The Service-Led Future of China’s Economy
Full translation of the keynote speech by Lu Ming, economist and distinguished professor at Shanghai Jiao Tong University
China is approaching a critical economic threshold: a per-capita GDP of $14,000. Historically, crossing this line signals a transition from a manufacturing-heavy economy to a “post-industrial society” where growth is driven by services. Yet, the current market narrative is dominated by fears of deflation and sluggish consumption. Is China’s growth engine stalling, or is it simply switching gears?
Lu Ming, a Distinguished Professor at Shanghai Jiao Tong University and a member of the National Committee of the CPPCC, argues that the pessimism is misplaced. In a keynote speech delivered at the 8th Hongqiao International Economic Forum on November 6, Lu contends that China is not suffering from deflation, but rather “structural divergence”—a mismatch where manufacturing faces overcapacity while demand for services outstrips supply.
With the 15th Five-Year Plan on the horizon, Lu outlines a radical shift necessary for the next stage of development: abandoning the obsession with hardware and investing instead in “soft” infrastructure—from increasing household leisure time to densifying urban grids. He argues that service consumption is not “low-end,” but the essential fuel for absorbing manufacturing capacity and retaining talent in cities.
To help you understand this pivot, today we translate Lu Ming’s full keynote speech, delivered on November 6 at the 8th Hongqiao International Economic Forum in Shanghai organized by Yicai Media Group. This address offers a crucial preview of the policy logic likely to shape China’s economic agenda for the next five years, redefining where the real growth opportunities lie.
Lu Ming: Riding the Tide: Unleashing the Power of Service-Led Growth in China’s 15th Five-Year Plan Period
Lu Ming: China is on the verge of becoming a high-income economy and is entering a post-industrial phase. Although the service sector remains smaller than what is typical for this stage of development, it holds substantial untapped potential for future growth.
Distinguished hosts, organizers, and guests,
Thank you for the invitation. Today, I would like to examine China’s consumption landscape from a focused, micro-level perspective—by looking specifically at service consumption.
Let me begin with a fundamental question: Where does China stand in its economic development today? According to publicly available GDP data, China’s per-capita GDP reached USD 13,500 last year and is expected to exceed USD 14,000 this year, placing the country firmly on the threshold of becoming a high-income economy. In China’s more advanced regions, per-capita income is already approaching USD 30,000—comparable to moderately developed economies.
Crossing this threshold signals a profound structural shift. I describe this transition as China’s entry into a “post-industrial society.” Two indicators illustrate this clearly: the composition of GDP and the composition of employment. Services now account for 57% of China’s GDP and 49% of total employment. In leading metropolitan areas, the service share exceeds 60%, and in Shanghai it is now approaching 80%.
The report of the 20th National Congress of the Communist Party of China reaffirmed China’s commitment to becoming a strong manufacturing nation. Yet from a structural standpoint, China’s service share remains relatively low. The chart I am showing here places per-capita GDP on the horizontal axis and the service-sector share on the vertical axis. The upward-sloping line represents the pattern seen across advanced economies: the more developed the economy, the higher the share of services.
Where does China stand on this trajectory? The red arrows indicate that the share of services has indeed been rising over time. Yet, when compared with the historical paths of today’s advanced economies, we find that China’s service-sector share has been consistently lower at every stage of development.
Lu Ming: During the 15th Five-Year Plan period and beyond, the share of service consumption in China’s GDP is bound to rise, and its expansion will only accelerate. Strengthening China’s manufacturing capabilities will, in turn, rely increasingly on the development of producer services.
Let me address a natural question: will China’s drive to become a strong manufacturing nation disrupt the broader structural shift toward service-driven growth? From both a theoretical and empirical standpoint, the answer is no. There are two key reasons.
First, a stronger manufacturing sector creates stronger demand for producer services. As China upgrades its industrial base, manufacturing will rely more heavily on R&D, design, logistics, finance, trade, branding, and consumer-facing services. The stronger the manufacturing sector becomes, the larger the share of producer services will be in the overall economy.
