment or service
GDP.
While the CV and CL indices measure overall regional variations in service develop-
ment, they do not provide any assessment of the performance of individual regions. Thus, the
location quotient (LQ) is used to evaluate the extent to which the share of service
employment/GDP of a particular region departs from the national average. The LQ is calcu-
lated by dividing the proportion of a regions employment/GDP in the service sector by the
proportion of national employment/GDP in that sector.6 The values of LQ can range from
zero to infinity, with an LQ equal to 1 meaning the proportion of employment/GDP in the
service sector for a region is equal to the national average. Whereas an LQ greater than 1
indicates relative concentration of service activities in a region, a value of <1 would suggest
an underrepresentation of the service industry in that given area.
The study covers a period of nearly three decades of economic reform, i.e., from 1978/
1979 to 2007, the year for which the most current statistical data are available in early 2009.
The analysis is based on data from government statistics. Comprehensive Statistical Data
and Materials on 50 Years of New China published by the National Bureau of Statistics of
China (NBSC, 1999), provides data on employment, GDP, and population through the year
1998. Additional data are collected from Chinese national (NBSC, various years) and
5When employed in the study of industry, the CL also may be referred to as the coefficient of industrial con-
centration (Joseph, 1982; Beyers, 2007).

6For empirical applications of LQ, see Yu and Wei (2003), Ye and Wei (2006), and Ford and Smith (2008).
provincial statistical yearbooks of various years, as well as from the World Banks World
Development Indicators (e.g., World Bank, 2008), which provide the basis for international
comparisons.
Nonetheless, data availability on spatial distribution of services in China, especially the
lack of disaggregated information at the regional level, presents a major obstacle to empirical
analysis. For instance, data for most individual service activities are not reported in the gov-
ernment publications. Therefore, it is impossible to fully evaluate the contributions of indi-
vidual activities, especially of those modern services or producer services to the overall
growth of the service sector, despite the increasingly frequent use of these concepts in gov-
ernment documents.
For the convenience of analysis, this paper, following the government statistics of China,
uses the tertiary industry to represent the service sector. That latter presently includes such
categories as: (1) transportation, storage, postal and telecommunications; (2) information
transmission, computer services, and software; (3) wholesale and retail trade; (4) hotel and
catering; (5) finance and insurance; (6) real estate; (7) leasing and business services; (8) sci-
entific research, polytechnic services, and geologic surveying; (9) water management, envi-
ronment, and public utilities; (10) other services for residents; (11) education; (12) public
health, social security, and social welfare; (13) culture, sports, and entertainment; and (14)
governments and social organizations.7
THE SERVICE SECTOR IN CHINAS NATIONAL ECONOMY
The service sector in China has continued to grow during the three decades of economic
reform. As shown in Figure 1, shares of both employment and GDP have recorded rapid
growth, respectively rising from 12.6 percent and 21.6 percent in 1979 to 32.4 percent and
40.1 percent in 2007. Several economic factors have been important in boosting the growth
of services. First, the rise of the service sector has been driven by growth in income. As per-
sonal income rises, the demand for services of various kinds clearly also increases. Many ser-
vices are characterized by a high income elasticity of demand (George et al., 1992; Illeris,
2007), implying a tendency toward rising shares of services in total expenditure as income
increases, and thus a tendency of stronger growth in these service activities. Second, the
growth of other sectors, especially manufacturing, has fueled the increased use of services as
basic inputs for those sectors. Third, increasing international trade in services and outsourc-
ing of service activities to countries such as China contributes to the growth of the service
sector. In addition to these demand-side factors, some supply-side factors also play an impor-
tant role. Technological development, for instance, facilities the growth especially of such
knowledge-intensive services as communications, information technology and research, and
7From 1985, Chinas National Bureau of Statistics began to classify GDP into three sectors: primary (agricul-
ture, forestry, animal husbandry, and fisheries), secondary (industrial and construction enterprises), and tertiary (all
other economic activities not included in the primary and secondary sectors). Since then, the tertiary sector was
viewed as equivalent to the service sector. After 2003, when the NBSC began to use the new Industrial Classifica-
tion for National Economic Activities (GB/T4754-2002), the scope of the tertiary sector changed slightly, as ser-
vices for agriculture, forestry, animal husbandry, and fisheries were returned to the primary sector and
international organizations were added to the tertiary sector (see Table 2 in the next section of this paper). There-
fore, the scope of the service sector and tertiary sector now differ slightly. Nonetheless, the overall quantitative
discrepancy between the two categories is very small (for a detailed discussion, see Xu, 2000).
ENRU WANG 283

