An Overview of China’s Services Sector

The Chinese economy has transitioned from manufacturing‑based to service‑based. Highlighting this, the following figure shows that the share of China’s service sector as a percentage of gross domestic product (GDP) rose from around 40% in the 2000s to 54.6% in 2023, a development that is in line with the middle‑income countries average according to the World Bank’s World Development Indicators. Valued at USD 9.7 trillion in 2023, China’s service (tertiary) sector surpassed the industrial (secondary) sector in terms of value added to GDP as of 2012. Overall, though, China’s shift toward services has taken place relatively rapidly. From a global perspective, advanced economies had a comparative advantage in the service sector, as evidenced by their much earlier shift toward tertiarization. While the Industrial Revolution took place during the late 18th century and 19th century, the global economy’s Service Revolution took place in the 20th century. In the mid‑20th century, the United States was the first country to shift to being a “service economy,” with other developed countries following subsequently. In the case of China, though, its tertiarization has been solely a 21st‑century phenomenon.

China Is Among the World’s Top Five Services Trading Nations

China was the world’s fourth largest services trading entity in 2023, behind only the United States, United Kingdom, and Germany. While China’s services trade amounted to USD 929 billion in 2023, its services exports amounted to USD 380 billion (see the following table). In contrast to its merchandise trade situation, China is a net importer of services, with the country the world’s second‑largest services importer, importing USD 549 billion worth of services (representing a services trade deficit of USD 169 billion) in 2023, according to data provided by the World Trade Organisation.

Despite such impressive sounding headline figures, China’s international trade in services remains comparatively small. Indeed, its share of the total trade in services as a percentage of GDP was less than 5% in 2023. Sonali Jain‑Chandra, Siddharth Kothari, and Natalija Novta (IMF, 2024) argued that China has more restrictions on services trade than many OECD member countries. Nevertheless, if we look at the overall international picture, there is a less discernible relationship between the services share of GDP and the trade in services. This suggests that countries with more developed services sectors are not necessarily engaging in a high level of services trade. Accordingly, the following figure features an analysis of the cross‑sectional data of a global sample of 158 economies. While this highlights the generally positive relationship between services share and trade in services, many of the world’s major services economies – including the United States, United Kingdom, Germany, and Japan – were far below the average level that might be expected from a simple linear regression. The overall landscape is also notably distorted by the figures for a relatively small number of services hubs with extremely high trade in services ratios.

The Future Development of China’s Services Sector

China’s 14th Five‑Year Plan also places emphasis on fostering innovation in services trade, promoting new trade models, and enhancing trade digitalization. In July 2024, China announced a major step toward further opening up the services sector, allowing six cities – including Shenyang in Northeast China’s Liaoning Province, Nanjing in East China’s Jiangsu Province and Hangzhou in East China’s Zhejiang Province – to offer greater market access for foreign services providers. For example, foreign investment will be granted greater access in the eldercare, travel, telecoms, entertainment, and live performance sectors. In September 2024, China’s State Council issued a set of guidelines to promote cross‑border trade in services and further opening up of the services sector to foreign services providers. The guideline covers six areas, including promoting institutional opening‑up in services trade, facilitating cross‑border flows of resources such as talent and capital, advancing innovative development in key areas such as international shipping, and expanding the international market. The guideline covers a wide range of areas, including new emerging sectors such as cross‑border data flows, which are a significant move in terms of improving the business environment and creating greater opportunities for domestic and foreign services providers.

China’s Surging High-Tech Services Investments

The following figure shows the growth trend relating to China’s fixed asset investments. Typically, the country’s overall investment growth is in line with its level of overall services‑sector investment, with property investment having been the key driver until relatively recently. Services‑sector investment growth, however, has consistently underperformed overall investment since 2021 due to largely weakened real estate sector investment. Nevertheless, high‑tech services‑related investment (relating to the so‑called advanced services sector), such as that geared to e‑commerce and R&D services, still showed very strong growth, at least partly offsetting the sharp decline in real estate investment. In the first seven months of 2024, while property sector investment dropped by 9.8%, this weakness was largely offset by strong growth of 11.9% in high‑tech services‑related investment, an outcome that helped maintain a relatively stable overall service investment level (‑0.7%).

