In recent years, Beijing has made the eradication of poverty one of its primary goals, giving rise to significant reforms to support citizens living on society’s margins. At the same time, the government is confronting several pressing economic and demographic challenges. These include a rapidly ageing society with a growing need to protect the elderly and those in ill-health. It is also seeking to replace the gap in social security once provided by state-owned enterprises that have been in decline since being broken up in the post-1980s reform era.

By 2025, China’s welfare spending could rise to over a third of gross domestic product. The Ministry of Human Resources and Social Security has committed to expanding its programme of welfare expansion across childcare, education, employment, medical services, elderly care, housing and social assistance, but serious obstacles remain. Here is a snapshot of the current policy paths being undertaken.

Urban migration

China’s “hukou” system requires residents to register in a particular area. For sixty years, the policy has been a key determinant of access to public services and protection from the state. In cities, where competition for resources is fierce, an urban hukou is needed for everything from health insurance and school and university places, to certain jobs and even to buy property.

First introduced in 1958 in the early years of the Communist regime, the hukou (literally translated as “household individual”) was envisaged as a modern way to track the population and control internal migration across a vast country. In 1985, it was extended into physical form through the creation of ID cards.

Today, certain privileges are reserved for “real” city residents, effectively meaning those from elsewhere, particularly migrant populations, are often treated as second-class citizens. This has meant that hukou reform has become central to achieving China’s current 14th five-year plan to alleviate poverty and make China a near-majority middle-income country.

More than half of the Chinese population now live in cities, but only 35% of city dwellers have an urban hukou. It is estimated 250 million migrant workers lack access to social payments, whether for children’s education or medical assistance.

“A lot of the problem with migrant workers that go from the rural areas into the cities is that they are not incorporated into the welfare system,” says Professor Jane Duckett, Edward Caird Chair of Politics at the University of Glasgow, who specialises in Chinese politics and social policy. “They are not entitled to those kinds of benefits. Although the trend has been to push employers to give better contracts to those people and include them on that basis.”

In recent years, hukou policy reform has shifted in a direction that makes it easier for migrant workers to gain access to welfare. In 2014, the Chinese government created its “new urbanisation plan,” which promised to assist over 100 million residents in the process of swapping their documentation, for example.

But some provinces are reforming faster than others. According to Professor Duckett: “There are some parts of the country that are more dependent on migrant labour and therefore are doing more to provide for this group. Guangdong and Zhejiang [in the south east] tend to provide more for migrants whereas other areas such as the ‘rust belt’ in the northeast do not.”

Meanwhile, many rural areas have been locked out of China’s “economic miracle”, and lifting rural welfare has become a hot button issue for President Xi Jinping. Since 2010, “barefoot social workers”, a flagship programme to assist remote communities, have been deployed to rural areas, with over 600,000 in the field as of the start of 2019. However, the system falls short, with Chinese social policy experts saying many social workers lack proper training, citing inefficient local enforcement of national strategies.

“The focus of the child support system has shifted from helping the neediest children to striving for universal welfare,” Zhang Rongli, a professor at China Women’s University and a renowned expert on children’s rights and welfare, told Sixth Tone last year.

1-2-3 child policy

In May 2021, couples in China were allowed to have three children following a sharp decline in birth rates stoking fears around the economic implications of an ageing population and dwindling numbers of those of working age. A two-child limit was in place from 2016, replacing the decades-old controversial one-child cap on family planning that applied to all but the wealthiest. “Like in most countries, declining working populations [in China] are finding it increasingly challenging to support growing retired groups,” Mark Tanner, managing director of The China Skinny, explains. “Chinese have traditionally supported their parents in their old age. But that role was once shared amongst many children, so the burden is far greater on the only-child generation. On top of that, the average Chinese retirement age is 54, and people are living longer — jumping from 44 in 1960 to 77 today. Together, [these factors] are nothing short of some of the most extreme imbalances to support elderly anywhere.”

However, removing the restrictions on the number of children a family can have has failed to lead to an upsurge in births, as would-be parents say they are deterred by the rising cost of raising children in cities. Experts suggest that recent policy moves such as the ban on after-school tutoring and exam cramming schools and controlling house prices will have more of an effect on the birthrate than the three-child policy.

