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Experts predict it will take a long time before China’s service sectors recover from the Covid-19 pandemic and the much-anticipated surge in consumption is unlikely in the near future

By NewsChina Updated Aug.1

With a chair and sign advertising a “10 yuan (US$1.4) haircut,” Guo Fei earned 120 yuan (US$16.8) in two hours at his makeshift stall in a community in Beijing.  

This is just a quarter of the price he normally charges at the salon where he works in Sanlitun, a bustling shopping area in the city.  

Before the Covid-19 pandemic outbreak, the salon was so busy that Guo and his colleagues didn’t take walk-ins. But they’ve seen few customers since it reopened on April 15, when authorities eased restrictions on businesses to contain the Covid-19 pandemic.  

To drum up business, Guo and his colleagues began offering streetside cuts near the salon.  

“This is the worst I’ve seen for our industry in 20 years,” Guo told NewsChina.  

Guo and his colleagues are not alone. The sharp drop in demand for service industries has been felt across the board, from dining and hairdressing to entertainment and fitness. Though China has emerged from the pandemic, business owners have yet to see the rebound in consumption they had expected.  

Cai Zhen, a researcher at the National Institution for Finance and Development, said that services where price has a greater impact on demand would take longer to recover, and few analysts believe the recovery will be large enough to make up for the business lost. This poses a challenge to China’s economy, in which service sectors play the largest role.  

Long Winter 
Chen Linlin, who owns a board game cafa in Sanlitun, prepared as usual for what has always been her busiest time of year - the five-day May Day holiday. But customer turnout was far below average. 

A March survey of 5,434 offline shops by the research arm of Meituan Dianping, a food delivery and services platform, showed that 74.5 percent of reopened shops did not see a single transaction and 11.5 percent reported less than 10 percent of the turnover they had during the same period last year.  

What’s worse, many services still have no timetable for reopening. At a press conference on May 2, Li Sufang, a Beijing city official, announced pandemic control restrictions would continue for cinemas, dance clubs and music venues, internet bars, mahjong parlors, sports venues, indoor tourist spots such as museums and cross-provincial and cross-border group tours.  

The China Film Association issued a notice demanding authorities set a nationwide reopening date, the Securities Times reported on June 5, as the nearly four months of closures have taken their toll. Statistics from Tianyancha, an industrial data provider, show that 2,700 cinema-related companies have gone bankrupt or closed their doors. 

While still struggling, catering, a pillar of the service sector, resumed business earlier than others as demand is higher. In Shanghai, “80 percent of restaurants have reopened, but revenues are only at about 50 percent and recovery for restaurants that serve slowly prepared meals has been the most challenging,” said Jin Peihua, deputy secretary of the Shanghai Restaurant Cuisine Association.  

Guangdong Province is also struggling. Cheng Gang, secretary general of the Guangdong Restaurant Association, told NewsChina that restaurants focused on formal dining rely heavily on banquets, which have declined sharply since the pandemic began.  

Jiang Xu, a manager at a Chinese restaurant chain, said that eat-in restaurants nationwide are seeing less than 50 percent of their previous business. And because these restaurants are usually larger, they have higher rents and overheads. But the financial support they receive from the government is limited to meeting immediate needs, Jiang said. 

Pandemic control measures such as spacing diners one table apart and restricting the flow of customers have also hurt restaurant revenues. A manager of a Chinese restaurant chain in Shanghai who asked to remain anonymous told NewsChina that as long as pandemic control measures are in place, restaurants would not match last year’s revenues.  

“It will take at least three months for catering to recover. People’s dining habits have changed. Fewer people go out to eat now and they go out less frequently. More companies will go bankrupt if difficulties persist in generating cash flow and access to capital,” said Jin. 

The service sector has been the largest driving force in China’s economy since 2014, creating more jobs than manufacturing since 1994, according to the National Bureau of Statistics (NBS). Yao Yang, dean of the National School of Development, Peking University, said during an online forum hosted by China Media Group on May 22 that more than half of the country’s urban workforce is employed by small businesses with less than five people, most of which are in the service sector. 

Stimulating consumption in the service sector has been a priority for government at all levels, which has handed out billions of yuan in discount coupons for tourism, retail and catering. Many local officials are eating out at restaurants and shopping to encourage the public. In early May, authorities ordered reductions and delays in rent payments for small businesses struggling in sectors such as catering, hospitality, tourism, education, housekeeping, film and beauty.  

A couple sits at two separate tables at a restaurant in a shopping mall in Tianjin, March 11, 2020

Mask-wearing models work at an auto expo at Hunan International Convention and Exhibition Center in Changsha, Hunan Province, May 2, 2020

Set for a Struggle
Companies are doing their best to mitigate losses. Pan Xue, owner of a nail salon in Beijing, said she has been taking customers with prepaid membership cards from 10 closed nail salons. Closing shops commonly transfer their prepaid accounts to larger ones at a loss to avoid disputes with customers, Pan said. 

Many restaurants have adapted their menus for takeout, a move that Jin Peihua said is essential to increasing revenue. During the pandemic, fast food contributed at least 25 percent of the total revenues for the industry while restaurant takeout accounted for less than 10 percent, according to Jin.  

These efforts have paid off. NBS data showed that in April, revenue from catering and retail dropped by 31 percent and 4.6 percent year-on-year, compared to their declines of 46.8 percent and 12 percent in March. According to the Ministry of Commerce, retail, catering and hospitality recovered faster during the five-day May Day holiday than over the Qingming Festival, or Tomb Sweeping holiday, in early April.  

But there are still challenges ahead. An analysis by the NBS and the China Federation of Logistics and Purchasing showed that more than half of all enterprises in service sectors reported weak market demand in May. This decline led to decreased tax revenue, which adds to the financial pressures on local governments.  

In less developed areas where governments have fewer financial resources to support businesses, service industries and tax revenues will take more time to recover.  

A report on household finances during the pandemic released by the Southwestern University of Finance and Economics (SUFE) and Alibaba’s Ant Financial on April 21 showed that in the first quarter, lower income groups and freelancers were affected the most, making any projected surge in consumption unlikely.  

“More than half of all households said they intended to increase their savings and reduce consumption. People tend to save instead of spend during times of uncertainty,” said Gan Li, director of the Survey and Research Center for China Household Finance at SUFE.  

Because demand for many services is heavily affected by changes in price, experts predict that it will take at least 10 months to return to pre-pandemic revenues despite stimulation policies. “The coupons do stimulate demand and the effects have been better in retail and catering, which have inelastic demand,” Cai said. He suggested coupons should target specific fields to boost demand in services more affected by price changes like entertainment, beauty, fitness and hospitality.  

“Demand for optional consumption such as tourism and entertainment will return gradually only when consumption in sectors with inelastic demand like retail and catering is restored,” Cai said.