China’s economy

Served in China

Services are poised to become the country’s biggest sector

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TE: "Because services tend to be labor-intensive, their expansion should encourage faster job creation, higher wages and greater household spending. That would serve the world economy well, too".

The Economist still seems to live in the economists' dream world of the 1980s which defined a large-sized service sector as THE determinating factor for an overall advanced society with high income employment in a "postindustrial" world.

While it is correct that a majority of the services are relatively labor-intensive compared to the value they create or add, this fact is also the reason why the lowest paid jobs are usually offered, in advanced economies, in the world of services.

Admittedly, China's service sector share of 44.6% of GDP is extremely low and services should be closer to 55% of GDP by now. That this is not the case is rather a sign for a still -proportionally- underdeveloped middle class than an indication for an overdeveloped 'factory fetishism'. This is why I'm positive that China's service sector will automatically grow with the country's widening middle class.

However, the assumption that an increase of the service sector (beyond a healthy share of about 70 to 72 percent of GDP) will create more high value jobs is illusionary and proven wrong over and over again. As a matter of fact, in some advanced capitalist societies enough empirical evidence exists, meanwhile, in support of the contrary.

By examining the content of so-called "service activities" and by relating the observed trends to uneven social developments in the U.S., we can clearly see that services in developed societies, beyond such "basic needs" as banking, insurances, legal services etc., are becoming increasingly an economic substitute for the 'service slavery' seen in ancient Rome and Greece.

Jul 12, 2010, NBC News published a list of the 8 lowest-paying jobs in America. All except one (which was farm working) are located in the country's service sector. Among them were food preparation and serving workers, busboys and dishwashers, cashiers in retail, hosts and hostesses, amusement park attendants, movie theater ushers, ticket takers and also personal and home care aides.

We can observe a transformation of the social structure in "post-capitalist" societies on the basis of the contradiction inherent in a process of extremely uneven accumulation of capital, on the one hand, and a growth of services that only exists because there are enough people being existentially squeezed into a low-skill, low-paid 'service slavery'.

To shrug this development off as being merely a "postindustrial" phenomenon is dangerous in an educated, free-spirited 'commonwealth' which enjoys universal suffrage.

In the long run, it will destroy the very fabric of our open societies, since it deprives a growing share of people the prospect of social mobility, thus undermining the liberal democratic constitution which is the basis of Western ‘moral supremacy’.


Slowly but surely China is changing to a developed economy. Services is a normal expression of a developed economy.
Industrial production should not decline, but the people employed in it should. The service part will inevitably increase.
China will surprise nay sayers now and in future.

la.výritý in reply to wepamist

You are correct. China could afford a free-floating Yuan by now.
As a matter of fact, the Chinese government is taking steps in this direction. Since 2005, the renminbi exchange rate has been allowed to float (in a narrow margin though) around a fixed base rate referring to a basket of world currencies. This move wasn't done to 'please America' IMO, but rather in the hope that the Yuan (RMB) will become a reserve currency over the long term. To achieve this goal, China must allow the Yuan to float freely.
This will almost certainly happen after China's GDP (calculated at USD market exchange rates) will surpass America's. Some economists see this happen as early as 2020, taking into account the future growth (China exceeding 3.5% on average in constant yuan over the next 7 years) and the inflation in the two countries (as well as the exchange rate between them).
This scenario is even more likely, since the growth outlook for the USA is rather bleak. Even if innovation were to continue into the future at the rate of the two decades before 2007, we're facing headwinds that will drag down long-term growth to half or less of the 1.9% annual rate experienced between 1860 and 2007.
This scenario includes the general educational deficit we're currently experiencing, which results in insufficient class mobility (in other words: in an unflattering GINI index) which, again, will result in a shrinking middle class combined with a continuation of the deficiency in global competitiveness (trade deficit); it includes the government debt and the, thus, looming 'fiscal cliffs' as well as the unsolved and upcoming environmental challenges, the demographic problems of the state-underpinning elites, and the overhang of excessive consumer indebtedness. A provocative 'exercise in subtraction' of the latter suggests that future growth in consumption per capita for the bottom 99% of America's income distribution could fall below 0.5% per year for an extended period of decades.
By 2020, if the above described current trends are realized, China will become the world's largest economy. This then combined with a free floating currency will be most likely the moment when the Yuan supersedes the greenback as the world's main reserve and only trade currency. China's foreign-exchange reserves already give it significant power as a creditor nation. But, currently, even if foreigners wanted to hold Yuan instead of Dollar, the controlled Yuan exchange rate holds them back from doing so.
This is actually China's dilemma; it is torn between the global challenge to remain a leading export nation and the hegemonic desire to become THE globally-dominating superpower. In removing all current exchange rate constraints (this is what the country's 'hegemonists' ultimately want), China would probably cause the Yuan to soar . . . something that China's economists are keen to avoid.
But if, one day, the Chinese hegemonists win over the economists . . . then, may God help us!