This shift would seem to indicate that innovation and technology are the new drivers of China’s service investment. The above figure also highlights another interesting development – the growth of the country’s manufacturing sector has been consistently higher than its overall investment level since 2020, with exceptionally strong investment growth recorded for the high‑tech manufacturing industries (the so‑called advanced manufacturing sector), which will ultimately drive demand for high‑tech services support. Essentially, this process will help achieve the country’s strategic objectives of deepening the integration of the “advanced manufacturing and advanced services sectors” as a means of upgrading the nation’s industrial structure.

China Also Aims to Build High-Tech Services as Pillar Industries

While China’s services sector has played a major role in facilitating the overall upgrade of the domestic industrial system, the country still aims to develop many of its high‑tech services sectors as pillar industries that will play key roles in its overall economic structure. China has two particular objectives in mind for development in these areas:

1. Positioning them as core elements of industrial digitalization (i.e., upgrading traditional industries, including – but not limited to – the use of new technologies such as artificial intelligence, blockchain, and the Internet of Things)
2. Harnessing them for digital industrialization (i.e., turning key services sectors, such as the telecommunications, information technology, and internet industries, into pillar industries).

Future Growth of China’s Key Services Sector Amid the Nation’s Digital Transformation

In all likelihood, China is set to continue to be a world leader in the e‑commerce, digital trade, digital payments, and digital banking sectors largely on account of its sustained focus on the national digital transformation process. The country’s continued rapid urbanization and digitalization will drive the development of smart transport, smart logistics, and smart cities, and other related smart services.

Financial Services: China is a Global Leader in Digital Finance

Digital transformation has continued to be a primary focus for China’s banking sector. This has seen many of the country’s financial institutions increasingly leveraging fintech and such emerging technologies as AI, big data, cloud, and blockchain in order to transform their companywide operational models as a means of boosting productivity and efficiency. Largely on account of the Chinese government’s prioritization of digital economic development, the country is already a largely cashless economy, with a substantial proportion of payments processed via mobile phones and such e‑payment platforms as WeChat Pay and Alipay. As of end of December 2023, about 87.3% of internet users in China had used an online payment service, according to data provided by Statista. In a subsequent development, the People’s Bank of China is piloting its own China Central Bank Digital Currency.

At present, China is the world’s largest digital payment market, with its total 2023 transaction value estimated as USD 3,294 billion, with that figure expected to reach USD 3,744 billion in 2024 – a 32% global share, according to data from Statista. In all, China’s digital payment market is expected to show 8.77% compound annual growth from 2024–2028. This is seen as being primarily driven by two segments – digital commerce (consumer payments for products and services over the internet) and mobile point‑of‑sale payments via smartphone applications. A third segment is digital remittances (including online cross‑border payments), which accounts for a comparatively small share of the market. In addition, the country’s vibrant fintech industry has also helped to nurture a flourishing e‑commerce sector.

Retail and Wholesale Services: China is the World’s Largest e-Commerce Market

While the retail trade used to be a relatively labor‑intensive sector, its rapid digitalization – a trend driven by technological innovation, and an apparently permanent change in consumer behavior – has transformed it dramatically. Technical advances in such fields as big data analytics, digital payment processing systems, Artificial Intelligence (AI)‑driven product customization, and robotics have all helped to grow the market share of e‑commerce sales relative to overall retail sales. In addition, social media‑facilitated commerce has now become an increasingly popular option for would‑be vendors looking to capitalize on the benefits of e‑commerce.