There is speculation that China could soon remove all birth restrictions entirely. But such a move could lead to a cascade of other problems and exacerbate the wealth disparity between rural and city residents, as women living in richer cities delay or avoid having children while those in the country follow tradition and have larger families. It could also worsen discrimination in the job market. “Social pressure in China is significant. But many people do not have the money, time or energy to have more children,” says Xizi Luo, a PhD student in the Department of Economic History at LSE. “The labour market also still has a strong underlying discrimination against pregnant women. Households need to balance the potential income reduction and cost increase when they make the decision [to have a child].”

Unemployment

The world’s largest means-tested form of basic income, known as dibao (short for “minimum livelihood guarantee”) was created in China in the 1990s, and provides unconditional cash transfers and benefits to recipients whose income falls under a threshold set by local governments.

The number of dibao recipients has been shrinking since 2011 in both urban and rural areas, partly because of local government funding constraints and resistance from the public who believe welfare decreases incentives to work, according to analysts.

Prior to the reform of giant state-owned enterprises that culminated in the 90s, many Chinese workers enjoyed job security and full cradle-to-grave benefits under what has been nicknamed the “iron rice bowl” system. It was not uncommon for on-site medical care and childcare to be included. But since the reforms, China has failed to provide a strong unemployment insurance programme.

“There had been a lot of cooperative schemes in the 60s and 70s, but they collapsed in the early 80s and weren’t replaced until 20 years later. It hasn’t been a priority,” Professor Duckett says. “Officially, 90 to 93% of the population have some form of health insurance but one of the problems is that as an employee or a social official then your scheme is much more basic. What [the Chinese government] has done in the past decade is to merge the urban-rural scheme to help with mobility; they have been trying to break down the barriers in those two systems.”

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China’s dramatic crackdown on the country’s tech firms is turning into a broader reform of the welfare system and a greater policy focus on social equality. The term for that shift is common prosperity, which has been used frequently by China’s President Xi Jinping, but which gained more prominence after he declared in a speech in August that ‘common prosperity’ was one of the main hallmarks of modernisation with Chinese characteristics.

The re-emergence of a term that was widely used during the Mao era has sparked discussions about its meaning for China’s future. Whether the Chinese government can truly push through the reforms needed to address the growing inequality at home remains open to debate.

Nonetheless, the increased emphasis on social equality sends a clear signal that the government is unwilling to procrastinate and that it wants to see progress on some of the more contentious reforms — including the long-discussed but never fully enacted property tax and the even trickier pension reform. This alone merits full attention.

Background

Common prosperity (共同富裕 gongtong fuyu) isn’t a new term in Chinese political vocabulary. Its first appearance was as early as 1953, when it was used as a rallying cry in support of China’s impoverished peasantry, according to the China Media Project. But the events of the 1960s and 1970s gave the term a bitter aftertaste and an intrinsic association with violent class struggle and stifling collectivism.

Even Xi’s frequent reference to common prosperity in recent years — the first being in his inauguration speech as Party Secretary in 2017 — and its emphasis in the 14th Five-Year Plan did little to change this perception.

How difficult it might be to reframe an established political term in China became clear in late August when state media started to circulate a polemical and ultra-nationalistic essay by a previously unknown blogger, Li Guangman. Li apparently took the renewed stress on common prosperity as a sign that the current tax investigations into Chinese media personalities such as actress Zhang Wei was not just a crackdown on notorious tax evaders but the beginning of a “profound revolution” that would end China being a “paradise for capitalists” and turn it back into a people-oriented society.

Although Li’s blog post was widely quoted by official state media, including the state-backed Xinhua news agency, it also attracted criticism. Hu Xijin, the nationalist editor of Global Times wrote on his personal Weibo account that Li’s language was incendiary and not in line with the Chinese government’s official reform agenda. Hu stressed that ‘Reform and Opening-up’ remains the guiding principle of the country’s policies and that any change, including the current crackdown on China’s tech giants, would be carried out in accordance with Chinese legal procedures, and not in a Maoist ‘campaign-style revolution.’

Hu wasn’t the only one spooked by Li Guangman’s essay. Vice-premier and Xi Jinping’s chief economic advisor Liu He reassured private businesses saying that their role in China’s economic development had not been diminished and it would remain crucial in the future. Even the announcement of a new Beijing stock exchange by Xi himself has been considered by some as a subtle sign in support of private entrepreneurs.

What does common prosperity mean?

One way to understand what common prosperity means is to look at Zhejiang province. In late May, the State Council designated the province a “high-quality development and common prosperity demonstration zone.” On 20 July, the government in Hangzhou (Zhejiang’s capital), followed up by releasing its own five-year action plan for achieving common prosperity.