Second, China is entering a phase of consumption upgrading. As incomes rise, the structure of household spending naturally shifts. When income levels were low, most spending went toward basic necessities. Over the past 25 years of rapid growth, Chinese households poured much of their budget into big-ticket manufactured goods—home appliances, cars, and housing. But as China approaches high-income status, these categories are hitting structural limits. The auto market is a clear example: China already produces around 30 million vehicles a year, a level close to saturation. There is very little room left for further expansion on the goods side.
So where will incremental consumption come from as incomes continue to rise? The answer is clear: services. This allows for a highly predictable outlook. During the 15th Five-Year Plan—and well beyond—service consumption will continue to rise as a share of total spending, pushing the service sector to occupy an increasingly central role in China’s economic structure.
Lu Ming: China is not experiencing deflation. What we are seeing instead is a case of structural divergence. In today’s economy, many segments of the service sector are facing a situation of “demand exceeding supply,” while existing supply-side infrastructure, institutional arrangements, and policy frameworks have not kept pace with the rapid rise in service consumption.
With this structural view in mind, let’s turn to prices. Over the past several months, the decline in certain price indices has sparked debate about whether China is slipping into deflation. But from my perspective, “deflation” is not the most accurate description. What we are seeing is better understood as structural divergence.
These figures come directly from China’s official price statistics. Each cluster of bars represents one month of data, with the National Bureau of Statistics releasing a full set of price sub-indices every month. The bar on the far left—CPI—is the figure that usually gets the most attention, and indeed, it has shown negative year-on-year readings in a number of months. But once you look beyond that single number, a very different story emerges.
The bars on the left side of the chart are dominated by manufactured goods, which account for much of the downward pressure. Meanwhile, the bars on the right—especially the orange “Other” category—are more closely tied to services. This “Other” category typically captures two kinds of items: new forms of consumption, and service categories that don’t fit neatly into traditional classifications.
And here is the key point: the “Other” index is not only consistently above 100 every month, it has also been rising. In other words, in many of China’s emerging service sectors, the real issue isn’t deflation—it’s inflation.
Take childcare services as an example. Regardless of income level, every household with young children needs access to early childcare. Prices have been rising simply because demand has far outpaced supply. This captures a structural reality in today’s Chinese economy: in manufacturing, supply exceeds demand; yet in many service sectors, demand exceeds supply. And that gap represents one of China’s most important opportunities for future growth.
Look at the photos in the slide. The one on the left shows what China’s tourist destinations look like during the May Day or National Day holidays. Many people ask: “If demand is weak, why are all these places packed?” Clearly, this is not a story of insufficient consumption. Or consider the film industry. When a high-quality movie is produced, demand explodes. This year’s blockbuster Ne Zha has already exceeded 10 billion RMB in ticket sales and is approaching 20 billion—ranking among the top five globally. The demand is there; the question is whether supply can keep up.
Jiangsu’s “Su Chao” amateur football league offers similar insight. Its rapid rise—driven by grassroots enthusiasm, supported by local authorities, coordinated across departments, and amplified through social media—has become a powerful engine for new offline consumption.
Now, let us look at the supply side. Inspired by Jiangsu’s success, other provinces have tried to create their own local sports events—only to discover that many cities lack adequate stadium infrastructure. This has prompted a rush to build or upgrade facilities. Again, this is not deflation. It is unmet demand—demand that the existing infrastructure, institutional framework, and policy environment were not prepared to support. This kind of supply-demand mismatch is a defining feature of China’s economy today.
Lu Ming: Crossing the 10,000-dollar threshold in per-capita GDP is a critical inflection point in global consumption patterns. Once a country moves beyond this level, the share of services in total consumption begins to rise rapidly. China is now entering this phase, and the potential expansion in service consumption is enormous.
To understand what lies ahead for China, it is helpful to look at how advanced economies have moved through a similar stage of development. The United States offers a particularly instructive example. As shown in the chart, American household consumption can be divided into three broad categories.