la.výritý in reply to wepamist

Not wanting to excuse the Chinese from being reluctant in unpegging the Yuan, but one of the main reasons China is pegging its currency to the dollar is to reduce uncertainty in export/import and to decrease currency-based volatility. There is no international law, neither on the part of WTO nor by IMF, which requires that a participating economy must have a free-floating currency.

As a matter of fact, the IMF's and WTO's predecessor, the GATT, operated under the Bretton Woods Agreement, a system for monetary and exchange rate management established in 1944. One major outcome of the Bretton Woods conference included the introduction of a pegged foreign exchange rate system. Currencies were at first pegged to gold and later to the US dollar.

New multilateral institutions were established during the conference, notably the "Bretton Woods" institutions, now known as the World Bank and the International Monetary Fund. They were dedicated to international economic cooperation. From the policy-makers' standpoint, having a pegged currency, reduces a currency's volatility, thus stabilizing trade uncertainties. This, of course, was just the opposite of having a floating currency as is often (not always) the case today.

However, a country with its currency pegged to another country's, e.g. the Renminbi to USD, must keep a supply of the currency to which it is pegged on hand, in order to exchange that currency for its own currency if its own currency begins to weaken against the pegged currency. 'Weakening' of a currency always means that more units of a given currency are required to equal a single unit of the pegged currency.

In order to stabilize the exchange rate of the Yuan/Renminbi against the greenback, the Central Bank of China will buy or sell its own currency when it sees it weakening or strengthening against the USD. Too weak a Yuan isn't in China's interest either, since it must pay for purchases with the pegged currency for its commodity imports, which are currently all denominated in USD. China is trying to change this but is facing strong opposition from Washington.

While buying Yuan and selling US Dollars increases the strength of the former (i.e., fewer units of its currency will be required vs. a unit of the pegged currency) and decreases the strength of the latter, buying dollars and selling Yuan has exactly the opposite effect.

The Fed could do the same: Buying Yuan and selling Dollars would increase the strength of the former and decrease the strength of the dollar. Why is the Fed not doing this?

BTW, currently (2011) 9,860 hedge funds were registered worldwide with an estimated over-all volume of 4 to 5 trillion US dollars. These institutions influence and manipulate the exchange rates way more than the Bank of China does.

la.výritý in reply to wepamist

While it's true that the Chinese currency isn't 'free floating', many experts are of the opinion that, currently at least, the Yuan is close to its real value. Fact is, over the last 5 years Chinese prices have risen much faster than American prices which adjusted the real Dollar/Yuan exchange rate to almost realistic levels.

The Economist wrote already 2010 (quote):

"Listen to some Americans and you might believe that the under-valued yuan is the source of all that is wrong in the 50 states. But this is only part of the picture. The real exchange rate adjusts the nominal exchange rate by taking into account changes in the price levels in the two countries involved. Chinese prices have risen much faster than American prices . . ."
This 'automatic adjustment' (through steep price and wage rise in China in the last years) has been continued until today.

