Chinese Service Sector Eunuchs: Bigger but Impotent

There's an uncomfortable truth regarding the central government's ability to orchestrate less reliance on manufacturing and exports and more on a reformed service sector.

Partially due to a shrinking industrial base and irrationally exuberant online gambling in China's stock markets-cum-casinos, services now account for 50 percent of economic activity, up from approximately 40 percent 10 years ago; but in India the services share is almost 60 percent, despite a much lower GDP.

The government's refusal to loosen the reins of control and welcome both bottom-up entrepreneurialism and foreign investment in "sensitive" areas prevents service industries from flourishing. More fundamentally, the woeful state of China's service sector is the inevitable consequence of a power structure that frowns on independent thinking and autonomous decision making.

China has made laudable progress implementing large-scale, technologically proficient solutions to enhance mass-market efficiency: The digital holy trinity of Baidu, Alibaba and TenCent are powerhouses in their own right; e-commerce is pervasive and and online shopping a national sport; branches of the major banks are on every corner in every city; airline reservations are now online; mortgage applications have been standardized; social platforms like WeChat facilitate virtual financial transactions; the stock market is fully accessible to individual investors; and tens of millions of ordinary folk are launching virtual enterprises.

But genuine, personally responsive service is nowhere to be found except, only intermittently, at the very tip of the socioeconomic pyramid.

Since the start of the 21st century, China has witnessed an explosion in consumer choice. A plethora of luxury fashion, automobile, and fashion brands are lapped up by an ever-expanding middle class. However, despite adherence to WTO timetables and flirtation with service sector "special economic zones," education, health care and financial enterprise remain highly regulated. Foreign banks are unable to conduct renminbi transactions for customers with less than $120,000 in deposits.

In a bid to retain control of what the government labels "strategic interests," social and political stability outweighs the development of institutions that protect individuals.

In China, there is no Steve Jobs of Apple or Mark Zuckerberg of Facebook . Creative mavericks must cozy up to the government and conform to sanctioned business models lest they become personae non grata -- eaten by the system and absorbed back into the bloodstream of the body politic. The PRC's anti-individualistic power structure does not, and will not, celebrate originality. Even Jack Ma, Alibaba's iconic leader, based his business-to-business e-commerce platform on traditional Chinese strengths: efficiency maximization and scaled resource mobilization.

It is not just a problem of over-regulation and impenetrable red tape, lax intellectual property rights, and poor corporate governance.

The problem is also deeply cultural.

A service ethos requires the courage to go off script, probe into customer motivations, tailor individual responses, and even make mistakes. It also requires challenging past practices and experimenting with empirically untested solutions. In framework-fixated China, the qualitative dimensions of world-class service are scarier than bungee jumping. Hence the blank stares that greet unfamiliar requests at five-star hotels and the swarms of sales girls at high-end department stores who accost customers without first asking what they want.

The same goes for consumer-led online transactions. Bargains, not personalized engagement, rule.

To reach the next level of prosperity, Beijing's mandarins will need to resist a basic instinct to control, well, everything. Yes, foreigners do not appreciate the exquisite delicacy of the central government's balancing act as it pursues a reform agenda that does not destabilize. But, still, the PRC's upwardly ambitious middle class has achieved critical mass. The country's institutions need to evolve with the times, lest the Chinese people lose faith in a paternalistic government's ability to slowly but surely implement an economic agenda that delivers broad-based opportunity.