Fig. 1. Share of services in Chinas total GDP and employment, 19792007, in percent. Sources:
Compiled by author from data in NBSC (2008).
business and financial services. Clearly, the aforementioned reforms and policy initiatives
designed to promote the development of services also have played an overall positive role.
From a comparative perspective, however, the share of the service sector in Chinas
national economy is considerably lower than that in many other countries. As shown in Table
1 (compiled primarily from World Bank, 2008), in 1980, the value-added of services
accounted for only 21 percent of Chinas total GDP, much lower than the world average of 56
percent, and only slightly more than half of that in low-income economies. Over the subse-
quent nearly three decades, the Chinese economy has experienced profound structural shifts,
as the service sector has been grown more rapidly than that in many other countries. Still, as
of 2007, when per capita GDP in China had reached a level close to that in middle-income
economies, the value-added of services only accounted for 40 percent of countrys GDP, sig-
nificantly below the 59 percent of middle-income economies.
Many factors explain the relatively low share of services in national economic output,
some of which are worth noting in this paper. First, the service sector inherited from the
planned economy was extremely undersized and outdated. Despite its impressive growth
over the past three decades, it will simply take more time for this sector to assume a truly
substantial share of national output. The second factor relates to the low involvement of
Chinas service sector in the global economy. The percentage of services in Chinas exports
is considerably lower than that of the rest of the world (Table 2, compiled principally from
World Bank, 2008). That share has even declined since the 1990s as China continued to gain
importance as a global manufacturing powerhouse and consistently encouraged the expan-
sion of exports as an engine driving overall economic growth. In a similar vein, the ratio of
service exports to Chinas GDP has been consistently below the world average. These figures
(low percentage of services in total export and low percentage of service exports among total
GDP) reflect the low level of globalization of Chinas service sector, which may be both a
Table 1. Per Capita GDP and Sectoral Composition of Economic Output in China and
Selected World Country Groupings, 19802007
Middle-
High-income Low-income
GDP measure China income World
countries countries
countries
1980
Per capita GDPa 186 16,894 302 991 4,007
Agriculture, value-addedb 30 4 37 18 7
Industry, value-addedb 49 37 24 41 37
Services, value-addedb 21 59 39 41 56
1995
Per capita GDPa 658 22,907 310 1,227 4,778
Agriculture, value-addedb 20 2 32 13 4
Industry, value-addedb 47 30 23 35 31
Services, etc., value addedb 33 68 45 51 65
2007
Per capita GDPa 1,791 28,777 415 1,997 5,964
Agriculture, value-addedb 12c 2d 25 8 3d
Industry, value-addedb 48c 26d 28 32 28d
Services, etc., value-addedb 40c 72d 48 59 69d
aIn constant 2000 U.S. dollars
bIn percent of GDP.
cData for 2006.
dData for 2005.
cause and a consequence of the sectors low standing in the national economy. Meanwhile,
the low ratio of service exports to total service GDP also indicates that, compared to many
other countries, Chinas service sector is less export-oriented; this lack of export-orientation,
in turn, implies a possible absence of policy priority.
Another indicator of the globalization of Chinas service sector is foreign direct invest-
ment (FDI). Although the service sector received little FDI throughout the 1980s, the hous-
ing reforms of the 1990s led to a booming market, and a considerable amount of FDI began
to flow into the real estate industry. In 1995 and 2007, the real estate industry alone attracted
20 percent and 23 percent, respectively, of the total FDI utilized (NBSC, 2008). The multi-
tude of other service industries, however, continued to receive only a very small share of
FDI; overall, the service sector received only 30 and 41 percent of FDI in these two years,
while 68 and 55 percent went to industry.
The third factor that explains the relatively low share of services in the national eco-
nomic output has to do with philosophical and institutional constraints that can hinder the
development of services. The traditional philosophy of development that neglected the
importance of services continued to influence local governments and officials in the reform
era, (Jiang and Li, 2004), forming a path dependency in local economic development. Some
institutional constraints also continue to exist. For much of the three decades of the open-
door policy, the service sector has been largely protected from foreign ownership. By the
ENRU WANG 285
Table 2. Service Exports as a Percentage of Total Exports and Total and Service GDP in
China and Selected World Country Groupings, 19802007
High- Middle-
Low-income
1982 China income income World
countries
countries countries
1982
Service exportsa 2,512 349,060 6,202 51,270 407,322
Services in total exportb 10.6 19.6 14.8 13.0 18.4
Service export to GDPb 1.24 4.07 2.41 2.09 3.66
Service export to total service GDPb 5.72 7.27 7.35 5.26 7.03
1995
Service exportsa 19,130 1,055,335 13,110 187,556 1,258,100
2007
Service exportsa 91,999 2,274,975 33254 528,572 2,838,658
aIn million current U.S. dollars
bIn percent.
1990s, as part of its efforts to accede to the WTO, China promised to eliminate most restric-
tions on foreign entry and ownership within a few years following its accession (2001)a
commitment that represented the most radical services reform program negotiated in the
WTO (Mattoo, 2003, p. 299). Indeed, some service industries, such as retailing (Wang and
Chan, 2007; Wang and Song, 2008) and real estate (Luo et al., 2001; Li, 2005), were opened
to foreign investment and have evidenced increased competition and accelerated growth
since then. However, the restrictions on foreign ownership seem to be more persistent in
industries such as insurance and media and telecommunications. In media and telecommuni-
cations, in particular, the state still retains a monopoly, and other forms of ownership (includ-
ing domestic non-state ownership) are largely prohibited. The late and slow opening of the
service sector, and the existence of monopolies over certain subsectors, have been perceived
as constraints on the improvement in productivity and more rapid growth in the sector (Jiang
and Li, 2004).
In addition to their rapid growth but still relatively small size in the national economy,
another characteristic associated with the development of Chinas service industries is that
the service sector as a whole has played a more prominent role in creating jobs than contrib-
uting to GDP growth (see above). In other words, the service sector has been more of a job
factory than an output (or GDP) generator. From 1978 to 2007, service employment
increased more than fourfold in absolute terms, boosting its share in total employment from

