Investors eye China services as the next big thing

By Clement Tan

HONG KONG, March 21 (Reuters) – As Chinese leaders encourage the country’s 1.3 billion people to open their wallets to boost domestic demand, hotel chains, supermarkets and other service providers offer investors a fresh tilt at the country’s growth story.

Beijing is targeting a 4 percentage point rise in the service industry’s contribution to GDP by 2015, up from 43 percent in 2010. Still well below the U.S. service sector, which makes up about two-thirds of the world’s largest economy.

For investors with longer-term horizons, services that cater to a growing middle class offer an opportunity to cash in on a shift in consumption patterns as Chinese consumers move increasingly up the value chain, say analysts.

“There’s a lot of pent-up demand for services due to supply constraints,” said David Cui, Bank of America-Merrill Lynch’s Shanghai-based chief China equity strategist.

Policy-makers want increased domestic spending to offset a reliance on exports, and have outlined plans to narrow the rural-urban divide and boost wages for 158 million migrant workers. The services sector is vital for future job growth.

Supermarkets, logistics firms and tourism companies focused on domestic travellers offer good opportunities, says Cui, who recently authored a report on China’s services sector, though analysts warn that stock picking is still vital.

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