The plan’s focus is on reducing income gaps between wealthier and poorer areas, as well as between cities and rural regions, through economic upgrading and more investment in local businesses. For example, the plan includes a target to increase the per capita GDP from the equivalent of £12,200 to more than £15,000, and the average annual income of residents from the current £6,825 up to £8,500. While this means that disposable incomes will have to grow by 24.5% over the next five years, the annual growth rate is estimated to be around 4.6%, which is lower than the projected annual GDP growth in the coming years. What’s more, some of the targets, like the urban-rural income ratio, have already been met.

Cai argues that China should combine its policy to promote innovation-driven growth with the creation of a modern welfare state

Besides the modest social targets, the plan offers little that is new in terms of broader welfare reforms. Although the document includes some references to fiscal policies and transfer payments, it largely follows the conventional Chinese ‘workfare’ approach of promoting jobs and employment as the main strategy to reduce social inequality. In fact, Zhejiang’s Party Secretary Yuan Jiajun stressed in an interview in July that economic growth remains the cornerstone of the province’s common prosperity strategy.

Not everyone agrees with this strategy. For example, Cai Fang, vice-president of the Chinese Academy of Social Sciences, wrote in a recent essay that economic growth alone would not be enough to reduce income inequality. Cai notes that China’s Gini coefficient, which measures the distribution of income, is now estimated to be 0.46, meaning that China’s income inequality is worse than that in most advanced economies, including the US.

Cai further emphasised that, in order to bring per capita GDP levels in line with a medium-sized developed country by 2035, per capita GDP would have to increase by at least 14.7% every year. This is nearly three times as much as the target set by the Zhejiang government.

Although Cai does not dismiss the importance of economic growth and social responsibility programmes by Chinese private businesses — the so-called ‘tertiary contribution’ — he nonetheless points out that no country has yet managed to bring down its Gini coefficient without transfer payments which would allow low-income households to move up the social ladder into the lower/middle-income group, a key advancement which is generally considered the principal prerequisite for upward social mobility.

Cai therefore argues that China should combine its policy to promote innovation-driven growth with the creation of a modern welfare state. According to Cai, an increase of government spending on welfare from the current 26% up to 36% to fund better access to social services such as childcare, education, healthcare and support for the elderly would be enough to turn China into a welfare state.

The CBBC View

China wants to increase domestic consumption and reduce income inequality. The central government hopes that promoting a common prosperity strategy can achieve this. Yet instead of a ‘profound revolution,’ current pilot schemes like the Common Prosperity Demonstration Zone in Zhejiang and Shenzhen’s plan to become a Socialist Model City remain surprisingly supply-side oriented.

It is true, however, that central authorities have dialled up the pressure on businesses and local authorities alike to improve the working conditions of gig workers and implement better tax compliance. They have also accelerated plans to introduce a long-debated but never really implemented property tax. And even a change to China’s comparatively low retirement age is not inconceivable anymore, despite fierce public opposition to any such changes.

But the ability of China’s central government to change social policy remains limited, not least because of the system’s fragmented and de-centralised nature. Without a convincing plan to finance increased spending, most initiatives will probably remain underfunded.

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When four siblings, aged between six and fourteen years old, committed joint suicide by drinking fertiliser in the village of Cizhou, south China, in 2015, the nation was horrified. 

In a note, the eldest boy wrote that he had “dreamed of death,” an end to the years of suffering and neglect they had endured. The children came to symbolise the “left behind generation,” the young who live alone in rural areas abandoned by their parents who have migrated to cities in search of work.

That year, President Xi Jinping pledged to eradicate rural poverty in China by 2020. Five years on and the leadership has successfully lifted more than 70 million out of economic hardship, according to official statistics. However, a great number still remain locked in a struggle to survive.

This month marks the halfway point of the 2020 deadline. It arrives at a crucial moment as the country begins to emerge from the coronavirus and months of economic deep freeze. But even as China looks set to avoid a technical recession, with GDP growth for the year up to 1.8 percent – the gap between rich and poor in society remains one of the highest in the world. 

Last month, Premier Li Keqiang made a statement that shocked many. Speaking at the 13th National People’s Congress, he revealed that 600 million people are living on less than 1,000 yuan (£115) a month, barely enough to afford to rent a room in a medium-sized city. Hardest hit is the countryside, where 40 percent of the population still live.