Currently, China is the world’s largest e‑commerce market. According to eMarketer, the country accounted for 51% of global e‑commerce business in 2023, followed by the United States on 20% and the United Kingdom on 3%. Inevitably, its e‑commerce sector is well‑developed – China has embraced e‑commerce across many areas of economic activity, with sales and marketing being the most notable example. It is also significant that Chinese consumers have become adept at completing online transactions through a variety of digital options, including web, mobile, and social media platforms. As a sign of this, in 2023 online sales accounted for more than 27% of total retail sales across the country, according to data provided by China’s National Bureau of Statistics. This represents a quadrupling of overall online sales over the period from 2015–2023, and a compound annual growth rate of 19%, an impressive level of expansion that has established China firmly as the world’s largest online retail market.

China’s e‑commerce market is dominated by domestic players, with a number of well‑established platforms serving distinct segments – Business‑to‑Consumer (B2C), Consumer‑to‑Consumer (C2C), and Manufacturer‑to‑Consumer (M2C), as well as social commerce. This omnichannel ecosystem has contributed to China’s status as a global e‑commerce leader, while many of China’s e‑commerce market leaders – Alibaba’s Taobao, Tmall, JD.com, and Pinduoduo – are also key players in several overseas e‑commerce markets, such as the ASEAN bloc.

Trade and Logistics Services: China is Among the World’s Most Digitalized Trading Economies

While China is a leader in the digitalization of its retail trade in the domestic market, the country is also among most advanced digitally in terms of international trade. Globally, countries have been pursuing a seamless and efficient trading environment by simplifying and digitalizing formalities amid challenges posed by the COVID‑19 pandemic, geopolitical tensions, high inflation, and supply chain disruptions. Significant progress has been observed in trade facilitation in the post‑pandemic era. UNCTAD (2023) estimated that the full implementation of digital trade facilitation, beyond the WTO Trade Facilitation Agreement commitments, could cut average trade costs globally by 14%.

The following figure shows findings from the UN Global Survey on Digital and Sustainable Trade Facilitation. The global average trade facilitation implementation rate of 31 general and digital trade facilitation measures stands at 69% in 2023, up by 10 percentage points from 59% in 2019. Developed economies showed the highest regional implementation rate, with 85%. The growth in China is particularly impressive, with the overall implementation rate increasing from the already high rate of 83% in 2019 to 91% in 2023.

In terms of the implementation of “Digital Trade Facilitation” measures, particularly “paperless trade facilitation” and “cross‑border paperless trade,” China’s lead is even more obvious. The survey findings show that China achieved scores of 96% and 72%, respectively, compared to a global average of 69% and 45% in 2023 (see the following figure). Digital trade facilitation plays a critical role in enabling more efficient and transparent trade procedures, enhancing the resilience of global supply chains and decreasing overall trade costs.

Real Estate Services: China Leads the World in Building Smart Cities

The rise of smart cities has reshaped urban development and its interaction with the real estate market worldwide. By focusing on sustainability, innovation, and connectivity properties in smart cities often have improved infrastructure and connectivity, with green buildings and eco‑friendly practices becoming standard. Many cities are now utilizing technology for a variety of urban planning initiatives, including integrating AI and machine learning as a means of optimizing energy use, security procedures, and maintenance processes. In addition, connected networks of sensors and communication devices will facilitate real‑time data collection, analysis, and feedback and make the management of resources and services more efficient and effective. IoT – the Internet of Things – is a technology that digitally networks everyday objects, including vehicles and home appliances. Connected via the internet, such devices can communicate with each other and can be controlled using a smartphone app while also interacting with other devices such as smart lighting systems, to coordinate and optimize energy usage.