Fig. 2. Annual increase in labor productivity in the service sector by province and the overall
economy, 19782007, in percent. Symbol X denotes the national average.
12 to over 32 percent. Meanwhile, the share of services in total GDP increased over the same
period by only 16 points from 24 to 40 percent. As shown in Figure 2, for most provincial
regions and the national average as well, the annual increase in labor productivity (measured
as GDP per employee) in the service sector is noticeably lower than that in the overall econ-
omy. The exceptions include the three centrally administrated municipalities (Beijing,
Tianjin, and Shanghai), and three provinces in Northeast China (Lining, Jilin, and
Heilongjiang).8
REGIONAL TRENDS IN SERVICE DEVELOPMENT
We now turn to regional trends in service development in China, with a focus (as at the
national level) on employment and output/GDP. For both employment and GDP, I will assess
both the overall spatial concentration of services and trends in inter-provincial inequalities in
service development over time.
8Beijing, Tianjin, and Shanghai have been leading the structural shift of the economy, and represent the highest
levels of service development in China. It is also not surprising to observe high labor productivities in services rela-
tive to that in the overall economy in the three northeastern provinces, as the Northeast, one of the most important
industrial bases in pre-reform China, has experienced a continuous decline in industrial production (and in its signif-
icance) due to the poor performance (and later failure) of many SOEs.
ENRU WANG 287

Fig. 3. Regional inequality in service employment, 19792007 (CV and CL).
Regional Inequality and Spatial Concentration in Service Employment
The coefficient of variation (CV) and coefficient of localization (CL) values plotted in
Figure 3 indicate shifts in the levels of regional inequality and spatial concentration in the
share of service employment. Both the CV and CL exhibited a decrease during much of the
study period, (except for an upturn more recently), indicating that levels of regional inequal-
ity and spatial concentration of service employment have largely declined over time. At the
initial phase of the economic reform in 1979, the level of inter-provincial inequality in the
share of service employment was fairly high (CV = 0.51), as was the overall spatial concen-
tration of service jobs (CL = 0.28). By 2007, the values of these indices had decreased to
0.22 and 0.14, respectively.
To understand the forces contributing to the dynamics of the spatial concentration and
overall regional inequality of service employment, one needs to examine the performance of
individual provincial regions. Location quotients are calculated (Table 3) to determine in
which provinces the greatest relative changes in the share of service employment occurred
during the period of study. As can be seen, there is a general trend toward convergence in the
service employment across provincial regions.
In 1979, provincial-level regions that exhibited high concentration of employment in
services included the three centrally administrated municipalities (Beijing, Tianjin, and
Shanghai), the three provinces in Northeast China (Jilin, Heilongjiang, and Liaoning),
Shanxi, and Inner Mongolia. These latter (non-municipality) regions were the most impor-
tant centers of manufacturing and energy production during socialist period, indicating that
distribution of the limited amount of employment in the service sector was closely associated
with the locations of industry.
Furthermore, as most programs of industrialization were located in cities (Ma, 2006), the
1979 location quotients in Table 3 also imply that there might be a high degree of
Table 3. Location Quotients for Service Employment, 19792007a

Provincial region 1979 1993 2007 TREND79-93 TREND93-07
Beijing 2.59 2.13 2.20 CD
Tianjin 2.24 1.58 1.24 CD CD
Hebei 0.76 0.80 0.78 CU
Shanxi 1.26 1.07 0.99 CD CD
Inner Mongolia 1.19 1.18 0.94 CD
Liaoning 1.48 1.27 1.26 CD
Jilin 1.56 1.19 1.04 CD CD
Heilongjiang 1.49 1.23 0.98 CD CD
Shanghai 1.77 1.44 1.67 CD DU