The World Bank said China has the fastest rate of poverty reduction ever recorded in human history

Internationally, China has been praised for its poverty reforms. The World Bank has lauded the “phenomenal success” in achieving “the fastest rate of poverty reduction ever recorded in human history” over the past 40 years. In 2018, Jim Yong Kim, the bank’s president, said Beijing’s model “offers a new option for other countries and nations who want to speed up their development while preserving their independence; and it offers Chinese wisdom and a Chinese approach to solving the problems facing mankind.” 

Meanwhile, President Xi himself has declared the war “basically done.” However, some experts say declarations of victory could be premature and politically motivated.

“China will most probably meet the target, as it is a political mission set by Xi Jinping and that being the case, everything will be done to make this happen, at least formally anyway,” says professor Steve Tsang, director of the SOAS China Institute in London. 

At the 13th National People’s Congress, Premier Li Keqiang said that 600 million people were still living on less than 1,000 yuan (£115) a month

“Let’s not forget that ‘poverty’ is a relative thing, and the idea of eliminating it is a political thing. Not formally meeting the target will be seen as a failure of Xi Jinping, hence it will not be allowed to happen as long as Xi is in power.  But it does not mean poverty, as is normally understood, will be eliminated. Even the wealthy socialist countries in Europe do not claim to have eliminated poverty,” says Tsang.

The lack of a universal definition of poverty makes assessing progress difficult. China’s targets define poverty as rural and income-based. Since 2011, the line has been 2,300 RMB per person, per year (based on 2010 prices), according to professor Qin Gao, founding director of Columbia University’s China Center for Social Policy.

Each year, the line is adjusted according to the Consumer Price Index. Currently, it stands at around 4,000 RMB (£460). 

Critics of China’s poverty strategy accuse the government of setting an artificially low threshold that is easier to meet. But Professor Gao says this is not true: “The World Bank’s line at  US $1.9 per person per day [set according to 2011 purchasing power parity], once adjusted, is about 2,800RMB – about 200 RMB lower than China’s 3,000RMB (based  on 2018 prices).”

Meanwhile, some scholars argue that China should adopt a “relative” measure as used by most OECD countries, including the UK. This takes the median income level and is better at capturing income inequality. Instead, China, like the US, uses a hard-set income threshold, or “absolute” measure.

Professor Gao says that one of the biggest barriers to sustainable poverty relief is dwindling social mobility. “In rural populations, there is much less upward mobility than in the cities. To address poverty you need to lift people up to higher living standards but, more importantly, to opportunities,” she says.

Wu Alfred Muluan, a scholar of welfare policy in modern China at the National University of Singapore, agrees that building long-term capacity in individual communities is more effective than offering hand-outs. He says that while Beijing has made great strides in poverty alleviation, its distinct top-down approach could present future challenges. 

“Many people who were not poor in the past now face financial difficulties,” says Prof Wu. “In each province, resources are a lot more concentrated. For example, in capital cities and Tier 1 cities, there are increasing resources. The general strategy is to push villagers to urban areas, from third-tier cities to second, from second to first, and so on…But at the same time, first-tier cities are asking low-end people to leave because they feel they cannot house these populations.”

Another controversial top-down method has been to migrate entire communities thousands of miles to richer provinces, for example from Gansu in the northwest, to Zhejiang and Fujian in the east. 

“It will remain a great challenge in the future as it’s not certain they can be integrated,” says Wu. “What is more important is for these communities to cultivate their own capacity, cultivate their own economics, and cultivate their own culture.” 

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In the book, you say China is at a ‘critical turning point’ – investment-led growth has led to bad debt and Non-Performing Loans. Can China get out this debt trap?

Following the 2008 global financial crisis, China launched a massive stimulus programme to keep its economy afloat. It worked, in that China avoided the dramatic falls in economic growth that many other parts of the world saw. But that reliance on debt to drive the economy then became a bad habit that the government has yet to overcome. Total debt as a proportion of GDP is now more than 300 percent and has been growing steadily. This kind of growth at this level is seen by many economists as unsustainable. China’s leaders know what they need to do: in order to break their reliance on debt-fuelled growth – which by the way has contributed to the country’s pollution problem and has been energy wasteful – they need to build up a much stronger consumer and service-driven economy. But while progress has been made, they are still struggling to grow the proportion of the economy made up of domestic consumption; it is still below 40 percent, a rate not much changed in years, and one that is some twenty percentage points below the world average.

