Summary of Key Points
The central argument of this article is that the slow development of consumer services in China (such as catering, domestic services, fitness, education, etc.) is not due to a lack of desire among consumers, but rather due to systemic constraints on the supply side, practical barriers on the demand side, and widespread misconceptions about the service industry. To boost consumption, it is necessary to address these institutional limitations and obstacles first. At the same time, we must correct misconceptions such as the belief that the service industry is of low value and a drag on economic growth. Only by doing so can the service industry (especially those related to daily life) truly thrive, thereby creating a positive cycle of income growth and increased consumption.
1. Why are there misconceptions about boosting consumption?
Many people think that "there's no need to promote consumption; people will spend more when their incomes rise" or that "consumption does not drive long-term growth; investment is the key." These views are based on the assumption that the current state of consumption is already optimal. However, this is not the case:
- The low income levels of ordinary people are due to a distorted industrial structure. China's manufacturing sector accounts for a large proportion of GDP, and it is capital-intensive (with many factories and few employees), resulting in lower wages for workers. Even though GDP has increased, workers' incomes have not risen significantly, which in turn hinders consumption.
- Scholars who argue that consumption does not drive growth assume an optimal balance between investment and consumption. However, China's investment ratio has been high (for example, through large-scale factory construction and infrastructure projects). In this context, increasing consumption can make the economy more balanced, as it can stimulate the service industry, which in turn creates more jobs and income.
2. What institutional constraints hinder the development of the service industry?
The service industry faces greater difficulties than the manufacturing sector due to systemic biases in policy design:
- Tax incentives favor manufacturing: The VAT rate for manufacturing is 13%, while it is often only 6% for services. Local governments prefer to promote manufacturing (e.g., by building industrial parks) to increase tax revenue. Since VAT is levied at the place of production, local authorities are more motivated to encourage production rather than consumption.
- Financial support favors manufacturing: Banks are more willing to lend to companies with collateral, such as factories and machinery. The service industry, which often relies on intangible assets (e.g., staff without physical assets), faces difficulties in obtaining financing.
- Local governments prefer manufacturing: Manufacturing can quickly boost GDP, and investments in this sector directly contribute to GDP growth. Additionally, manufacturing generates foreign currency through exports. In contrast, the service industry is mostly domestic-driven, with smaller markets, so local governments offer fewer incentives to support it.
3. What practical barriers exist on the demand side that prevent consumption of services?
Even if the service industry wants to grow, there are several obstacles for consumers:
- Lack of time: Employees work an average of 48.6 hours per week by 2025 (which is high internationally), leading to limited disposable income due to frequent overtime. For example, implementing autumn vacations in regions like Zhejiang and Sichuan increased service consumption by 12% and 92%, respectively, highlighting the importance of time for consumer spending.
- Strict market entry requirements: Many service industries (e.g., education, healthcare, elderly care) require licenses, which limit supply. For instance, setting up a childcare center can be cumbersome, resulting in a scarcity of services and limited access for parents who want to use them.
- Insufficient consumption opportunities: There is a lack of convenient and evenly distributed fitness facilities, and the night economy is restricted by business hours (e.g., bars cannot operate late). High-income groups also face limitations in accessing luxury activities like yacht rentals and golf courses due to a lack of relevant infrastructure.
- Household registration and urban planning issues: Although large cities offer better services, household registration restrictions deter people from other regions from spending there (out of concern for not being able to stay long). Additionally, urban planning that focuses on wide roads and large commercial areas can make it difficult for service providers to reach customers.
4. Debunking misconceptions about the service industry
There are several common misconceptions about the service industry that need to be clarified:
- Myth 1: The service industry is of low value or part of a "virtual economy":
Services can improve quality of life (e.g., hiring a housekeeper saves time) and drive demand for related products (e.g., furniture and equipment for restaurants). The service industry is an essential part of the real economy.
- Myth 2: The low proportion of service consumption in GDP is due to statistical issues: Services may seem cheap, but this is because the industry is underdeveloped. Fewer jobs and lower wages lead to lower prices. If the service industry develops fully, more jobs will be created, leading to higher wages and a higher share of GDP.
- Myth 3: A high proportion of the service industry reduces productivity: This is a misunderstanding of the "Bowmer cost disease" phenomenon. While manufacturing can increase productivity through automation, services rely on human labor, which may see slower growth in productivity. However, this is a natural outcome of economic development; the surplus workers from manufacturing will move to the service sector, which is healthy for employment.
5. Policies are on the right track, but consensus is needed
Policies are beginning to recognize the importance of the service industry. For example, a national service industry conference was held in 2026, and the "15th Five-Year Plan" for expanding consumption places greater emphasis on service consumption than commodity consumption. However, many local governments and consumers still do not see the service industry as as important as manufacturing.
To truly develop the service industry, it is essential to change these mindsets. The service industry is not a burden but a necessary part of economic upgrading and a key driver of consumption growth. Only by reaching a consensus can policies be effectively implemented and service consumption flourish.
In summary, the problems with China's service consumption are rooted in institutional factors and misconceptions. By addressing these issues, the service industry can drive income growth, which in turn will promote further consumption, leading to a healthier and more balanced economy.