Jiangsu 0.88 0.94 1.04 CU CU
Zhejiang 0.76 0.87 1.08 CU CU
Anhui 0.66 1.00 0.88 CU DD
Fujian 0.94 1.10 1.02 DU CD
Jiangxi 0.80 0.88 0.99 CU CU
Shandong 0.70 0.67 0.93 DD CU
Henan 0.73 0.73 0.73
Hubei 0.73 0.98 1.20 CU DU
Hunan 0.67 0.74 0.92 CU CU
Guangdong 1.03 1.11 1.15 DU
Guangxi 0.73 0.89 0.76 CU DD
Hainan 1.11 1.22 1.11 DU CD
Chongqing 0.80 1.08 n.a. CU
Sichuan 0.75 0.74 1.02 CU
Guizhou 0.57 0.62 1.10 CU CU
Yunnan 0.51 0.54 0.68 CU CU
Tibet 0.99 0.79 0.96 DD CU
Shaanxi 0.91 0.86 0.98 DD CU
Gansu 0.83 0.70 0.96 DD CU
Qinghai 0.85 1.26 1.08 DU CD
Ningxia 0.98 0.93 0.96 DD
Xinjiang 1.12 1.05 1.06 CD
aCD = converging downward; CU = converging upward; DD = diverging downward; DU = diverging upward; -- =
stable trend with little change (< 5 percent).

Sources: Compiled by author from NBSC, 1999, 2008.
concentration of service jobs in cities and in provincial regions with higher proportions of
urban population. To test this hypothesis, Pearsons correlation coefficients were calculated
for the relationship between the share of service employment and the level of urbanization.
For the year 1979, the coefficient is 0.99 and statistically significant at the 1 percent level,
implying a very strong correlation between the two variables. Over time, however, the
strength of the correlation tends to decrease. For the years of 1993 and 2007, Pearsons r was,
respectively, 0.864 and 0.782, both still statistically significant at the 1 percent level.
ENRU WANG 289

Fig. 4. Regional inequality in service GDP, 19792007 (CV and CL).
Provincial regions with high concentrations of service employment in 1979 saw their
lead dwindle subsequently, as lagging provinces began to catch up with the national average.
From 1979 to 1993, as shown in Table 3,9 18 provincial regions converged (via upward or
downward dynamics) toward the national average, 8 showed signs of divergence, and
another 3 largely remained stable. This trend continued in the second half of the study period,
in which 20 provincial regions (further) converged, while only 4 (further) diverged, and 5
displayed a stable trend with little change.
Regional Inequality and Spatial Concentration of Service GDP
While service employment reported a clear pattern of continuing convergence and de-
concentration across provincial regions, the trajectory of regional inequality in service GDP
is more complex (Fig. 4). For the year 1979, the values of CV and CL (respectively, 0.17 and
0.12) are only moderate compared to those based on employment data. Subsequently, both
the CV and CL declined gradually, suggesting a decreased degree of regional inequality and
spatial concentration of service GDP. However, by 1992, the CV hit bottom (with a value of
0.11), followed by the CL (0.09) in 1993; since then, both indices have risen continuously,
reaching 0.20 and 0.13m, respectively, in 2007. These values are higher than those for 1979.
Thus, the question arises of why regional inequality and spatial concentration of service GDP
(measured using the CV and CL) have displayed such a V-shaped pattern over the last nearly
three decades. In other words, why does the trajectory of regional inequality and spatial con-
centration of service GDP differ from that of service employment, despite the fact that the
same measures are used?
9The year 1993 is significant, partly because it is the mid-year of the study period and also because it repre-
sents a turning point in the evolution of regional inequality in service GDP (as shown below).
Many factors may have contributed to the more complex pattern of regional inequality
and spatial concentration of service GDP. One has to do with the nature of industrialization
and structural change in Chinas economy. As noted earlier, prior to the economic reform,
Chinas industries were heavily concentrated in only a few provinces. This pattern changed
after the launching of the reform. With new industrial projects (especially many township
and village enterprises) being developed, a new round of industrialization took root and
began to spread in previously less industrialized regions. Initially (e.g., from 1979 to 1992 or
1993), this process of industrialization increased personal incomes and therefore demand for
services in virtually every region of China. Rapidly growing industries have themselves
experienced the pressures of expanding demand for services, especially for the producer ser-
vices. These factors presented growth opportunities for services everywhere. The service
sector in large agricultural provinces such as Shandong, Henan, Sichuan, and Hubei, for
example, expanded rapidly during their industrialization, which contributed to the conver-
gence in service development. Indeed, as Lin (2004) has argued, the unique pattern of simul-
taneous industrialization and tertiarization in Chinas economic transformation distinguishes
it from the advanced Western economies that have undergone a linear, sequential sectoral
transition from primary to secondary and then the tertiary.
In the second period starting from 1992/1993, the previous trend seems to have reversed
course. The increasingly uneven distribution of manufacturing during the 1990s, as demon-
strated in the study by Ebenstein and Hanink (2008), could only lead to pronounced diver-
gence in service GDP.
The second factor that has contributed to the rebound in regional inequality and spatial
concentration of service GDP relates to the increasing concentration of some high value-
added services that are also relatively new in the economy. In order to test this hypothesis,
two service industriesfinance, and insurance and real estate (together referred to as FIRE
hereafter) were selected on the basis of data availability. These two industries generate
higher value-added than do many other services. For example, in the early 2000s, the GDP
output per worker in the two sub-sectors were, respectively, 11.1 and 11.7 times higher than
the service sector as a whole. Results based on available data reveal that since the 1990s
there has been an increasing spatial concentration of FIRE activities. In 1996, about 48.5 per-
cent of FIRE GDP concentrated in six provincial regions, including Shanghai, Shandong,
Jiangsu, Guangdong, Beijing, and Hebei. By 2007, the proportion increased by more than 10
percentage points and was almost 60 percent, with Hebei being replaced by Zhejiang. This
finding is consistent with recent empirical studies of other countries and regions (Coe, 1998;
Coffey and Polese, 1998; Wernerheim and Sharpe, 2003; Jennequin, 2008). Considering the
rising importance of the FIRE industries in the service sector and overall economy, this
increasing spatial concentration has an important impact on the distribution of service GDP
among provincial regions.10
Having analyzed the overall trend in inter-provincial variations in service GDP, we now
turn to levels of service GDP concentration in individual provincial regions, as measured by
location quotients (Table 4 and Fig. 5). The LQ values based on 1979 GDP data demonstrate
interesting characteristics. Among all provincial regions with an LQ value >1 (i.e., having a
higher share of service GDP in their economies than the national average), Beijing and
Tianjin were two centrally administrated municipalities with high degrees of urbanization
10In 2007, the GDP share of FIRE industries in the service sector rose to 21.4 percent and their contribution to
total national GDP rose to 9.5 percent (NBSC, 2008).