And to think that other currencies are free of manipulations is naive. Mary Anastasia O’Grady, a member of the editorial board of the 'conservative' Wall Street Journal, wrote in November last year an op-ed piece (“Ben Bernanke: Currency Manipulator” ) charging that Bernanke is no less a currency manipulator than those nasty Chinese Communists.

la.výritý in reply to Hui Shi

I agree that "promoting the skills needed to function in a modern economy through broader and higher quality education" is surely one of the most important tasks. However, this would need a steadily updated thinking-ahead definition of what skills will be needed when graduates leave school.

Education is the key element for all societies in order to stay competitive in a globalized world; no question about that. The problem with this is that even a good education in the field of high-end services no longer guarantees a well paid job in the saturated service markets of our most advanced economies. E.g., passing the bar is no longer the meal ticket it used to be.

Also the most aggressive commercials placed on TV by ambulance-chasing law firms - tediously appearing every 10 minutes - or legal ads that try to convince an innocent audience that "there is always someone somewhere to sue", can't create enough legal jobs anymore to avoid that “unemployed lawyers sue their schools over false employment promises” (Washington Times, June 2012).

And also the MBA recruiting disaster goes on, as America's top business schools continue making fruitless strides in MBA job placement. About one of every four graduates of the nation's top business schools is still unemployed one year after graduation or is working in much lower paid jobs than expected - foreign to his field of study - maybe never being able to recover the immense tuition costs. The situation is even worse for graduates of less prestigious schools. Almost 50% end up driving a taxi or flipping hamburgers.

The crux with "technologically-advanced, industrial jobs that require higher levels of education" is that they involve hard science, such as math, as a basic skill, which many students in "cushy" societies shun too quickly.

And I'm certain that you are aware that "taxing the rich enormously and paying that money to the poor" has its natural limits in open societies.

la.výritý in reply to wepamist

As I've said before, all international monetary and trade organizations are descended from the so called Bretton Woods institutions. Bretton Woods advocated a pegged currency regime in order to reduce the currency's volatility, and, thus, stabilizing trade uncertainties. This view is still ingredient of the statutes of the successor institutions, IMF and WTO.

A 'cheap' Yuan makes all imports expensive, thus leading to price and wage adjustments. Fact is, even as the average standard of living is fast rising for the Chinese people, they are becoming more competitive all the time.

For our homemade dilemma (the de-industrialization of America in favor of an ill-conceived "service economy", we need to find a bogeyman to blame for government's perennial failures. Until November 6, 2012, both presidential candidates have been harping on China, blaming them for an alleged currency manipulation (supposedly in order to keep their products flowing into America). In reality it's us who reach for these cheap imported consumer products. It's almost impossible to find merchandize at Walmart or Target that is "made in USA".

In my opinion, this accusation is hypocritical to the extreme. All countries with central banks manipulate their currency, whether through increasing the money supply (inflation), or by adjusting the interest rates. It's in any government's best interest to maintain control over currency in order to stabilize costs. Europe's single currency just experienced (and is still experiencing) a brutal attack from institutionalized foreign currency manipulators. The U.K. Pound was victim of such attack on September 16, 1992. On the so called 'Black Wednesday', Soros' fund sold short more than $10 billion in pounds, profiting from the UK government's lack of currency control. I never heard the Chinese Yuan being 'attacked' in the course of last years 20 years.

Actual fact is that the Federal Reserve has been nothing but a currency manipulator since its creation; that's rather the pot calling the kettle black. What is really at issue here is the fact that China's Central Bank is operating in China's best interest, as also the Fed operates in America's best interest.

We simply could impose duties on all imports from China that would level out any real or imputed currency disproportion. We are not doing this because it would boost our inflation overnight into a politically not acceptable dizzy height.


