China – The Key Driver of Global Business Services Over The Upcoming Decade

China’s business services industry is forecast to climb to the top five in the world by 2025. Chinese business services providers are expected to become the key contributors to the expansion of business services globally over the 2016-2025 period, posting a CAGR of 11% and an increase in absolute value of nearly USD1,800 billion.

Chart 1. Increase in Revenues of Business Services within the Largest Economies, CAGR and Absolute Value Growth 2016-2025

Source: Euromonitor International from Trade Sources/National Statistics

Strong expansion of business services revenues and growing importance of these industries is projected to be stimulated by rising foreign investment, government support and the improving overall business environment.

Foreign investment drives high tech service industries

According to China’s Ministry of Commerce, foreign direct investment (FDI) grew by more than 4% during 2016, mainly stimulated by an 8.3% investment increase in service industries. Overall, service industries amounted to 70% of all Chinese FDI and were the main recipients of FDI in 2016.

Easing regulations for investment and elimination of the restrictive measures in free trade zones are set to boost FDI over the upcoming years. High-tech services industries are projected to be keyinvestment targets while the country’s gradual transition towards services and a higher-value added economy are forecast to stimulate expansion even further. Such industries as computer services or research and development are set to be the second largest globally in 2025 (up from third place in 2016, after the US and Japan), outpaced only by the US.

Government support to stimulate research and development

China’s 13th Five Year Plan 2016-2020 is set to concentrate on high-value added areas and move away from traditional manufacturing to service industries. Strong focus on innovation will in particular stimulate the research and development industry. The Chinese government has been seeking to improve the country’s global innovation ranking from 18th in 2015 to 15th in 2020, while R&D’s share of GDP is set to go up from 2.1% in 2015 to 2.5% in 2020.

In addition, China’s expenditure on R&D activities has been growing at a higher pace compared to global spending and with strong Chinese government support, such trend is projected to prevail overthe upcoming years.

Improved business environment to accelerate business services

Expansion of business services revenue is also projected to be boosted by improvements in the business environment, particularly benefiting from the strong potential in regional areas.

Regional development is forecast to be strengthened during the upcoming decade. Such initiatives as One Belt, One Road and Yangtze River Economic Belt are set to improve collaboration between regions and boost business activities.

In addition, establishment of free trade zones is expected to diversify the economy and stimulate investment in service industries. This year China launched an additional seven free trade zones, totalling 11, which are expected to improve the performance of such business service industries as legal, accounting and recruitment services.