ENRU WANG 291
Table 4. Location Quotients for Service GDP, 19792007

Change7993 Change9307
Provincial region 1979 1993 2007
( pct.) (pct.)
Beijing 1.15 1.38 1.80 20 30
Tianjin 1.08 1.07 1.01 -1 -6
Hebei 0.92 0.95 0.85 3 -11
Shanxi 0.91 1.01 0.88 11 -13
Inner Mongolia 1.06 1.02 0.89 -4 -12
Liaoning 0.72 1.05 0.91 46 -13
Jilin 0.84 0.87 0.96 4 10
Heilongjiang 0.72 0.87 0.87 20 0

Shanghai 0.97 1.13 1.31 30 16
Jiangsu 0.83 0.90 0.93 8 4
Zhejiang 0.76 0.95 1.02 25 7
Anhui 0.78 0.81 0.97 3 21
Fujian 0.92 1.08 1.00 17 -7
Jiangxi 0.85 0.88 0.80 4 -10
Shandong 0.60 0.88 0.83 47 -5
Henan 0.78 0.86 0.75 11 -13
Hubei 0.74 0.94 1.05 27 12
Hunan 0.78 0.94 0.99 21 5
Guangdong 1.13 1.01 1.08 -10 7
Guangxi 1.04 1.02 0.96 -2 -6
Hainan 1.16 1.31 1.02 13 -23
Chongqing 1.06
Sichuan 0.93 0.91 0.91 -2 0
Guizhou 0.80 0.91 1.04 13 15
Yunnan 0.84 0.99 0.97 18 -2
Tibet 1.13 1.07 1.38 -5 28
Shaanxi 0.85 1.05 0.87 23 -17
Gansu 0.93 0.99 0.96 7 -4
Qinghai 1.15 1.07 0.90 -7 -16
Ningxia 1.16 1.07 0.95 -8 -11
Xinjiang 0.80 0.95 0.88 18 -7
Sources: Compiled by author from NSBC, 1999, 2008.
and industrialization. Guangdong was another relatively developed economy in the country
with a long tradition and well-developed network of commerce.11 Other provincial regions,
however, were all small, underdeveloped economies of provincial China. Among the 31 pro-
vincial regions, Tibet, Ningxia, Qinghai, Hainan, Inner Mongolia, and Guangxi, respectively,
ranked 31, 30, 29, 27, 24, and 21 in the country by the size of their economies. These
11 In 1979, trade (wholesale and retail) alone contributed to nearly half (46 percent) of service GDP and
accounted for over 11 percent of the provinces total GDP (NBSC, 1999).

Fig. 5. Location quotients for service GDP, 19792007.
provincial regions tended to have either a very underdeveloped industrial sector, meaning
that agriculture and services played a bigger role in their economies (such as Hainan, Tibet,
and Guangxi), or an industrial sector that was somehow specialized and contributed a larger
than national average share of GDP to their regional economies (such as Ningxia and Qing-
hai).12
On the other hand, provinces with lowest LQ values (< 0.8) tend to have large primary/
agricultural sectors with large populations (e.g., Henan, Anhui, Shandong, Hubei, Hunan,
and Zhejiang), with a few exceptions (including Liaoning and Heilongjiang). As stated ear-
lier, the extreme importance of the industrial sector in the latter two provinces has overshad-
owed the contribution of services.
As time proceeded during the period of study, certain provincial regions exhibited
noticeable changes in their LQs based on service GDP. During the first period (between 1979
and 1993), the LQ values of most regions had moved closer to 1, showing a tendency toward
12In Tibet, Hainan, and Guangxi, the entire secondary sector (including industry and construction), respec-
tively, accounted for only 21.6, 27.7, and 28 percent of their GDP totals in 1979, much lower than the national aver-
age of 47.1 percent. In Ningxia and Qinghai, however, the secondary sector contributed to 51.3 and 49 percent of
regional GDP, and the industrial sector alone as much as 44.4 and 42.3 percent of the total GDP. The contributions of
the industrial sector in Ningxia and Qinghai came from the large heavy industry projects in aluminum production,
the chemical industry (especially salt), and energy (especially hydroelectricity).
ENRU WANG 293

