China economic structure faces manufacturing saturation and service sector gaps

Lu Ming, a professor at Shanghai Jiao Tong University, has identified a significant structural contradiction within the Chinese economy. He notes that while the manufacturing sector is facing saturated domestic demand and intense price competition—often described as 'involutionary' competition—the service sector is failing to meet rising consumer demand.

In manufacturing, companies are engaging in aggressive price wars to secure market share, leading to a deflationary spiral in sectors such as steel, building materials, and photovoltaics. Conversely, the service industry faces a supply gap in critical areas including elderly care, education, healthcare, childcare, and cultural entertainment. This mismatch in quantity, quality, and geographic distribution is cited as a key factor constraining consumption and slowing economic growth.

Lu attributes the service sector's limitations to several systemic factors: tax structures that favor manufacturing (13% VAT vs. 8% for services), a financial system geared toward asset-heavy industries that disadvantages light-asset service providers, social perceptions of service roles, and regulatory hurdles. While emerging sectors like AI and new energy vehicles show growth, they are capital-intensive and have not yet generated sufficient employment or income growth to offset the contraction in the real estate sector.