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China can revive manufacturing competitiveness by making more cuts to firms’ social security contributions: planning agency

China’s powerful economic planning agency wants further cuts to social security contributions paid by companies, which it says are higher than those facing US and Japanese firms, to help revive the nation’s manufacturing competitiveness.

Mandatory pension and health-care payments imposed on Chinese employers were already close to the levels found in France and Germany, even though the nation’s welfare coverage lags far behind those of European countries, the National Development and Reform Commission said in a research note.

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Chinese companies were burdened with higher social security obligations than those in the United States and Japan, the note said.

The commission said that a cut to corporate social security payments of 150 billion yuan (HK$174 billion) would help boost gross domestic production growth by an estimated 0.137 per cent, if half of the total went to employees’ salaries and the rest to corporate investment.

Beijing has been trying to reduce business costs facing factories and workshops by making modest cuts to the amount every employer must pay towards staff benefits.

In April the State Council decided to lower corporation contributions to some social benefits on a selective basis within two years – starting from May – while still maintaining the same level of welfare for employees.

Although it might seem to employees that the cut in corporate contributions means their benefits are being sacrificed, most local governments, such as Shanghai, have promised that the reduction will not affect the amount staff will receive after they retire.

Pension premiums contributed by companies should be lower than 20 per cent of an employee’s salary, and contributions to the housing fund of less than 12 per cent of the salary of staff.

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More than a dozen provincial governments released new rules in response to the move.

However, the commission said the high corporate burden of social welfare contributions facing mainland firms – which it ranked 13th out of more than 170 countries around the world – had become a major factor in the “continuously growing” labour costs and was now hitting business profits.

Social security premiums contributed by Chinese companies accounted for nearly 40 per cent of their total wage bills – close to the level of contributions paid by companies in Germany and France, but much higher than those in the US and Japan, it said in the note.

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Apart from facing five different social insurance costs – mandatory pension, unemployment, medical, working injury and maternity payments – employers also needed to contribute to a housing fund for staff, making the nominal rate up to 60 per cent, it said.

Such payments had “jeopardised the competitiveness of China’s manufacturing industry”, Guan Bo, of the commission’s Institute of Social Development, who wrote the note.

The cost of a Chinese company hiring one employee was enough to hire 2.5 staff in the Philippines and 3.5 in Indonesia, the research note said.

“Our advantage in labour costs has been replaced by Southeast Asian countries, and as developed countries, such as the US launched initiatives to re-industrialise and revitalise manufacturing, our manufacturing sector is faced with a huge challenge,” the note said.

Professor Liu Erduo, from the School of Labour and Human Resources of Renmin University, said that amid the economic slowdown, companies had rising pressure on labour costs and the government wanted to put their interests before those of employees under such circumstances.

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“Judging from messages from central government officials, the top authorities believe employees have enjoyed quite strong growth in salaries in the past years, and they want to ease companies’ burdens first and put staff benefits aside for the time being,” he said.

Though some local governments, such as Guangdong and Shanghai, had ample social insurance funds so had pledged not to alter employee benefits after corporate contributions are cut, some northern and northeastern provinces were being faced with a large shortfall, Liu said.

Social insurance funds were managed independently by local governments and the funds were not transferable between different provinces, though there had been calls for reform for nearly a decade, he added.

Nationwide, there was a shortfall of nearly 1 trillion yuan in China’s pension fund by the end of 2014, according to a report by the Chinese Academy of Social Sciences issued late last year.