Fig. 6. Trends in location quotients for service GDP, 19792007.
convergence to the national average (see Table 4 and Fig. 6). For these regions, the lower
their 1979 LQ values, the greater their rates of increase have tended to be.13
During the second period (between 1993 and 2007), the LQ values of the provincial
regions displayed different dynamics of change. Among the 30 regions, 17 experienced
divergence with their LQs moving further from 1, while only 11 converged and 2 (Sichuan
and Heilongjiang) registered no meaningful change in LQ. By 2007, the three provincial
regions with highest LQs were Beijing, Shanghai, and Tibet (see Table 4 and Fig. 5). Beijing
and Shanghai presented no surprise, as the municipalities, along with other major cities such
as Guangzhou (Lin, 2004), have been leading structural changes in the economy nationwide.
For Tibet, the rapidly rising importance of the service sector in the economy is ascribed to a
booming tourism sector. From 1993 to 2007, tourism in Tibet recorded an astonishing annual
growth rate exceeding 30 percent. In particular, there was a huge rush of tourists to Tibet
after the QinghaiTibet railway from Golmud to Lhasa was completed in October 2005,
especially after regular train service between LhasaShanghai and LhasaGuangzhou was
opened in October 2006. Consequently, income derived from tourism in Tibet increased by
75 percent in 2007 relative to the previous year (TSB, 2008). The GDP contribution of tour-
ism to Tibets service sector and economy, respectively, reached 25.7 and 14.2 percent, a
sizeable jump from 6.9 percent and 2.5 percent in 1993.
In addition to the V shape that characterizes the trajectory of regional inequality and
spatial concentration of service GDP, another attribute that distinguishes the spatial variation
in the share of service GDP from that of service employment is their correlations with
regional levels of urbanization. As demonstrated earlier, over the past nearly three decades, a
significant positive correlation exists between the location of service employment and the
level of urbanization, although the strength of that correlation has decreased slightly. In
13 The exceptions included Beijing and Hainan, which saw further increased divergence with a continued
increase in LQ, and Shanghai, which first converged to the national average from below but quickly diverged with
rapid expansion of service GDP in its economy.
contrast, no significant correlation is found between the urbanization level of a region and
the share of service GDP in its economy except for the year 2007 (Pearsonr = 0.517, p <
0.01).
To summarize, two indicesCV and CLdepict a consistently converging trend in
regional variation in service employment. Regional variation in service GDP, however, has
displayed a different evolutionary trajectory: both the CV and CL depict a V shape charac-
terized by a convergence during the first half of the study period, followed by divergence in
the second half. LQ values indicate the performance of individual regions in particular years,
and reveal that the factors contributing to regional variations in service employment and
GDP vary at different stages of development.
DISCUSSION AND CONCLUSIONS
Prior to the economic reform, Chinas economic policy was consistent with economic
base theory, in that services were considered to be of minor significance in the economy and
accorded low priority in economic development. The three decades of economic reform have
been characterized by a gradual but definite shift from a pro-industry, anti-service strategy to
one that recognizes the importance of services. Since the 1990s, in particular, the increasing
emphasis on services in government policy documents and policy rhetoric indicates that an
environment more favorable to the development of the sector has been created. And indeed,
the service sector has gained a substantial measure of importance and will likely continue to
expand in the future.
Despite the fact that the service sector has recorded more rapid growth than either the
primary or the secondary sectors (as measured in terms of both employment and GDP), the
contributions of the service sector to the national economy are much lower than what one
might expect from a comparative assessment of the situation in metropolitan economies upon
which most previous studies of Chinas service sector have been based. Thus, China overall
still lags substantially behind its metropolitan areas in the process of structural transforma-
tion and economic tertiarization.
Similarly, the share of the service sector in Chinas national economy is considerably
lower than the world average, and even lower than the average of low-income countries. This
paper has examined some of the factors contributing to this low representation of the service
sector, including a very low starting level in the late 1970s, prior low involvement in the glo-
bal economy measured by low shares of services in Chinas exports and utilized FDI, and
some philosophical and institutional constraints (including continued influence of the old
development philosophy, pervasive and persistent state monopoly of service industries, etc.).
It is argued that the service sector has played a more prominent role in job creation than
in GDP growth. While this is not as unique to China, as worldwide the service sector tends to
be more labor intensive than manufacturing (Bryson and Daniels, 1998; Stutz and Warf,
2007), it nonetheless has important implications for the future development of services in the
country. It highlights the potential of service activities in creating jobs that China needs for
rural migrants,14 young college graduates, and displaced workers.
14It is estimated that in 2008 China employed 130 million rural migrant workers in its cities. As a result of the
global economic crisis in 2008 and 2009, Chinas manufacturing sector has been badly damaged. According to a sur-
vey conducted by Chinas Ministry of Agriculture, about 20 million migrant workers have been forced to return to
rural areas due to lack of work (LaFraniere, 2009).
ENRU WANG 295
It also suggests some of the challenges confronting the service sector. One comes from
the GDP mania in economic development. China has embarked upon a strong push for
rapid economic growth in the reform era, which has been translated into a de facto GDP
mania, with the political careers of local government officials hinging on the local GDP
growth rate. This preoccupation with growth, in addition to promoting a tendency among
local officials to neglect job creation, has led to many other problems including environmen-
tal disruption (End Obsession, 2006).15 Consequently, many service activities have not been
given priority by local governments in local economic development. Another challenge is
related to low productivity. As shown in this study, in most provincial regions, the service
sector has experienced a lower increase in labor productivity than has the overall economy.
This poses a challenge for Chinas service sector in the future, as international competition
intensifies and services have become an important component of international outsourcing/