When one is on the wrong side of competition and efficiency, groaning and moaning is the order of the day. The pioneering and fighting spirit of the West does seem to have evaporized into the thickening air of rising Asian prosperity and confidence. Blaming others for our problems is the easy part. Pulling ourselves up by the straps of our boots and joining the welcome back party would need cool heads and long-term planning and definitely more than sheer hot airs!

Hui Shi in reply to la.výritý

To be fair, the kind of unskilled factory jobs that keep China's factory employment so high aren't exactly high paying either. The reason why service jobs are so low-paying in developed countries is that as an economy transitions to being more technologically-advanced, industrial jobs require higher levels of education and, accordingly, pay more. Rising minimum wages mean that industries such as textiles that don't benefit from higher technology move offshore, and eventually the only low-skills jobs left are services jobs that cannot possibly be outsourced.

Are these changes good for society? It depends on how you look at it. While the benefits as a whole outweigh the costs, they are distributed extremely unequally; the most skilled gain enormously, while the least skilled gain nothing or even lose their jobs from it. Lowering minimum wages would allow them to keep their jobs, but at the cost of lowering living standards. But at the end of the day, they are changes that cannot be realistically stopped, and nations must adapt to dealing with them.

While we COULD in theory simply end globalization, the fact that net benefits outweigh net costs mean that you are better off taxing the rich enormously and paying that money to the poor. That does not mean, however, that this is the BEST outcome, merely one better than closing markets.

What would be the best outcome would be to embrace the mechanization of an economy, by promoting the skills needed to function in a modern economy through broader and higher quality education. This would promote social mobility, if education was provided at a reasonably high standard even to the poor, and social equality. This would then create incentives to increase efficiency on those remaining unskilled jobs, or to allow immigrants to do that. Those who are left behind by societal change would fall under the jurisdiction of the state's redistribution programmes.

wepamist in reply to la.výritý

Thanks for your replies; however even if inflation in China is higher than one in US (or any other western developed world) I suppose that due to the structural input low costs available in China (i.e.: wages, land subsidies, etc.) that inflation increase is only a marginal consequence.

So that absolutes terms of trade values still allow China to benefit from its x-rate floating regime: take into account its steady surplus in current accounts (more or less 20U$ billions dollars per month).

As a result, in my opinion western world leaders should urgently meet their chinese counterparts and put on a table following bargain: if China wants to continue in its free access into global economy (allowed by WTO membership) should accept immediately a free x-rate regime for Yuan currency.

On the contrary, Chine free global trade has an "unfair" set-up, in which goods are free to be sold global while currencies are not free.

If that immediate short term change would not be accepted, western world should consider to implement quotas or other duties charges (i.e.: same as Europe made with Japan cars export during '80s).

Why not any western world leader (or better a G20) agenda should prioritize that topic in order to rebalance trade flows ?

wepamist in reply to la.výritý

please allow me to ask you some additional questions:
a) why in your opionin Fed doesn't buy Yuan and sell Dollars ?
b) why in your opinion G20 doesn't put on its agenda a review of x-rates currencies regime in order to let Yuan fluctuate freerly ?
c) have western world leaders fear in driving China towards a real free competition ? Why ?
I suppose that no economic sense may explain above passive western behaviour; on the contrary it might be caused by political "preference" (i.e.: conservatives forces do prefer to push toward internal devaluation of low incomes classes rather than rebalance distribution of wealth).
Thanks in advance for your reply.


Good - we built the model in Hong Kong for them and handed it to them on a plate and now it is up and running well.


Why not focusing on currencies x-rate floating regime ?
It is still acceptable that yuan currency regime is NOT a free floating one ?
Instead of searching for a "miracle" sustainability from education, why not simply implement a free market of currencies whithin a free global market for goods and services ?

wepamist in reply to la.výritý

Why not focusing on currencies x-rate floating regime ?


When one is on the wrong side of competition and efficiency, groaning and moaning is the order of the day. The pioneering and fighting spirit of the West has seemed to have evaporized into the thickening air of rising Asian prosperity and confidence.


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