The purple portion represents durable goods—automobiles, home appliances, and other long-lasting physical products. The ochre portion shows non-durable goods—everyday necessities such as food, clothing, and basic items. And the dotted line captures services, spanning healthcare, education, tourism, leisure, cultural experiences, and a wide range of modern service activities. Together, these three components map out the full landscape of U.S. household consumption.
There is a particularly important feature in this chart: the red line marking the point at which U.S. per-capita GDP crossed the $10,000 threshold. Before reaching this level, the share of services in total consumption actually declined each year. This is easy to understand if we look at China’s own experience over the past 25 years. For those born in the 1960s, 70s, or 80s—who lived through the period of rapid economic expansion—rising incomes first went toward cars, apartments, and home appliances. Big-ticket durable goods naturally crowded out the share of services in the consumption basket.
China has now moved past this phase. With per-capita GDP expected to reach USD 14,000 this year, the country has effectively crossed the same “red-line threshold” that the United States once did. And once the U.S. crossed that point, its service-consumption share kept rising—ultimately reaching about 70% today.
Yet the current share of services in China’s household consumption is only 46%—far below what global comparators would suggest.
Looking ahead, if China maintains a medium-term growth rate of around 5%, per-capita GDP would double over the next 15 years. The national average would approach $30,000, while leading metropolitan regions such as Shanghai could reach $60,000, comparable to advanced OECD economies. At those income levels, service consumption in China’s most developed regions would naturally converge toward 70%, with the national average rising toward 55%. If we compare this with the U.S. trajectory, the growth potential is enormous. And even if the pace of expansion is slower, the structural shift is only a matter of time.
Lu Ming: We must abandon the outdated view that service consumption is “low-end” or somehow in opposition to manufacturing. Cities should first aim to retain people by improving the quality of urban life before they can foster innovation. A vibrant service sector not only enhances urban attractiveness but also helps absorb and support the productive capacity of a strong manufacturing base.
To unlock this enormous growth potential, we must also confront several deeply rooted challenges. In China, a long-standing mindset still treats service consumption as something “low-end” or even wasteful. Many in the older generation—the parents of people my age—continue to believe that spending on travel, cultural activities, or other services is frivolous, a sign of indulgence rather than meaningful consumption.
Underlying this is a persistent belief that pits services against manufacturing, as if only tangible goods count as “real” consumption while services do not create value. This mindset needs to change.
Let me offer a few observations on why service consumption is not “low-end” at all, but in fact a crucial engine for raising productivity and upgrading China’s economic structure.
First, consider domestic and household services. These services play a far more important role in improving labor productivity than we typically acknowledge. When families outsource part of their household workload to trained service providers, they free up time for work, learning, and innovation.
Second, look at the role of “third spaces” in cities today—places like cafés. Some people dismiss cafés as symbols of “involution,” or complain that a cup of coffee costs ten yuan. But the value of a café is not in the beverage. It’s never just the coffee. It’s the brainstorming, the spark of innovation, the exchange of ideas that happens around it. That value, of course, never shows up in the price tag of the drink.
Third, in many Chinese cities, we now see a pattern: cities that create vibrant consumption scenes and offer a high quality of life are the ones attracting young people. This approach—what I call “keeping people through better living ”—is effectively a universal, inclusive industrial policy. You first create a good life, attract talent, and only then can you talk about innovation.
Fourth, a large share of modern consumption is heavily technology-driven. The rapid growth of gaming has fueled advancements in metaverse-related technologies. China’s animation industry has also expanded quickly, and many of the underlying technologies used in animation and gaming are essentially part of the metaverse ecosystem.
Fifth, many forms of service consumption directly enhance human capital—education, healthcare, culture, and the creative industries are all examples where consumption simultaneously builds long-term productivity.