insourcing and international trade.
This paper has examined regional trends in the development of services and has revealed
some structural shifts occurring in regional economies. As measured using both the CV and
CL, regional variation in service employment has been declining continuously, with Chinas
experience similar in many respects to that of many Central and Eastern European countries
that have experienced a transition from socialist to market economies (Stare, 2005). The LQ
values for individual provinces shed light on their performance in generating service employ-
ment at different periods of time. The very uneven distribution of that employment in the late
1970s was closely related to the highly concentrated pattern of industries (and urbaniza-
tion)16 inherited from the socialist planned economy. In the 1980s, as a new round of indus-
trialization diffused more widely outward from the metropolitan areas, this facilitated a
concomitant development of services and helped equalize the distribution of service employ-
ment. Throughout the entire study period, the LQ values most provincial regions have con-
verged toward 1, resulting in a continuous decrease in the overall spatial concentration of
service employment.
One significant finding of this study is that regional inequality in service GDP has not
followed the same trajectory as that of service employment. The evolution of regional varia-
tions in the share of service GDP has displayed a clear V shape (i.e., continuous decline dur-
ing the first half of the study period followed by a continuous rise from 1992/1993). It is
argued that, among many possible reasons, the re-emergence of a trend toward uneven distri-
bution of manufacturing in industrialization, as well as rapid spatial localization of certain
services (especially high-value-added services such as the FIRE industries) contributed to the
increased inequality in service GDP across the countrys regions.
Findings related to the FIRE and tourism industries confirm the assumptions implied in
the modified economic base model, which suggests that when the economy grows, an
increasing number of service activities, especially the basic ones that serve external markets,
may locate independently of the population density. With increasing importance in the econ-
omy, the spatial concentration of these services could be a driver of divergent regional devel-
opment of services.
15Despite calls from leading economists for an employment-first strategy in economic development (Hu,
2000; Cai, 2006), there are few signs suggesting that the current preoccupation with production growth will change
significantly in the near future.
16Unlike service employment, the share of service GDP does not display significant correlation with the level
of urbanization across Chinas regions.

