Is China Turning Into a Service Economy?
By Staff News & Analysis - April 16, 2013

Industrial eclipse … Earlier this year, we noted that China's output of services was poised to overtake its industrial production, probably as soon as this year. That would represent an interesting milestone for China's economy, which is renowned for the hum of its assembly lines, the belch of its smokestacks and the clang of its construction sites. Today's GDP report brings that crossover even closer. In the past four quarters (running from the second quarter of 2012 to the first quarter of 2013), services and industry accounted for the same amount of China's GDP. Indeed, services trumped industry in each of the past three quarters. That hasn't happened since 1961, as far as I can tell. – Economist

Dominant Social Theme: China remains an industrial monster.

Free-Market Analysis: We've run articles fairly regularly on China and the problems of running a full-bore industrial economy in a world of falling demand.

We've tried to cover a variety of issues regarding the challenges that one of the world's largest economies faces but it never occurred to us that evolution of the Chinese economy would be toward service jobs!

That's because we consider service economies to be fairly moribund ones (potentially, anyway) that may even signal the decline of industrial competence.

In the United States, for many years there were arguments over the positives and negatives of a "service economy."

The idea was that a "mature" economy could include a plethora of service jobs. We never really understood this argument.

If everyone is a "server" then who are the makers? Just as there are servers, so there must be those who have wealth and are willing to spend it to be "served." And wealth, the way we see it, comes from building things (mostly) that people want.

When the US (and Europe, with the exception of Germany) stopped building things people wanted, this was to us a sign of economic decline. Is China going down the same path? Here's more from the article:

I should point out that China's service sector (which includes transport, wholesaling, retailing, hotels, catering, finance, and real estate among other things) is still unusually small. In other economies at China's stage of development, services typically account for about 55-60% of GDP. Prices for services have also been rising faster than industrial prices, contributing to the shift in their favour.

I should also point out that both sectors are highly seasonal, with services typically peaking in the first quarter and industry peaking in the second. So industry (which includes construction, mining and utilities, as well as manufacturing) may bounce back in April, May and June. Nonetheless, the industrial eclipse is edging a little closer. China's collars are turning white.

Is this a good thing? America's collars turned white and so presumably did Greece's, Spain's, Italy's, etc. This preoccupation with white-collar employment seems to go hand-in-hand with central banking economies that depend on money printing to create whole industries that rise and then subside along with the money printing itself.

There is no doubt, in our view, that China's great economic miracle is in large part the product of a money printing operation that was adopted in part from the West. Now it would seem that the inevitable arc of these sorts of evolutions is proceeding along expected lines.

When the first surge of industrial wealth has been created, such societies inevitably find that markets are less easy to penetrate and that continued growth must come from internal mechanisms. In the case of China, officials announced that the population must become more consumerist. But now it seems that alternatively, a solution may include a transition to a "service economy."

After Thoughts

Are we incorrect in interpreting this as a kind of red flag?