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Service Boom May Soften China's Export Downturn. By Peter Wonacott Staff Reporter. From The Wall Sreet Journal October 31, 2001
Oct 31, 2001

China, facing slumping exports, is seeing signs of a service-industry boom that should prevent a sharp slowdown in economic growth, a government statistician said.

Although China's growth eased to 7% in the third quarter from 7.9% in the first half, the economy probably won't slow further this year or next, said Liu Liping, chief of the production division at the National Bureau of Statistics. "Maintaining growth between 7% and 7.5% shouldn't be a problem," Ms. Liu said.

That's partly because a swelling number of Chinese travelers, who are spending money on airlines, hotels and restaurants in China, have helped cushion the blow from a deteriorating global economy, she said. Ms. Liu didn't provide fresh statistics for the service industry, but said anecdotal evidence suggested that greater mobility of Chinese workers and tourists was spreading wealth and new jobs. "Growth is quite high," in the service sector, she said. According to figures released earlier this month, China's service sector grew 7% in the first nine months of the year, making up about a third of the value of gross domestic product. The rate outpaced the 2.5% increase in heavy industry, but was not as fast as the 9.3% growth for light industry, during the same period.

Stepping up China's service-sector growth could prove crucial in the coming months. China's exports are expected to fare badly from a downturn in U.S. consumer spending following the Sept. 11 terrorist attacks in New York and Washington. China's exports rose 7% in the first nine months of the year, but the slowdown from 27.8% growth last year threatens to hit rich coastal cities -- the areas that powered 20 years of export-led growth -- especially hard. In the longer term, the impact could force China's companies to change. While China's cheap manufacturing base has given it a formidable edge over Asian neighbors, it's not clear how long such advantages will last.

Pressure may come not only from slowing sales, but from rising unemployment. "Most would argue that 7% is already good enough for China. It is not," Andy Xie, a Hong Kong-based economist at Morgan Stanley, said in a research note. Mr. Xie estimates that China needs to maintain 10% growth to create enough jobs for the nation's pool of surplus labor estimated at about 300 million people, as well as for 10 million more people entering the labor force each year who are better educated than those already working.

Getting China to grow faster, and to take advantage of a better-educated work force, Mr. Xie said, will depend on successful financial reforms forcing banks and stock markets to steer capital to companies that can use it well, leading the economy away from a dependence on low-cost labor.

Write to Peter Wonacott at peter.wonacott@wsj.com.

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