Former China central bank official warns against miscategorising ‘virtual economy’

With Beijing keen on developing China’s advanced manufacturing sector while shifting away from Washington’s service-centric growth model, a former official has warned against miscategorising what the “virtual economy” really entails.

And echoing a chorus of calls from Chinese leadership and prominent advisers, he also wants to see more drastic measures taken to enhance R&D and high-end producer services.

The comments by Sheng Songcheng, former chief of the central bank’s statistics department, came as the world’s second-largest economy is looking to learn from countries such as Germany that have embraced advancements in manufacturing.

“My view is, we cannot simply categorise the service sector as the ‘virtual economy’,” Sheng said at a forum in Shanghai earlier this week while comparing China’s service sector with that of the United States.

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China’s service sector, which is now the country’s largest source of jobs, accounted for 54.6 per cent of the national gross domestic product last year, lower than 81.2 per cent in the US, he said.

China has long been viewed as the world’s workshop, with its lower-priced but high-quality supplies shipped across the globe. However, its service sector has been growing fast in recent years, and the much-ballyhooed China International Fair for Trade in Services has been held annually in Beijing since 2019.

And as of late, there has been unprecedented emphasis on shoring up support for the real economy in China. Major financial regulators and state-controlled banks have already injected 1 trillion yuan (US$138 billion) worth of liquidity into the market this year by cutting the reserve requirement ratio, and officials have hinted that more such moves could be in the pipeline.

But Sheng warned against splitting the economy along the lines of real and virtual parts, arguing that high-end elements of manufacturing – including research and development, design, patents, branding and sales – also fall into the realm of producer services.

“Without a hi-tech, high-quality service sector – particularly producer services – there would be no advanced manufacturing,” he said.

China’s producer services – which fall under the services sector – account for 31.4 per cent of the national GDP, compared with 47.7 per cent for the US, according to data provided by the former central bank official.

To spur the development and deployment of advanced manufacturing and “new productive forces”, Sheng said, China must increase the share of high-end producer services in the broader economy.

“These high-end elements of manufacturing also belong to the service sector and are tallied as economic output,” he said.

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Citing the example of Chinese tech powerhouse Huawei, he said: “Its core competitiveness is far more than just manufacturing. It’s also in R&D, design and patents – all high-end services.”

He also noted that Huawei diverted more than 23 per cent of its 2023 revenue of 704 billion yuan into R&D, the highest total among all Chinese companies.

Sheng said Beijing should step up efforts to nurture the nation’s high-end producer services, while also encouraging consumption in the digital, green and health sectors while fusing digital technologies with the real economy to better integrate service sectors with manufacturing.

Beijing has been on the lookout for new growth sources for China’s economy amid a persistent property crisis, growing trade barriers and the West’s intensifying tech and geopolitical containment efforts.

Leadership is going all-in on promoting “new productive forces” – a catchphrase coined by President Xi Jinping that encapsulates home-grown innovation, a tech-heavy strategy for the nation’s economic transformation, and progression up the value chain.

But a tendency in some localities to prioritise the real economy and manufacturing while marginalising or overlooking the service sector has some economists and officials worried.

“The underdevelopment in producer services is a weak link in our economy, despite our strengths in agriculture and complete manufacturing sectors,” former Chongqing mayor Huang Qifan, an influential voice in China’s economic circles, said last year.

Huang said that only a third of China’s service sector is geared toward producers.



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