Rising growth in China's services sector doesn't generate enough demand for foreign goods to offset the decline from a slowing industrial sector, according to research published Monday by the San Francisco Federal Reserve Bank.

 

Import values in October 2015 were almost 19% lower than they were in October of the previous year.

Gary Shilling, a consultant and BloombergView columnist, wrote last week in a piece titled Truth-Telling on China's Economy:

Now the good news: The domestic-oriented service sector is likely to keep growing at low, double-digit rates — and that should result in real GDP growth of 4% to 5%...the service sector’s share of GDP has grown while the industrial sector’s share retreats. Since the first quarter of 2007, services gained 8.2 percentage points of GDP, to 51%, while the industrial sector’s share dropped 5.8 points, to 40%. The remaining 9% is agriculture. Services’ share of GDP first topped that of industry in the second quarter of 2012.

Mark Spiegel, a vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco, wrote in Monday's economic letter:

The steep recent decline in China’s imports is consistent with the country’s growth pattern across different sectors. There has been a strong positive relationship between slower growth in gross imports and slower growth in industrial output over the past 15 years. However, imports and service outputs do not show a significant relationship. These results hold both for imports from non-commodity exporting advanced economies and for advanced and emerging market economies that export commodities to China. Therefore, from the rest of the world’s point of view, an increase in China’s service sector does not offset a similar magnitude decline in its industrial sector. 

Spiegel added that "while strong service sector growth should mitigate the adverse implications of the steep decline in the industrial sector, it is unlikely to provide much support for China’s imports. The service sector relies much less on imported intermediate inputs than other sectors. The agricultural and industrial sectors use a larger share of these imports than they contribute to total output; by contrast, the service sector accounts for very little international trade, with its share of imports only 0.3 times the size of its share in output.

China, services, industrial_exportsThis pattern has resulted in a close correlation between China’s imports and output growth in its industrial sector, and almost no correlation between imports and service sector growth."

He concludes that the reallocation of growth towards China’s service sector should have more benign medium-term implications for its trade partners.

Chinese consumption is poised to surge from $3.7tn in 2014 to $6.4tn in 2025, resulting in $56tn of cumulative spending over the next decade, according to a report published last week from The Demand Institute, a US think tank jointly operated by the Conference Board and Nielsen, the market research firm. But the growth will be highly uneven, putting the onus on business leaders to knowledgeably navigate and prioritise between hundreds of distinct urban markets—at a time when China’s traditional five-tier system for classifying cities is no longer adequate to the challenge. No More Tiers: Navigating the Future of Consumer Demand across China’s Cities introduces a much more sophisticated, demand-centric approach. Based on analyses of some 200 key factors, this City Strata framework classifies 286 prefecture-level cities—home to over 90 percent of Chinese consumers, or 1.3bn people — into eleven coherent strata.

“Companies are being told they need to be everywhere to compete in China, and that the future lies in expanding to ‘Tier 3’ and ‘Tier 4’ cities in the five-tier system,” said Louise Keely, president of The Demand Institute, senior vice president at Nielsen, and a co-author of the report. “Both are myths. The current city classification scheme captures long-standing administrative and logistical relationships with the central government in Beijing; in the lower tiers, however, they say as little about future capacity for growth as a system that lumps Boston with Helena, Montana. Now more than ever, a selective city-level strategy is vital, given the profound challenges China faces in transitioning out of the state-driven boom economy of the last 20 years into a more sustainable consumer-led growth model.”

China consumer demand, services