How scary are the demographics? Has China run out of its once seemingly limitless supply of young workers?

What had been what economists call a “demographic dividend” has now become something of a demographic time-bomb for China. And recent moves towards ending the notorious one-child policy appear to be too late; couples have reached an income and education level where they are no longer interested in having more children. The high costs of education in China also discourage families from having more kids. As the workforce ages (and it recently began to shrink in overall size too), innovation tends to suffer; those who are older typically are not as willing to take risks with new ideas and that hurts the economy’s vibrancy, research by Ctrip founder James Liang has shown. In the factories, demographics, of course, has had a huge impact as workers age, shortages emerge, and wages rise. Overall competitiveness has suffered, with manufacturing wages now higher than in Mexico or Malaysia. Meanwhile, the cost of supporting an ageing population with ever more retirees is substantial. It is putting pressures on the finances of local governments and families alike, who have to pay for new health care and pension costs.

The economic ‘rebalancing’ away from FDI and manufacture to retail and services has really been all about the urban middle class. How is rebalancing playing out in the countryside?

In my mind, this is the biggest challenge facing China: ensuring that the other half of the country who still live in rural China or are migrants who hail from the interior regions, also become part of the spending middle class. This is a top government priority and is critical to the success or failure of the China model going forward; it will not be easy and may well fail. One of the biggest obstacles is the continuing strength of the hukou policy. That means that migrants are unable in most cases to access affordable healthcare in the cities they live in or put their children in urban public schools. Instead, they are supposed to return to the countryside for their medical needs, put their children in low quality but often pricey private schools that cater to migrants, or leave their offspring as ‘left-behind children’ in the interior. The policy also explains the prevalence in China of what economists call ‘precautionary savings’ – when people are afraid to spend too much today and instead are saving most of their earnings to pay future costs of education, healthcare or retirement. That too helps explain why China has a savings rate of around 45 percent, much higher than in most places around the world.

You say the government now favours ‘reverse migration’, back from the city to the country, as a way to help care for the rising rural elderly population, and revitalise local economies with small businesses. Is this happening and does it work?

The record of this policy is mixed. Policymakers do see the trend of migrants returning to their hometowns as positive, in that they can both be closer to their ageing parents, and help overcome the national tragedy of left-behind children or youth growing up in the countryside far from their mothers and fathers. Local governments in the interior have tried to ease the challenges faced by returnee migrants by providing training and financial help, often in the form of low-interest loans, for those who want to start their own businesses. The goal is that migrants will succeed as entrepreneurs upon their return and help to revitalise places that otherwise might lag as China develops. One challenge is that the returnees may feel like strangers in their own villages, after decades working in faraway cities, and thus may not have the right connections or knowledge to succeed. There are many cases already of returnees seeing their newly-formed small businesses fail.

It has been suggested that the problem of a lack of workers can be solved by automation and AI. Is this possible, and if so, you seem to suggest that it means employers are now looking to that future and ignoring better pay and conditions for human workers?

Even before the trade war and Covid-19 brought the issue of global diversification of supply chains to a head, factories producing lower-value products were leaving China in droves for countries in SE Asia and beyond. Now that trend has only accelerated. It is something that has long worried policymakers who do not want China to face the same hollowing out of industry that was seen in places like Japan. One plank of the national strategic upgrading plan “Made in China 2025” is focused on encouraging the automation of factories, along with building up a more competitive domestic robot-making industry, with both factories and automation companies being granted large subsidies in cities like Dongguan. This is helping China move more quickly towards a less labour-intensive manufacturing future. But it is also causing frictions between factory management and those migrant workers who do not want to return to their villages but would rather stay in the cities. In some cases, worker protests have erupted as factory managers have moved to quickly automate and shed employees.

Are there any good business success models for rural returnees?

In rural Guizhou, local governments are trying to encourage returnees to set up small businesses in ecotourism, with the aim of luring wealthier urbanites to holiday in this part of the country. In many ways, that is a natural choice, given the stunning mountain scenery, interesting ethnic diversity found among the people living there, and the spicy local cuisine, not to mention the clean environment with little industry in most of the province. Other places including neighbouring Yunnan have tried to use e-commerce to find markets for local delicacies, whether it’s Pu’er tea or wild mushrooms. Both of these models have been successful to a degree, although not without facing challenges. One common problem has been the phenomenon where everyone jumps into the same business and creates a glut, where for example, hundreds of rural villages all might be competing for the same tourists. Provincial governments too have often focused on large capital-heavy, but low labour-intensity vanity projects, like Guizhou’s push to make its capital of Guiyang into a national Big Data centre; the trouble is it provides little employment for the large numbers of migrants now returning.