This study has several policy implications. First, at the national level, it is advisable to
enhance the participation of services in the global economy by promoting exports of services
and attracting more FDI into service activities. This requires a re-evaluation of the current
manufacturing-led export strategy and a more effective incorporation of services in export-
ing. In addition to some traditional pillar industries such as tourism and marine transport,
China could attempt to boost exports of business services (such as financial, consulting, and
software and information technology services)17 and to expand some consumer services
(such as traditional Chinese medicine and some cultural services) to overseas markets.
Apparently, the central government has rather wisely realized the potential of expanding ser-
vice exports and has begun taking proactive steps in that direction.18
Second, China needs to improve labor productivity by obtaining more advanced technol-
ogy in order to prepare the countrys services for intensifying competition in a globalized
economy. To be sure, this is not to suggest a wholesale substitution of capital for labor;
although innovations and applications of new technology in certain service industries do
improve output per worker.19 Finally, at all geographic scales, and especially at the regional
level, services could well become basic sectors of the economy and even become growth
poles in their own right (McKee, 2008). This may be possible only when a certain degree of
specialization and agglomeration economies are achieved. In other words, regions should
focus on services in which they have a comparative advantage.
The current strong push for government action as a stimulus for economic growth in
China during the global economic crisis of 2008/2009 (e.g., Barboza, 2008) will also have
implications for the service sector. While the impacts of recent policy initiatives cannot be
fully assessed in this paper, it is worth noting that government support (especially financial
assistance) and a top-down approach can prove to be a double-edged sword. While state ini-
tiatives will probably spur the growth of services (at least in the short term), it can also
impede improvement in their productivity, especially when local governments interpret
increasing the share of services as a political directive rather than a genuine prerequisite
for local economic development.20
The current economic crisis has already affected many service industries in China such
as banking and financial services (although not to the extent as in the United States), interna-
tional tourism, and retailing. However, compared Chinas manufacturing sector, which has
been badly hit, the damage to services may only be temporary. In fact, in the long run, the
present situation may afford the countrys leaders a rare opportunity for services develop-
ment. The economic crisis may well be a catalyst for more rapid structural change in the
17Despite a late start, the export of software and information services from China has grown impressively over
recent years, increasing by more than sevenfold in value terms on an annual basis from 2001 to 2006 (Xinhua News
Agency, 2007).
18For example, a document jointly issued by the Ministries of Education and Commerce on April 10, 2009
suggests that the central government has pledged to create 1 million jobs for college graduates in the service out-
sourcing industries (including research and development in software, product technology and information technol-
ogy, and in industrial design) within five years. By 2013, China is scheduled to have 1.2 million trained service
outsourcing personnel in a sector worth roughly $30 billion (Xinhua News Agency, 2009).
19It should be noted that new technology does not necessarily open new paths for further development of many
labor-intensive services.
20For instance, local governments may focus more on funding the development of new service activities than
on their rates of return and profitability. Governments may also opt to protect certain unstable businesses by assist-
ing them with loans from state banks. For a convincing discussion on this issue, see Gu (2006).
ENRU WANG 297
Chinese economy, when much of the labor that is shed from the manufacturing sector (espe-
cially from export-oriented industries), will need to be transferred to services.
To conclude, this paper represents a preliminary attempt to study the development of
Chinas service sector at a variety of geographic scales. It sheds light on the regional varia-
tion in service development in China, its trend over time, and on some of the more important
contributing factors. A number of potential areas can be identified for future geographic
research on services, such as the growth and spatial agglomeration of individual service
activities (especially new services) and their contributions to uneven regional develop-
ment, the linkages between services and other sectors of the economy (especially between
producer services and manufacturing), and the impact of recent government policies on the
spatial development of services. A good many such studies, of course, must await the avail-
ability of sectoral data disaggregated to the appropriate spatial scales.
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The Service Sector in the Chinese Economy: A

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The Service Sector in the Chinese Economy:

Abstract: A U.S.-based economic geographer and observer of Chinas economy examines

Grand Forks, ND 58202-9020 (erwang@und.edu).

276 EURASIAN GEOGRAPHY AND ECONOMICS

ENRU WANG 277

THEORETICAL AND POLICY CONTEXT

Economic Base Theory

278 EURASIAN GEOGRAPHY AND ECONOMICS

Changing Policy Context

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280 EURASIAN GEOGRAPHY AND ECONOMICS

ENRU WANG 281

RESEARCH METHODS AND DATA

centration (Joseph, 1982; Beyers, 2007).

282 EURASIAN GEOGRAPHY AND ECONOMICS

THE SERVICE SECTOR IN CHINAS NATIONAL ECONOMY

ENRU WANG 283

284 EURASIAN GEOGRAPHY AND ECONOMICS

ENRU WANG 285

286 EURASIAN GEOGRAPHY AND ECONOMICS

REGIONAL TRENDS IN SERVICE DEVELOPMENT

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Fig. 3. Regional inequality in service employment, 19792007 (CV and CL).

Regional Inequality and Spatial Concentration in Service Employment

288 EURASIAN GEOGRAPHY AND ECONOMICS

Table 3. Location Quotients for Service Employment, 19792007a

Shanghai 1.77 1.44 1.67 CD DU

stable trend with little change (< 5 percent).

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Fig. 4. Regional inequality in service GDP, 19792007 (CV and CL).

Regional Inequality and Spatial Concentration of Service GDP

290 EURASIAN GEOGRAPHY AND ECONOMICS

total national GDP rose to 9.5 percent (NBSC, 2008).

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Table 4. Location Quotients for Service GDP, 19792007

Heilongjiang 0.72 0.87 0.87 20 0

292 EURASIAN GEOGRAPHY AND ECONOMICS

Fig. 5. Location quotients for service GDP, 19792007.

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Fig. 6. Trends in location quotients for service GDP, 19792007.

294 EURASIAN GEOGRAPHY AND ECONOMICS

DISCUSSION AND CONCLUSIONS

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intensifies and services have become an important component of international outsourcing/

of urbanization across Chinas regions.

296 EURASIAN GEOGRAPHY AND ECONOMICS

ENRU WANG 297

298 EURASIAN GEOGRAPHY AND ECONOMICS

March 13, 2008 [http://www.gov.cn/zwgk/2008-03/19/content_923925.htm], accessed May 1,

ENRU WANG 299

300 EURASIAN GEOGRAPHY AND ECONOMICS

accessed February 15, 2007.

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