Finally, positioning services and manufacturing as opposing sectors is outdated. A strong service sector can help absorb and support the productive capacity of manufacturing. Consider the restaurant industry, promoting dining-out consumption does not mean households will stop buying cookware. On the contrary, restaurants will purchase large quantities of cookware as intermediate inputs. In many sectors, expanding service consumption actually helps digest excess manufacturing capacity.
In this sense, fostering service consumption is a mutually reinforcing, multi-win strategy.
Lu Ming: Large cities will increasingly hold a structural advantage in the development of service consumption. The diversity of services available in dense urban environments generates powerful consumption spillovers. Urban renewal must therefore pay close attention to population density, mobility, and scale—three factors that are essential for driving sustained growth in service demand.
Let me emphasize that in this new era of expanding service consumption, large cities will increasingly hold a structural advantage. Many emerging forms of consumption require face-to-face interaction—an inherent feature of service industries. Such consumption thrives only under certain conditions: a sizable population, high density, and strong mobility. These factors create the scale economies that make the quantity, quality, and diversity of services in major cities far superior to what smaller cities or rural areas can offer. This is why China has proposed building “consumption-center cities” in major metropolitan areas. Take Tianjin as an example. A recent concert by Jay Chou generated 3 billion yuan in local spending. Remarkably, 40% of attendees were Tianjin residents, while 60% came from outside the city. This illustrates not only the powerful pull of service consumption, but also Tianjin’s emerging role as a regional consumption hub.
Even more telling is the relationship—visible in national data—between city size and the diversity of service consumption. In the chart shown here, the horizontal axis measures urban population size, while the vertical axis reflects a service diversity index. The pattern is clear: the larger the city, the greater the diversity of services. This diversity, in turn, reflects people’s aspirations for a better life—driving them to move to large cities or travel across cities to participate in their service offerings.
Since we are in Shanghai today, let me share an example of this city. In the past two years, the Shanghai Museum hosted a blockbuster exhibition of Egyptian antiquities.
Initial estimates suggested revenue might exceed 100 million yuan, which already seemed impressive. But when the exhibition concluded this summer, the results were astonishing: 300 million yuan in ticket sales; 400 million yuan in cultural-creative merchandise; and 700 million yuan in total revenue. Seventy percent of visitors came from outside Shanghai—mainly from the Yangtze River Delta, but also from other regions and even overseas. This demonstrates the vast potential for consumption unleashed when compelling service-consumption scenarios are provided.
In recent years, we have witnessed explosive growth in concerts, live performances, theater, stand-up comedy, cultural tourism, and exhibitions. These activities increasingly integrate online and offline participation, amplifying their economic impact. Consider Xiaohongshu, a platform headquartered here in Shanghai. Although primarily an online company, it actively cultivates offline consumption. Its “Street Life Festival” and the recent anime-themed carnival on Fuxing Island attracted large crowds—even in 40-degree summer heat. These examples make one point clear: what matters is not a lack of demand, but whether cities can create the right consumption scenarios.
Another example is the hit game Black Myth: Wukong, which triggered a surge of offline tourism in related locations, such as scenic sites in Shanxi. Or take the viral photo wall outside Yanbian University, which brought unexpected foot traffic to the area—so much so that the university launched a barista-skills entrepreneurship program to channel this flow. These cases show how innovative scenarios can generate entirely new sources of consumption.
Let us also consider the choices made by young people today. Contrary to conventional wisdom, surveys by Xiaohongshu show that the top factor for young people when choosing a city is not jobs—it ranks only third. The number-one consideration is quality-of-life affordability. Cities like Changsha, Chengdu, and Hangzhou have become popular precisely because they offer rich consumption experiences at reasonable prices. Today’s young generation chooses where to live first, and only then decides where to work. This underscores the growing importance of building cities where life is attractive and vibrant.
However, many Chinese cities still bear the legacy of past urban-planning approaches—wide roads, low density, and dispersed layouts. These patterns reduce foot traffic and weaken the foundation for a thriving service sector.
In the next stage of urban renewal, Chinese cities must recognize the central role of density, mobility, and scale in driving service consumption.
Let me offer two pieces of evidence.