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China’s rapidly ageing population brings about plenty of challenges and opportunities. As our report on elderly care shows there is a lot of scope for companies to help in the care sector and make the most of the gradual welfare reforms that will benefit the older generations.

This article also explores how pensions are being reformed to address the shrinking number of working adults that are contributing to the social security system. Whilst there are steps being taken in the right direction there is no denying that in 1993, there were five adults contributing for every one elderly person withdrawing from it, whilst projections suggest that there may be just 1.3 contributors for every elderly person by 2050.

The population is expected to peak at 1.44 billion in 2029 before shrinking to 1.36 billion in 2050, when four in 10 Chinese people will be over 60; whilst automation and the growth of AI will also contribute to a shrinking work force. All of this is forcing China to strategically reconsider its vocational, education and training (VET) system.

Although China’s major cities have some of the best academic education systems in the world, the growing shortage of workers has seen a growth in the promotion of vocational training. The number of university graduates has risen from 6 million in 2008 to over 20 million in 2018 but VET has traditionally been seen as a lower status qualification than a university degree. There are still few organised national programmes available to those looking to train in an industry, and few national standards that are recognised from province to province. There is a marked divide between academic education and vocational training, and the links that allow students to enter into industry after VET graduation are often lacking.

There are still few organised national programmes available to those looking to train in an industry, and few national standards that are recognised from province to province

Aware of these challenges, China is hosting the WorldSkills Shanghai event in 2021 which Vice Premier Hu Chunhau has said should emphasise the sharing of professional skills, particularly amongst China’s young people. The country has also been working to create better links with international partners – including those in the UK – to try to raise standards and bring certification into line.

The University of Salford is a fine example of a UK-China partnership that trains students for the workplace. As this article shows both the curriculum and visits from Salford’s fashion department staff help students in China, who then have advantages when they go on to work in China’s fashion industry. The relationship is, of course, mutually beneficial; it also provides UK students with access, network development opportunities and solid experience in China.

In a similar fashion, through its partnership with Youjiang Medical University, the New College Lanarkshire in Scotland is providing dental nursing certification and education programmes to Chinese students, creating much needed dental nurses in a sector where previously there was very little standardised certification.

In the short to mid-term, the nature of work around the globe is likely to see significant change. Whilst also true in China, local factors such as the dramatically ageing population and the opening up of previously closed areas will see a number of uniquely Chinese opportunities present themselves.

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Although this is good news for businesses, China is nonetheless facing increasing pressure to reform its pension system. With an aging population, local governments are confronted with rising costs for its senior citizens at the same time as the working-age population is shrinking.

This has put considerable stress on provincial pension funds, with some provinces, such as Heilongjiang, already spending more than they receive from contributions. According to a study conducted by the Chinese Academy of Social Sciences, on the national level, pension funds could be fully depleted by 2035.

In order to help provinces with a disproportionate number of older people, China established a national transfer mechanism in July 2018. The mechanism would take surplus income from richer provinces and redirect it towards provinces with deficits. In early April 2019, China’s Ministry of Finance published4 its first budget for the transfer mechanism. The figures reveal stark inequalities between provinces.

However, the numbers also offer a useful insight into the shifting demographic situation in China and could be a precursor for future reform initiatives.

China’s march towards a universal pension system

China’s pension system dates back to 1955. However, it only covered civil servants and urban workers in the state sector. Under this system, each company managed its own pension fund and contributions and payments were handled on a pay-as-you-go (PAYGO)-basis. As the economy began to liberalise in the 1980s, this system become unsustainable and in 1991 the government created a regional fund which would cover all enterprises.

The new system rested on two pillars. The first one is an earnings-based pension following the PAYGOprinciple with defined benefits for retirees. The second pillar consists of forced savings into an individual pension account. Both relied on mandatary contributions from both employees (8 percent) and employers (20 percent). Although this reform vastly expanded the safety-net, it still covered only around 30 percent of urban residents5 in 2005. Rural workers remained excluded.

After a failed experiment with voluntary contributions, it was not until 2009 that the Chinese government managed to set up a universal non-contributory pension system for rural residents. Two years later, this basic insurance scheme was extended to non-working urban residents.

