China's economy is rapidly rebalancing toward services

While China's position as factory to the world gets a lot of attention, the country's economy is building out its service sector - and it is making rapid progress.

Services now account for 50% of China's GDP, up from 42% 10 years ago, according to World Bank data. This continuing shift may indicate the government's planned move toward services, innovation, and household consumption as the new economic drivers is going along to plan.

As Capital Economics wrote in a note last year, "the answer to the question of whether China's economy is sinking or swimming lies in its service sector."

_{Source: World Bank, World Databank, as of 2015.}

 

Services still have significant room to grow

Bloomberg reports there are already more than 300 million people working for Chinese services companies in retail, restaurants, hotels, and real estate. But the size of the service sectors in both developed and developing nations around the world suggests China still has significant room to grow.

The United States, for example, derives almost 80% of its GDP from services, according to Central Intelligence Agency data. Japan and Germany get more than 71% each, while the United Kingdom and France are both near 80%.

Fellow emerging market countries Brazil, Russia, and India also have greater service sector contributions than China, deriving 67%, 60% and 57% of their GDP from services respectively.

This is a lead China wants to follow, with the country's 13th Five-Year Plan making raising the service sector's contribution to GDP a priority. It's anticipated by China's leaders that growth driven by consumption and services can drive it to become a high-income nation.

This makes the current trajectory of China's service sector worth a closer look.

If you're looking to access the Chinese market, consider the iShares MSCI China ETF (MCHI), or broaden your search to other countries.

EXPLORE: Research other countries in the Worldviews series

 

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