Driven by the new or shackled to the old

Not all provinces have realized the inevitability of economic change or are learning to adapt

When the Politburo makes a pledge, no one can have any doubt that it means business. Capital markets have reacted positively since the Politburo meeting at the end of last month, chaired by President Xi Jinping, said China would maintain economic growth over the second half of the year to achieve its annual target of 7.5 percent from last year.

The bottom line is clear: The 7.5 percent target must be met, even though a slowdown from the previous double-digit growth is accepted, and to some extent welcomed in squeezing out overcapacity in some industries.

To hold up the bottom line, some micro-incentives are on offer, most noticeably the central government's investment packages on reducing air pollution and modernizing railways in central and western China.

This being the case, investors must be clear that China's growth in the second half of this year will not match earlier growth. Nationally, that will happen in just a few industries. At the provincial level, other than in industries encouraged by national policies, growth will come mainly from services.

This is not all dictated by policies formulated in Beijing, but first and foremost by supply and demand in the marketplace. The kind of growth led by large manufacturing has run into hurdles in many ways. However, it seems that not all provinces have realized the inevitability of change or are learning to adapt.

Some may still be nursing the hope that once a recovery begins, demand for essentially the same products will start to rise again.

Soon enough, investors will see two types of economic activity in all provinces and provincial level entities: those driven by services and those shackled to old industries.

Until next year, and in all likelihood over the next few years, the service provinces are going to develop much more quickly and be the beneficiaries of many more central government incentives than the old-industry provinces. The service provinces are also likely to produce more interesting listed companies and IPOs.

Looking at growth in the first half, a trend can already be discerned. In Shanghai, where GDP grew 7.7 percent year-on-year, its service industries grew 9.6 percent, even though the city's foreign trade grew only 5.4 percent.

Services accounted for 61.7 percent of Shanghai's economy in the first half. Municipal officials appeared particularly proud when they reported that although growth in the overall retail sector was meager, turnover in online retail grew 57.4 percent.

In Beijing, thanks to its many government offices and research institutions, services accounted for 76.4 percent of the economy in the first half of this year.

Reports from other provincial-level divisions are not so clear-cut. In Guangdong province, services accounted for 46.6 percent of GDP in the first half of this year, compared with 46.2 percent last year and 43.3 percent in 2007.

In Zhejiang, services were to the fore in its sector-by-sector breakdown in fixed-asset investment. Manufacturing grew 18.3 percent, falling 1.2 percentage points compared with a year ago, while the tertiary industry grew 22.6 percent, 0.6 percentage point up compared with a year ago. This is where services will eventually catch up.

By contrast, in Hebei, a province that reportedly produces more steel than the entire United States does, industry accounts for 55 percent of GDP, and services just 34.6 percent. This is a typical place dominated by old industries.

The author is editor-at-large of China Daily. Contact the writer at edzhang@chinadaily.com.cn.

(China Daily Africa Weekly 08/09/2013 page13)