Service consumption in China - Why, How and When?

Four recent pieces from CF40, taken together, offer one of the clearest pictures yet of China’s service-economy challenge

Earlier, we translated an insightful speech on service consumption by economist Lu Ming. His argument was that China’s next stage of growth hinges on building a modern service economy, not doubling down on traditional industrial expansion. He said:

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.

To understand the issue better, we turned to CF40’s recent research.

Why CF40’s new work matters

Some of you already know this, we are collaborating with CF40, China’s pre-eminent economic thinktank, to help run their English Substack, CF40 Research:

Four recent pieces from CF40, taken together, offer one of the clearest pictures yet of China’s service-economy challenge.

The first essay, based on A-share consumer companies, shows that China’s consumption mix remains heavily goods-driven, that essential spending has risen since 2020, and that services remain underrepresented and undercapitalized.

The second essay revalues China’s actual consumption basket using foreign price systems and finds that China’s goods consumption volumes are already close to developed-country levels. The real gaps lie in services.

The third essay looks across 60 years of global data and shows that only two types of services consistently expand as countries become wealthy: producer services and high-end social services. These are precisely the areas where China lags behind.

The fourth essay examines how advanced economies avoid stagnation. It finds that welfare systems and knowledge-intensive services are essential for balancing high savings with adequate investment and consumption. These service-heavy systems are the institutional foundation China has not yet fully built.

Below is a detailed digest of these four essays, in sequence.

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What A-share companies tell us about consumption

CF40’s “Understanding China’s Household Consumption through A-Share Consumer-Sector Listed Companies” begins with a simple but revealing fact: the listed consumer universe is overwhelmingly goods-oriented. As the authors write, “A total of 581 A-share consumer companies are selected as the analytical sample, of which 521 are classified as goods companies and 60 as services companies”. This imbalance mirrors the real economy.

From the A-share perspective, goods dominate both in scale and in structural trends. The authors note that “goods consumption showed an upward trend while service consumption exhibited a downward trend from 2014 to 2022”. Services only began to recover in 2023, and even then from a small base.

One of the clearest findings is the post-2020 pivot toward essentials. The paper highlights that “the share of essential consumption has increased, while the share of discretionary consumption has declined”. Grain and food products surged and have stayed elevated, reflecting both uncertainty and the defensive nature of household spending.

A-share data also became more tightly aligned with macro indicators after 2020. The authors report that “the linear correlation between the two growth series strengthens considerably after 2020… 0.7 for 2015–2019 and 0.97 for 2020–2024”.

In the conclusion, the authors underscore the central structural issue: “China’s share of service consumption still needs to increase, and the representation of service-sector firms among listed companies remains noticeably low”.

What China really consumes

In “The Value of China’s Consumer Basket in the U.S., Japan, France, Germany, and Mexico,” CF40 researchers ask what Chinese households actually consume, not what they spend. They reprice China’s consumption basket using foreign price systems.

The results challenge the prevailing narrative of “low consumption.” As the authors show, “China’s consumption basket is valued at $24,748 in the United States, approximately 80% of the U.S. level; $6,006 in Mexico… 1.17 times that of Mexico’s level; $9,253 in Japan, 93% of Japan’s level; and $9,235 and $10,805 in France and Germany respectively, approximately 75% of the levels in France and Germany”.

Even under the conservative scenario, which assumes unmeasured categories are as low as nominal data suggests, “China’s entire consumption basket is valued at $26,857 in the United States, representing 50% of U.S. per capita consumption”.

Where does China differ? In the parts of consumption that the basket does not capture. The authors explain: “The portions not included in the consumption basket are tobacco, alcohol and beverages, daily household goods, as well as service consumption in transportation, postal services, culture and entertainment, and restaurants and hotels services”.

In the summary, the authors remind readers that these measurement adjustments do not resolve structural issues. “Re-examining China’s consumption level does not resolve the existing structural challenges in the economy”. The challenge lies not in goods consumption, which is relatively high, but in the deep underdevelopment of many service categories.

Where service growth really comes from

“The Rise of the Service Sector in the Post-Industrial Era” looks across 23 economies over six decades. Its main finding is that the global rise of services is highly concentrated. As the authors write, “a very high proportion of the increase in the service sector’s share since 1965 comes from just a few subsectors”.

These subsectors fall into two groups.

First, producer services. The paper notes that these “account for about 60 percent of the rise in the service sector’s share”. These are the R&D, legal, accounting, engineering, and digital services that support a modern industrial economy.

Second, high-end social services. These include healthcare, social work, education, and other human-capital-related services. Depending on the sample, they contribute between 17 and 28 percent of service-sector expansion.

By contrast, the consumer-facing services people often associate with “service consumption” — restaurants, hotels, entertainment — remain small everywhere. They do not structurally drive service-sector growth.

The international comparison section quantifies China’s gaps. The authors write that China lags the global median in “renting and business services; health and social work; and real estate activities”. These are the very categories that expand most predictably as countries become wealthier.

The implication is direct: if China wants its service sector to rise to international norms, it must expand producer services and high-end social services, not rely on tourism or leisure alone.

How services prevent high-savings economies from stagnating

The final CF40 essay, “Rebalancing Savings and Investment in Industrialized Economies,” examines how advanced economies avoid the long-term stagnation that can arise when savings chronically exceed investment. The paper argues that much depends on households' ability to consume and firms' ability to invest in new forms of capital.

One mechanism the authors highlight is the development of new, service-heavy growth fronts. They write that advanced economies depend on “new investment opportunities in knowledge-intensive sectors” once traditional industrial returns decline. These sectors are overwhelmingly producer services: software, scientific R&D, intellectual property, and business services.

At the same time, social services and welfare systems reduce precautionary savings by lowering the household burden of healthcare, education, and old-age support. The combination of robust producer services and strong social services helps prevent persistent gaps between desired savings and actual investment.

This leads to the paper’s clearest message for China: countries at this stage “must build new institutional foundations for consumption and new frontiers for investment”. In China’s case, these frontiers align closely with the producer services and social services identified in the previous essays.

Bringing it together

Viewed together, these four CF40 essays point to a coherent conclusion.

China’s consumption challenge is not simply about confidence or stimulus. Goods consumption volumes are already high. What is small is the country’s service ecosystem: producer services that support innovation and industrial upgrading, and social services that reduce precautionary savings and support household wellbeing. The service economy is not just a symptom of development; it is the mechanism through which modern economies balance savings, investment, and household welfare.

For China to move into its next stage of growth, it must build the service infrastructure that its development level now requires.