Date
21 September 2018
Higher social security contributions could reduce disposable incomes significantly among Chinese people, hurting personal consumption. Photo: Reuters
Higher social security contributions could reduce disposable incomes significantly among Chinese people, hurting personal consumption. Photo: Reuters

China social security reform may drag consumption

China is preparing to overhaul the mechanism for collecting social insurance levies, a move that could result in increased burden on local businesses.

Under the new system, the power to collect the funds will be consolidated in taxation departments to close loopholes enabling evasion and make collections more transparent and efficient. The new measure will take effect from the beginning of next year.

Currently, employers and employees are both requested to contribute to pension, medical and unemployment insurances. And employers shoulder insurance covering injuries at work and maternity.

A third-party report has revealed that currently only 24.1 percent of Chinese companies fully comply with the social security funds payment rules. Up to 75.9 percent of firms do not make these payments based on the actual salary of their employee. Some only make such contributions based on minimal salary.

Though contributions required vary from city to city, in general, companies have to shoulder a heavier burden, and the money individuals can take home will also decrease following the reform.

Social security contribution in China is reaching close to that in North European nations, accounting for over 30 percent of income.

It’s estimated that the nation may need to pay a total of 8.7 trillion yuan in social security fund, based on 39 percent contribution ratio. That represents a difference of 1.9 trillion yuan from last year.

It is estimated that new measures would cost Chinese companies and workers an extra 1.9 trillion yuan compared to last year, which would cut corporate profitability by 13 percent.

Meanwhile, extra contribution could reduce disposable income by 16-25 percent, hurting personal consumption.

To mitigate the impact, authorities may tweak the contribution levels and make them easier for companies and individuals to absorb.

If that doesn’t happen, investors may have to reassess the prospects of consumer plays.

This article appeared in the Hong Kong Economic Journal on Sept 5

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Columnist at the Hong Kong Economic Journal

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