In 2014, both systems were finally unified into one single basic pension scheme, and in 2015, the State Council abolished the separate system for SOE employees and civil servants and merged their accounts with the general system.

Geographical disparities

Despite the continued expansion of China’s minimum pension insurance, considerable inequalities between regions remain, especially with regard to pension funds that rely on contributions by employees and companies (1st pillar).

The published budget for the transfer mechanism testifies to the considerable problems faced by many provincial pension funds. In total, the mechanism will reallocate £13,96 billion. However, only seven provinces are net-contributors, with almost 40 percent borne by Guangdong alone. The other net payers are Beijing, Shanghai, and the coastal provinces of Shandong, Jiangsu, Zhejiang, and Fujian. Three provinces, Guizhou, Yunnan, and Tibet are spending as much as they earn, whereas the remaining 21 provinces are all net-recipients. The biggest beneficiaries are Liaoning, Heilongjiang, Sichuan, Jilin, and Hubei, which, taken together, receive 63 percent of the funds.

Continuing problems and outlook

While the transfer mechanism might help to stabilize some of the struggling pension funds, it raises serious questions about the sustainability of the scheme. Given China’s overall demographic trends, it is likely that the amount required will further increase at the same time as the number of net-contributors shrinks.

What’s more, since 2012 the number of eligible recipients has grown faster than that of new contributors. Although the share of the participating working population has increased over the years from 23 percent in 2009 to over 36 percent in 2017, the number of retirees has grown even faster. In 2010 the number of contributors increased by 9.4 percent against a rise of 8.6 percent for recipients, whereas since 2012 the latter was consistently higher than the former. In 2015, the growth of the number of eligible pensioners was even more than double the increase in contributions, pushing down the dependency ratio from 3.16 in 2011 to 2.65 in 2017.

The impact of China pension problem on reforms

The woes of China’s pension funds have considerable ramifications on China’s reform efforts. First, the need for additional capital has likely stalled the long-awaited reform of state-owned enterprises (SOEs), as their assets have been used to plug the funds’ holes. This has made any privatization politically costly and has increased the government’s efforts to buttress the ailing state-sector despite low productivity and misallocation.

Second, the low level of state pensions and the lack of private alternatives have prompted many Chinese to invest in real estate and the stock market, thus fueling bubbles and encouraging rent-seeking. This has led to repeated government intervention in order to stabilise prices far beyond market rates.

Building a third pillar

In order to alleviate these problems, the Chinese government has made several efforts to add another pillar to the pension system. It has thus encouraged Chinese employees and pensioners to invest in private pension schemes, which could help raise the general pension level and ease pressure on public funds. Unfortunately, poor regulatory oversight, lack of professional risk management and low financial literacy rates have created a breeding ground for fraud and greed. In April, the Chinese journal Caixin reported of the real estate company Zhongan Minsheng Pension Service Co., Ltd. having convinced retirees to invest in apartments in Beijing’s high-end Haidian district. The investors would then receive an annual return of 4 percent- 6 percent, paid as monthly supplement to the state pension. However, in February 2019, the company stopped making payments and shortly after ceased operations completely, leaving one investor with a private debt of £340,000.

To avoid such scandals in the future, China’s government is pushing for further reforms. On 29 March 2019, the State Council published a document which called for further reforms to broaden investment channels for retirees. These include the promotion of financial pension services, an expansion of corporate bond issuance in the old-age care sector, and, most importantly, better access for foreign financial pension fund providers.

Although it might not solve the underlying structural problems, an effective opening up to international investors with a global portfolio could at least provide Chinese pensioners with a viable and comparatively safe alternative, especially given the vulnerability and fragility of China’s own financial and real estate markets.

Lessons for UK companies

Although China’s pension crisis might raise costs for businesses in China, it also offers new opportunities for UK financial institutions and Fintech companies. According to a 2017 research report9 by KPMG, China’s private pension insurance volume could reach GBP 1.3 trillion by 2025.

As pressures grows on the government to provide reliable and well-managed investment opportunities for an aging workforce and growing number of middle-class retirees, an accelerated liberalization of China’s financial markets, especially in the insurance and retirement fund sectors, looks more and more likely.

However, an effective operation in China for UK fund managers and investment companies will also require additional reforms in China’s domestic capital markets and reduced capital controls, without which foreign institutions might face the same risks as domestic investors.