Overall, Beijing and Shanghai were acknowledged as two of the world’s top 20 smart cities in 2024, according to IMD’s Smart City Index (see the following table). By country, China has the largest numbers of smart cities among the global top 100 (see the next table), and among these Beijing, Chengdu, Chongqing, Guangzhou, Shanghai, Shenzhen, and Tianjin are megacities with populations of over 10 million. Moreover, the populations of Chongqing, Shanghai, Beijing, and Chengdu are above 20 million. Most of the world’s top smart cities are small, such as Zurich. China shows how megacities can manage to be smart, which is more difficult. Key issues often faced by large cities around the world are those relating to traffic and road infrastructure, as well as the management of disaster risks. As smart city technologies continue to evolve, China’s real estate services landscape is set to undergo even more significant changes, whether in relation to buildings or city management. Moreover, the development of smart cities will also contribute to the growth of smart logistics networks and related services.

Smart and Green Logistics

China’s logistics sector is fairly advanced. It boasts a wide range of product categories and sophisticated technologies, including automated sorting systems, guided vehicles, pallet shuttles, and smart parcel lockers. A well‑developed ecosystem providing smart logistics companies with massive data and information flows has helped improve the efficiency of the logistics supply chain. Further, the integration of advanced analytics and IoT technology has enabled real‑time tracking and data‑driven decision‑making, which has improved route optimization. Applying machine learning, as well as predictive and sensing capabilities, has enabled material improvements to network efficiency, customer experience, and risk reduction sustainability.

Smart logistics and transport services are expected to accelerate in China for several reasons. The first of these is the Chinese government’s policies in promoting the logistics sector’s modernization. China’s State Council issued a circular at the end of 2022 detailing its plan to develop modern logistics during the period of the 14th Five‑Year Plan (2021–2025). This sees the country on course to establish an efficient, smart, and green modern logistics system by 2025 – one that integrates logistics and the manufacturing sector, and promotes smart logistics through the application of such technologies as 5G, big data, and AI, with the circular also designating the development of green logistics as a priority, China will construct a range of related ancillary facilities, including charging piles for cargo vehicles, hydrogen refueling stations, and shore power facilities for inland waterway vessels. The country’s liquefied natural gas (LNG) refueling station resources will also be enhanced as part of the overall program of boosting energy conservation and cutting emissions within the logistics sector.

Secondly, the continued focus on resilience and sustainability has resulted in global supply chain recalibrations, coupled with advanced technologies that are reshaping the core of supply chain management. Innovation related to AI, machine learning, and blockchain has streamlined processes and improved the efficiency of supply chain management. Thirdly, the development of smart logistics networks due to the rising trends of urbanization and smart cities will also contribute to the growth. Fourthly, the country’s massive and rapidly growing e‑commerce should also lead to increased demand for smarter third‑party logistics services.

In addition, China has been proactively promoting the advancement of its low‑altitude economy, an initiative that is reshaping transportation, logistics, and urban development. The concept of the low‑altitude economy and low‑altitude flying activities has come very much to the forefront in China and globally in recent years. As an indication of its significance, the low‑altitude economy was highlighted as a strategic emerging industry during the Central Economic Work Conference in December 2023, and then singled out in the 2024 Government Work Report as a key engine for future growth.

China’s Services Sector Future-Ready as Green Momentum Gathers

China made a clear commitment to sustainability in its 14th Five‑Year Plan (2021–2025), which charts a course toward peak carbon use by 2030 and carbon neutrality by 2060. This represents a significant shift in the government’s development paradigm, which now emphasizes environmentally friendly and sustainable measures, while the country also has stringent regulatory requirements linked to the central government’s “Dual Carbon” target.

Beyond regulatory requirements, a number of other factors are also driving the country’s prioritization of a greener agenda, with Chinese businesses increasingly recognizing the importance of sustainability. This emphasis has been driven not only by the need to follow regulatory requirements but also by demands from a diverse set of stakeholders, including institutional investors and corporate clients, as well as end customers both domestically and abroad.

