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Qian, Xiaolei; Smyth, Russell --- "Jump! And we may catch you" [2007] MonashBusRw 48; (2007) 3(3) Monash Business Review 42

Jump! And we may catch you

Xiaolei Qian, Russell Smyth

Despite being enshrined in law, social security contributions in China change from city to city and many firms pay little if nothing, reveal Xiaolei Qian and Russell Smyth.

One of the major challenges for foreign companies in China is working out what their social security obligations are under China’s Labour Law. At present, all China’s employees are entitled to industrial injury insurance, maternity insurance, medical insurance, old age pension insurance and unemployment insurance.

What are the business social security obligations on business?

The levels of contributions vary from city to city, however. Table 1 shows specified contribution rates in 2005 for five Chinese cities that have been major destinations for foreign direct investment (FDI). In not all of the five cities are employers required to contribute to the full range of social insurances.

In Beijing, Guangzhou and Shanghai, employers must contribute for each of the social insurances, but in Dongguan and Shenzhen there is no provision for maternity insurance. In both Beijing and Guangzhou there is an additional levy on employers for a ‘serious illness’ fund. In Beijing and Shenzhen, the applicable rates for industrial injury insurance depend on the type of industry and the actuarial computed risk of injury in the workplace, while in Dongguan flat rates are adopted for industrial injury insurance.

For old age pension insurance both employers and employees have to contribute in all five cities. None of the five cities require employees to contribute to industrial injury insurance. For maternity insurance, medical insurance and unemployment insurance whether the employee contributes varies from city to city.


Table 1 Contribution Rates for Five Chinese Cities in 2005

Table 1 (continued) Contribution Rates for Five Chinese Cities in 2005

Employer contributions are based on the average wage of the previous year, but vary from city to city. So firms need to monitor the average wage in the city in which they have invested

Who complies with social insurance obligations?

Table 1 also reveals that social security costs in China are relatively high compared with the rest of Asia. The World Bank estimates that 40–50 per cent of an employee’s salary goes into social security and fringe benefits, compared with 16 per cent in India, 12 per cent in Malaysia, 10–15 per cent in Indonesia and 20 per cent in developed countries like Australia. Enforcement however is a different matter, with many municipal governments reluctant to enforce compliance for fear of losing investment to other locales in China or even offshore to other low labour cost countries in Asia, such as India and Vietnam. Multinationals such as General Motors, Honda, Intel and Motorola have already shifted manufacturing operations to the central and western provinces of China to take advantage of lower labour costs.

Evidence suggests that municipal governments in China are turning a blind eye to employers’ failure to meet social insurance obligations and indeed are even using this as a means to lure investors. Some local governments in Guangdong have declared that foreign-invested enterprises do not have to pay social insurance at all and in Shanghai the fear of losing investments to surrounding provinces like Jiangsu and Zhejiang weakens enforcement resolve.

The sensitive nature of compliance rate data makes any information rare. The data from this study on the level of firm compliance with social security obligations in Shanghai for 2001 and 2002 was provided by Shanghai’s Ministry of Labour and Social Security. As China’s richest city, with gross domestic product (GDP) almost double that of Beijing, Shanghai is not representative of the rest of China. Its municipal government has traditionally been very powerful with enviable resources compared to almost every other Chinese city. Because of this privileged position one would expect compliance rates in Shanghai to be higher than the rest of China but an independent audit of 2600 companies there found that at least 80 per cent were not paying what they should. If this is true in Shanghai the rest of the country may just as well be worse makes Shanghai’s non-compliance figures all the more shocking.


Table 2 Compliance Rates in Shanghai by Industry

The data on compliance rates according to industry and ownership type are reported in Tables 2 and 3. Table 2 contains information for 12 industries for 2001 and 2002. Over the two years the highest rates of non-compliance were among electricity, gas and water, real estate and scientific research companies. Banking sector non-compliance was relatively high in 2001, but did not increase much in 2002. In 2001 there were no industries in which the rate of non-compliance exceeded 80 per cent; however, in 2002 the rate of non-compliance exceeded 80 per cent in 10 of the 12 industries.


Table 3 Compliance Rates in Shanghai by Ownership

Table 3 contains data on compliance rates for five ownership categories: state-owned enterprises (SOEs), collectively-owned enterprises (COEs), shareholding firms, private firms and foreign invested enterprises (FIEs). Non-compliance is highest among FIEs while COEs and SOEs are lowest.

Despite some progress the Chinese authorities have made on paper in setting up a social security regime, many companies enjoy the cost advantage of either not paying anything at all or paying less than they should. The challenge for Chinese authorities is to balance the pressure to keep costs low to attract and retain further foreign investment while ensuring the safety net all its citizens deserve.

MBR subscribers: to view full academic paper, email mbr@buseco.monash.edu.au

Public access: www.mbr.monash.edu/full-papers.php (six month embargo applies).

Cite this article as

Qian, Xiaolei; Smyth, Russell. 'Jump! And we may catch you'. Monash Business Review. 2007.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 42–45. DOI:10.2104/mbr07048

About the authors

Xiaolei Qian

Russell Smyth

Xiaolei Qian is a PhD student in the Department of Economics, Monash University, where she is writing her dissertation on the economics of education in China. Russell Smyth is Professor in the Department of Economics and Director of the Asian Business and Economics Research Unit, Monash University.


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