[ET Net News Agency, 20 September 2018] A planned change to the way social insurance
contributions are collected in China could considerably raise labor costs for companies,
while potentially reducing some of the pension burden for local governments, S&P Global
Ratings said today.
The State Administration of Taxation will begin collecting social-insurance
contributions from 1 January 2019, taking over from the Ministry of Human Resources and
Social Security. This is a major step in streamlining the collection of a tax that is
rampantly evaded in China.
"This will make it harder for companies to avoid paying social-insurance contributions
in China--especially for private companies," said S&P Global Ratings country specialist
for China, Chang Li.
The present system suffers from a complicated process in many provinces. For example,
the duty is often undertaken by both the municipal tax bureau and the social security
bureau, an ambiguity that allows employers to escape payment.
Under the new system, the contributions will be calculated by the central tax bureau and
collected by its local arms. There are only a few places that currently collect social
insurance contributions exclusively through the local tax bureau - the provinces of
Guangdong and Zhejiang, and Xiamen metropolitan area.
Many provinces and municipalities use the multi-layered approach, including Hubei,
Hunan, Qinghai, Jiangsu, and Yunnan, among others. These governments have tended to
under-collect contributions.
S&P believes local regulators will still have some scope to adjust their execution of
the new collection process. Overall, however, enterprises could face higher contributions,
potentially affecting their credit profiles.
"The increased social-insurance collection may squeeze Chinese corporate profit margins
by increasing labor costs," said Li. "We expect any potential credit impact will be felt
more by private sector companies, which have tended to avoid more of the tax than SOEs."
Labor-intensive sectors most affected by the change include delivery/courier services,
construction, and retailing. These sectors have thin margins and high employee turnover.
A major step-up in labor costs could lead companies to increase outsourcing and reduce
permanent positions to control their labors cots. In a worst-case scenario, layoffs could
also increase. Private companies account for 80% of employment and produce over half of
China's GDP.
S&P believes that Chinese authorities would seek to avoid the detrimental economic
effects of a sharp and rapid increase in labor costs. At the same time, however, local
governments could face funding gaps in future without greater corporate contributions.
This is because of China's aging demographics. (KL)