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During the 21^st century, measures to reduce poverty whilst improving healthcare, pensions and social services (including education and housing) have all moved up the policy agenda of the Chinese state. The Chinese Communist Party has shifted its goals from economic growth to ‘economic and social development’ – no longer are they focussed just on raising incomes, but now want to also provide services and safety nets.

The Party’s shift appears to be aimed at enhancing its legitimacy by realising ‘a moderately prosperous society’, and at reducing the protest and dissatisfaction that might threaten ‘social stability’. As China’s economic growth rates slow, attention has turned to quality of life along with concerns about the problems China will face as its society ages. There is also a commitment to China’s national development and a view that improving China’s economic and social health enhances its global status and influence.

The evolution of social policy since the 1990s

During the 1990s the Chinese party-state focussed on economic growth and state enterprise reform and, as part of this, reformed health insurance and pensions for urban workers – primarily the state sector. It also introduced means-tested income support and programmes for laid-off state enterprise workers to prevent urban protest (a particular concern in the years following the Tiananmen demonstrations of 1989).

But following the Asian Financial Crisis of 1997 and China’s entry into the World Trade Organisation in 2001, the focus began to turn to rural areas and the non-working urban population – now seen as a source of untapped domestic consumption and demand. The party-state introduced rural income support and pensions as well as cooperative medical schemes to help rural residents with their healthcare costs. It also introduced basic health insurance for the urban non-working population, made a commitment to a minimum of nine years of free education for all children, and announced major health care reforms.

Impressive achievements

China has seen huge reductions in extreme poverty, introduced universal entitlements to health insurance and pensions, and ensured steadily rising social services expenditure. Now categorised as an ‘upper middle income’ country by the World Bank, only 1.4 percent of the population lives on the international poverty line of $1.90 per day (2011 Purchasing Power Parity), a fall from 67 percent of the population in 1990. By 2010, China had extended health insurance and pensions across the entire population – for the first time establishing entitlements for rural residents. According to the OECD, public social spending in China has risen from 6 percent of GDP in 2007 to 9 percent in 2012. China’s government spending on health, education and social safety nets also increased in both real terms and as a share of total government spending over the decade to 2017.

Only 1.4 percent of the population live on the international poverty line, a fall from 67 percent of the population in 1990

Substantial problems remain

Despite the progress, China’s social problems are still enormous and social services remain problem-ridden. According to the latest World Bank data, from 2015, on the upper middle-income poverty line of $5.50 per day, 31.5 percent of the population remains in poverty – 430 million people. The quality of health care, education and housing varies enormously both within and between rural and urban areas – largely the result of fiscal decentralisation and policies that benefit the middle classes.

The quality of health care, education and housing varies enormously both within and between rural and urban areas

Public spending on health insurance and pensions, meanwhile, remains highly regressive, meaning that the most generous insurance schemes provide for the well off, and the least generous for the poorest in society. For example, from 1999 to 2006, although the number of people participating in publicly financed health insurance (mainly for employees in government and public institutions) was falling, this scheme still accounted for about 40 percent of the total government health budget. Meanwhile, overall public social spending remains considerably lower than the OECD average of 22 percent of GDP.

China has also set the goal of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy by 2030

Ever more ambitious goals

Under Xi Jinping, the Party has continued to set ambitious goals. It aims to eli­­­minate absolute poverty by 2020 (using the national poverty line of 2,300 RMB per annum, or about a dollar a day). It has also set the goal – by 2030 – of reaching rich country levels on indicators for infant mortality, maternal mortality and life expectancy. It is pressing forward with primary care reforms in health and is introducing IT in education and has recommitted itself to increasing the quantity of affordable housing – something that has been promised for over a decade but not yet delivered on. It has also begun to tackle the very difficult problem of merging locally administered health insurance and pension schemes to reduce the divisions between urban and rural and increase mobility.

Achieving these ambitious goals and pushing through next-stage reforms will not be easy. The Party is mobilising both public and private sector firms as well as local governments to eliminate absolute poverty, and this goal looks achievable. But other initiatives will require substantial public investment and effort if vested interests are to be overcome. This is particularly evident in the health and real estate sectors, where local governments’ revenues tie them to such interests, making reform particularly difficult. Since Xi Jinping’s supporters argue that he has amassed power precisely so that he can tackle vested interests, social services may be an important test of the leadership’s commitment and ability to use their new powers for the public good.

Professor Jane Duckett is Edward Caird Chair of Politics at the University of Glasgow and Director of the Scottish Centre for China Research. Follow her on Twitter: @j_duckett.

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