First, even within China’s own data, the relationship is consistent: when we compare cities by built-up population density (shown on the horizontal axis) with the share of services in GDP and employment (on the vertical axis), the pattern is unmistakable. Cities with higher density consistently exhibit stronger service-sector development.
Second, within cities themselves, street-network density matters just as much. The base images you see here are photos taken from some of Shanghai’s most vibrant service-consumption districts, paired with three statistical charts to illustrate the point. These charts measure each city’s street-grid density—whether the road network consists of wide, widely spaced arterial roads or a tighter grid of narrower, closely connected streets. Cities with denser street grids consistently show stronger service-consumption activity. And where service consumption is strong, quality also improves—because businesses compete more directly. Competition naturally drives differentiation, which in turn creates a richer diversity of services across the city.
In short: the denser the streets, the more diverse the service offerings. I want to emphasize this point again: the low-density, wide-road planning legacy found in many Chinese cities today has become a structural drag on the next stage of urban development and limiting the vibrancy of offline service consumption.
Lu Ming: Looking ahead to the 15th Five-Year Plan period, China must undertake significant structural adjustments. Consumption—not investment—must become the new engine of economic growth. And within consumption, the next major wave of expansion will come from services.
Let me conclude with a brief summary.
As China looks ahead to the 15th Five-Year Plan, I believe the economy must undergo two major structural shifts. First, consumption must assume a much larger role as the country’s new engine of growth. Second, within the consumption structure itself, China must place far greater emphasis on service consumption. This is the future economic momentum.
Lu Ming: Four policy priorities will be fundamental to unlocking China’s service-consumption potential: raising household incomes; improving holiday and working-hour arrangements; creating more compact and livable urban spaces; and strengthening investment in people by improving the conditions under which they live, work, and participate in the economy.
To achieve these structural shifts, several priorities require serious attention from policymakers and society at large.
First, China must boost household incomes by supporting a broad-based economic recovery. Only with rising incomes will people have the financial capacity to expand their consumption—especially service consumption. Today, the share of labor income within national income remains too low, and this is closely tied to the underdevelopment of the service sector. Compared with manufacturing, services are far more labor-intensive and therefore far more effective at generating wage-based income. If the economy continues to rely heavily on capital-intensive manufacturing and large-scale infrastructure investment, overall growth will not translate proportionally into higher household earnings. Therefore, increasing income is not simply a matter of issuing cash subsidies or consumption vouchers; it requires a structural rebalancing of the economy to elevate labor income as a whole.Second, we should recognize that service consumption requires not only money—but time. Chinese workers today face some of the longest working hours in the world—patterns such as “996” or even “007” leave little room for leisure. Under such conditions, it is impossible for service consumption to grow meaningfully. During the 15th Five-Year Plan period, China should therefore consider optimizing holiday arrangements, extending certain school holidays, and introducing more flexible leave policies. In Zhejiang, for example, proposals have already been made to lengthen spring and autumn breaks for students—but parents also need time off.
At the same time, working hours must be strictly regulated through nationwide coordination. If only individual firms shorten work hours, they will simply lose competitiveness to those relying on heavy overtime. A synchronized, nationwide adjustment is necessary. And if some workers prefer to work overtime, then companies should compensate them fully. Even if they themselves do not have the time to consume, the additional income can still be spent by their family members—ultimately helping drive service demand.
Third, space matters. Urban renewal should prioritize more compact, human-scaled urban design, recognizing that service consumption depends heavily on central locations and dense activity clusters. In my recent book The Concentric City, I argue that future patterns of consumption and mobility may re-concentrate in core urban districts.
Fourth, China must continue to invest in people. This means expanding both public services—healthcare, education, elder care, early-childhood care—and consumer-oriented service sectors such as sports, culture, entertainment, and tourism. Policy should support the creation of more service-consumption spaces while reducing unnecessary regulatory constraints so that the full potential of China’s service economy can be unlocked.
With that, I will conclude here.
Thank you very much.
