The government's goal of developing China's service industries during the 11th Five-Year Plan (2005-2010) may not be achieved within the timeframe, but the sector has huge potential for rapid growth during the next five years, said analysts.

"It will be very hard for us to reach the target according to the released economic data," said Dong Xian'an, chief economist with Industrial Securities.

In the first three quarters of 2010, services output accounted for 42.4 percent of GDP, down by 0.8 percentage points compared with the same period last year, and still 1.1 points lower than the five-year goal.

According to the 11th Five-Year Plan (2005-2010), the sector's proportion to GDP should be increased by 3 percentage points, and the ratio of those employed in the sector, as opposed to the total number of employees nationwide, was expected to grow by 4 percentage points.

To achieve the goal, the proportion of service employees needs to improve by 1.28 percentage points, given that in the previous four years the figure rose by 0.68 points on average.

Although the nation's service sector has realized rapid growth during the past five years, its development still lags behind the demand generated by fast economic growth, said Zhang Ping, chairman of the National Development and Reform Commission in a report to the National People's Congress Standing Committee on Wednesday.

"In 2009, the sector output only accounted for 43.4 percent of GDP, not only far below the level in developed countries, but also lower than the average level of developing countries," an official said under the condition of anonymity on Wednesday.

In addition, the amount invested in services, compared with in total domestic investment during the past five years has dropped compared with 2005.

Meanwhile, the trade deficit of services in 2009 increased by more than twice that of 2005, according to information from the Ministry of Commerce.

Zhang, the nation's leading economic planner, vowed to implement more favorable tax policies, support the efforts of qualified services enterprises to list on the markets and issue bonds, and ensure that the sector can obtain electricity, water, gas and heat at the same prices as other industries during the next five years.

"The urgency of promoting the services sector is growing as we face a greater challenge to shift the economic development mode," he said.

Dong said the services sector will witness a great improvement during the next five years, but mainly because of the declining youth population and the subsequent rising demand for services from older people.

The employment-intensive domestic sector can be the turning point in the government's efforts to solve the dilemma of restructuring the economy and ensuring rapid growth to maintain employment levels, said Li Wei, economist at Standard Chartered Bank.

"We see it has enormous potential and it should be developed further as part of China's efforts try to move its economic growth engine away from export-oriented industries to domestic sources," Paul Heytens, country director of the Asian Development Bank told China Daily in an earlier interview.

The government is planning to include the sector in the value-added tax (VAT) group to reduce the tax burden on services, and further advance economic rebalancing, said Liu Zuo, director of the Taxation Science Research Institute affiliated to the State Administration of Taxation.

"VAT is levied only on manufacturing, while services are subject to a business tax that raises a much smaller amount. Given the heavy dependence of local governments on VAT revenue, they have a strong incentive to promote manufacturing rather than services," said the Asian Development Bank in a report.

Louis Kuijs, senior economist with the World Bank, suggested the government should adopt a market-friendly approach, such as reducing the barriers hampering the service sector to boost domestic demand to aid more efficient economic restructuring.