This was evidenced by several recent surveys conducted by the Hong Kong Trade Development Council. In one survey of 300 Greater Bay Area (GBA) enterprises (HKTDC, UOB, 2023), for instance, 65% of respondents indicated that they had already adopted green and sustainable business practices, while the remaining 35% said they intend to introduce such practices. The same survey also showed that 99.7% of surveyed enterprises in the GBA intend to incorporate – or increase the number of – ESG (Environmental, Social, and Governance) elements in their business operations within the next two years. In another survey, of 283 companies operating in China (HKTDC, ACCA, 2024), 100% of the respondents said they have green measures in place. In terms of future commitments, the HKTDC 2023 study found that 94% of respondents plan to increase or maintain their current level of ESG investment in the next two years, while the HKTDC 2024 survey found that close to 99% of enterprises plan to sustainably invest over the next three years.

Green Finance

The green transition requires significant financial support. Accordingly, on the financial front, China’s peak carbon and carbon neutrality ambitions have also brought about changes in the country’s financing environment as it works toward implementing “green financing” policies. In the past few years, China’s sustainable bond market has evolved significantly in terms of policy guidance, standard‑setting, and regulatory measures, with market rules being better integrated and supervision clearer.

In March 2024, for example, the People’s Bank of China and six other bodies issued a set of guiding opinions in relation to stepping up financial support for green and low‑carbon development. This document’s key areas of focus included optimizing green finance standards, strengthening the disclosure‑based regulatory regime, and fostering the development of a green financial market and related products. Such policies are expected to make it easier for companies operating sustainably to get access to capital, while discouraging the financing of projects harmful to the environment.

While Hong Kong is among the world’s top issuers of green bonds, the city plays an even more important role as a green finance hub funding green and sustainable projects for the Chinese Mainland and many other parts of Asia. In 2023, Asia was the world’s second‑largest market for sustainable bonds, trailing only Europe. Within that, Hong Kong is the region’s leading green finance hub, facilitating a growing number of sustainable and green projects. In 2023, 37% of the international green and sustainable bonds issued in Asia were arranged via Hong Kong, according to data provided by the International Capital Market Association.

A Wide Range of Professional Services

In addition to green finance, companies also require a wide range of services in order to achieve their green and sustainable goals, most notably in relation to green certification, carbon emissions assessments, and energy transformation solutions. In the above‑mentioned HKTDC survey (2023), more than 90% of GBA companies saw Hong Kong as having existing strengths in terms of green applications, financial products and services, as well as having the necessary attributes to take a lead role within the GBA in terms of sustainable development practices (see the following figure).

The Future Growth of China’s Services Sector and the Business Implications for Domestic and Foreign Players
 

China’s services sector already accounts for a substantial share of global and local economic growth and job creation. China has focused on innovation and sustainability to transform its services sector, to build service industries as pillars for the economy to drive growth, and further develop its trade in services. China is also stepping efforts to further liberalize its services sector to foreign players. In September 2024, China’s State Council issued a set of guidelines to remove all restrictions on foreign investment in the manufacturing sector (effective on November 1, 2024) and promote cross‑border trade in services, as well as further open up the services sector to foreign services providers.

This opens up huge opportunities for foreign investors and service providers to participate in the transition, which can also be seen from the trend in China’s foreign direct investment (FDI). FDI into China has been increasingly skewed toward the high‑tech industries (manufacturing and services). The value of FDI into China’s high‑tech industries rose from USD 18 billion in 2015 to USD 61 billion in 2023, constituting annual average growth of 16.7% during the period, compared to a 10.7% decline in real estate and a 3.3% overall growth in total utilized FDI. The share of high‑tech industries as a percentage of China’s total utilized FDI also rose from 14% in 2015 to 37% in 2023.

Foreign Technology Will Remain Key to China’s Industrial Upgrade

Innovation and sustainability will be the catalysts for further growth in China’s services sector. In an HKTDC survey (HKTDC, Standard Chartered Bank, 2024) of 1,000 GBA enterprises, consideration was given as to how GBA businesses were upgrading their production processes in line with the New Quality Productive Forces policy – China’s latest push to modernize its economic growth model via technology innovation and transformation. Essentially, this policy is geared toward boosting productivity and promoting high‑quality development by upgrading production, fostering new strategic industries, and becoming more self‑reliant in terms of technology.

