Bringing China’s services sector to the forefront
China’s economy has been advancing in more ways than one, but one key difference shows it still has some catching up to do.
In many ways, China is already behaving like a developed economy – a highly productive manufacturing sector and its dominance in global goods trade are some examples. Beijing is looking to overtake the US as the world’s largest economic superpower in the next decade, which is the long-term goal relentlessly being pursued by the Chinese Communist Party (CCP).
China’s path replicates basic economic theory: in the 1960s, national output was largely drawn from agriculture. This was followed by the current era of high-value manufacturing and goods exports, which now accounts for one-fourth of GDP. How soon China transforms itself into a largely service-driven economy, which will drive and sustain a country’s development, is the next question.
The Middle Kingdom’s political leaders gathered in October to finalise the contents of the country’s 15th economic plan, which will be the blueprint of all government policies and programs to be implemented between 2026 to 2030. One unique feature of the plan is the focus on “high-quality, efficient development” of the services sector, which would help sustain GDP growth at above 5 per cent in the years ahead.
The missing link
China’s robust GDP expansion, which has averaged 7.9 per cent in the past 20 years, came alongside its rise as the world’s manufacturing powerhouse. However, the country still falls short of the USD 13,935 per capita income threshold that would officially make it a high-income nation per World Bank metrics, with the country settling at a per capita income of USD 13,660 in 2024. This is largely mathematical, as China’s 1.4 billion population meant that more heads are taking a slice of the pie. China has been contending with a declining population since 2022, but that is not the best way to reach high income status. Of course, public officials would prefer a higher income base for citizens to share to truly feel prosperous.
The CCP’s long-standing goal is to double the size of the Chinese economy to USD 30 trillion by 2035, which requires an annual growth of 4.17 per cent. Although growth averaged 5.8 per cent between 2015 and 2024, a 4.8 per cent expansion in the third quarter of 2025 sustained a slowdown since January as global trade pressures escalated.
What may seem ironic to some is the fact that, despite being the world’s second most populous country, China’s services sector contributes less than 60 per cent of its GDP. The International Monetary Fund describes services in China as an underexploited growth driver, and we agree.
This is also one key facet that explains why China remains a developing economy even when its industrial sector has raced full speed ahead. Graph 1 shows that China is behind developed and emerging market peers in terms of the share of services relative to GDP.
While services such as hospitality and entertainment account for more than half of China’s GDP, this falls short of the world average at 66 per cent. Mature economies like the UK and US are primarily services-driven, with the sector accounting for over 70 per cent of total output. With an abundance of manpower, there is room to unlock faster growth in China through this space.
Stoking services growth
The Chinese government made the right call when it announced subsidies to support businesses in the service sector, particularly by providing access to cheap loans worth up to RMB 1 million (USD 140,000) to expand operations and build additional infrastructure. Beijing envisions that businesses will avail of new credit lines to add more tables in restaurants, expand room options in hotels, and offer new cultural shows and travel packages, to name a few. This follows the government’s “Two New” trade-in program implemented since 2024 for households and construction firms. Under the subsidy scheme, individuals and companies are incentivised to upgrade gadgets and equipment – ranging from smartphones and home appliances to cars and commercial excavators – to stimulate private spending.
The AI boom of 2025 creates new opportunities for technology-related services to take on a bigger role; the manufacturing of computers and semiconductors generate a greater need for software development and maintenance as well as technology support services. In the long run, this will drive technological innovation and a new era of tech-driven growth for China.
Supporting the service sector is also a low-hanging fruit for China. Graph 2 shows how services has managed to sustain growth throughout 2025, staying consistently above to neutral 50 territory based on PMI data. In contrast, the manufacturing sector has flip-flopped between expansion and contraction, indicating continued softness in demand for goods. This consumption gap may easily be filled by services.
These efforts illustrate China’s seriousness in unlocking faster growth. The attempt to jumpstart the services sector is encouraging and makes Chinese assets a better buy for global investors in search for good returns. We at Lundgreen’s have long been bullish about China’s prospects, and we are affirmed by the fact that more international wealth managers are now reconsidering China as they diversify away from the traditional US and European markets. Shares in Chinese services companies, including tech services firms, remain undervalued despite rising in previous months, so it remains a good entry point for investors to join China’s upbeat growth story.
