Picture: Each citizen can apply for tax deductions with a downloaded phone app. For foreigners without a Chinese ID card number it requires a trip to the tax bureau. Per Linden, CEO of Scandic Sourcing was entitled for a CNY 5000 deduction per month due to 4 children and 2 elderly parents in Sweden (!).

For us that have worked long in China a changing regulatory environment is one of those things that we learn to live with and thrive on. This year there are, as usual, several quite substantial changes. We will point out just a few which we think will have far reaching consequences.

The economy in China goes through a transformation stage of lower growth and onset of maturity, and is at the same time under stress from increasing costs and the trade war with USA affecting many manufacturing companies. 

Will Social Insurance premiums kill manufacturing?

The rule that will have the biggest impact on production in China is the tightening of Social insurance payments. From January 1, social insurance contributions will be paid to China’s tax bureau, instead of the HR bureau. The rule has always been that all compensations should both be taxed and form the basis of social insurance contribution, however, it has been a common practice due to lack of coordination between the agencies, to use different base for income tax and social insurance, by having a low basic salary on which social insurance was paid and avoid to pay on allowances and overtime. If implemented fully this new law will have a severe impact in the manufacturing industry in China where migrant workers often refuse to contribute to social insurance, as the system is not nationwide and they will not enjoy all the benefits. Scandic Sourcing help clients monitor their Chinese subcontractors for social compliance as part of the Scandic Supplier code of conduct Audit program and have audited hundreds of factories in China. “We often find that companies pay social insurance for their local resident workers but at the wrong level and for migrant workers it is fairly common that they don’t pay at all. There will be a substantial cost increase in labor intensive manufacturing companies”, says Fredrik Sundstrom, Operation manager at Scandic Sourcing in Shanghai. There are no news yet on when a unified national social insurance system will be introduced.

Will there be a lack of workers

To finance the social insurance system start to look like a tough challenges for China with an aging population. Now the awareness of that the population will peak in a few years and then rapidly decline start to worry. By 2050 it is also estimated that 30% of the population will be over 60 and the active workforce shrink with 300 million people from its peak. The one child policy was abolished in 2015, to be replaced with a recommendation, but still a restriction to have two children, and lately there has been discussions to abolish the system completely and to encourage 3 children. This is not so easy with high cost of living and especially real estate prices in the cities. Young people are focusing on their careers and having children later. Newly married people in some parts of the country now have to pay a deposit of about CNY 20,000 when they get married, which they can get back after they produce a baby (1 CNY= 6.9 USD)

(Continue to read…)