The survey findings showed that the majority of GBA companies rely heavily on the adoption of overseas technology when it comes to industrial upgrades and business transformation, and will most likely continue to do so. The above figure shows that 56.8% of respondents said more than 20% of their total technology demands are met by foreign tech imports, while almost 27% said more than 40% of their tech is overseas‑sourced. Asked to consider the likely situation in three to five years’ time, 6.3% of respondents said they anticipate a “material increase” in the adoption of local technology content in their businesses, with another 39.2% anticipating a “marginal increase,” while 50.3% maintained the situation was likely to be unchanged and 4.1% expected an increase in foreign tech reliance. This implies there is plenty of room for overseas tech to play a role in GBA companies’ industrial upgrade and business transformation. It is also apparent that Hong Kong can serve as a platform for any GBA company looking to source innovative technological solutions from overseas or from the city itself – a distinct possibility given the city’s status as Asia’s leading unicorn hub. This may include accessing advanced materials, renewable energy, microelectronics, robotics, artificial intelligence, and more.

Sustainable Business Drive Presents Huge Opportunities

China’s green agenda offers substantial opportunities for overseas investment, given the country’s vast market and ambitious plans to meet high environmental standards and serve climate‑conscious goals. Simultaneously, Hong Kong is widely seen as the ideal platform from which foreign companies engaging with Chinese enterprises can pursue sustainable economic activities. The reality here is that Hong Kong’s service providers maintain international standards while having a comprehensive understanding of mainland’s sustainability requirements. Consequently, Hong Kong can ensure mainland businesses not only comply with local sustainability requirements but also with those of overseas investors’ own countries and of any partners involved in such inbound or outbound business projects.

Conclusion

The Chinese economy has transitioned from being heavily manufacturing‑based toward becoming more of a service‑based economy. In its recent national strategies, including its Five‑Year Plans, the country’s focus has been on “quality (growth) rather than the headline pace of growth,” while also prioritizing the development of advanced technology‑driven services to modernize the wider industrial base and fully establish a Digital Economy. Moreover, the country’s drive toward a green and sustainable future, which includes a commitment to achieving net‑zero emissions by 2060, has important implications for domestic and foreign enterprises operating across different areas of the economy, not least those in the services sector working to support the country’s overall transformation.

For the full contents of the chapter, please click here to visit the webpage of the Handbook.

Reference:

Jain‑Chandra, S., Kothari, S. and Novta, N. (2024), ‘China’s service sector is an underutilized driver of economic growth’, IMF Country Focus, Available at: https://www.imf.org/en/News/Articles/2024/08/02/cf‑chinas‑service‑sector‑is‑an‑underutilized‑driver‑of‑economic‑growth (Accessed: 23 August 2024).

IMD (2024), ‘IMD Smart City Index 2024’, Available at: https://www.imd.org/smart‑city‑observatory/home/rankings/ (Accessed: 24 August 2024).

HKTDC, UOB (2023, October), ‘Sustainability in the Gba: Unlocking Opportunities and Empowering Growth’. Available at: https://research.hktdc.com/en/article/MTUxODM1Njc0Nw (Accessed: 24 August 2024).

HKTDC, ACCA (2024, September), ‘Seizing Opportunities in China’s Sustainable Investment’. Available at: https://research.hktdc.com/en/article/MTc5MTE5MTU3NA (Accessed: 5 September 2024).

HKTDC, Standard Chartered Bank (2024), ‘Standard Chartered GBA Business Confidence Index July 2024’, Available at: https://research.hktdc.com/en/article/MTczNTkwMDM0MQ

For the full reference list, please click here to visit the webpage of the Handbook.