China is lowering social insurance costs for employers after the State Council confirmed the decision at its meeting held on March 26.

This follows Premier Li Keqiang’s pledge at the Two Sessions meetings, which were held earlier this month in Beijing, to lower costs for businesses by slashing tax and social insurance obligations.

The State Council has now directed regional governments to assess their existing funds and make moves to lower premiums based on local circumstances.

Lowering social insurance obligations

According to the State Council, regional governments should cut business’ social insurance obligations depending on the local government’s funding needs and the extent to which they deem it necessary to support the economy.

As Li promised at the Two Sessions, China will reduce employers’ share of basic pension premiums for urban workers from 20 to 16 percent.

To do so, the State Council announced that the policy of reducing unemployment and work-related injury insurance premiums will be extended for one year, until April 2020.

Specifically, the State Council released the following instructions for regional governments:

• If the region’s unemployment and work-related injury fund is able to cover payments for the next 18 to 23 months, the local government can cut premiums for such funds by up to 20 percent;
• If the region’s fund can cover payments for 24 months or longer, the local government can cut premiums by up to 50 percent; and
• Local governments cannot increase the payment obligations of small and micro enterprises or force payments for arrears.

To be noted, while China aims to reduce the proportion of employers’ pension contributions to 16 percent overall, some regions in China already have employer contribution rates of 16 percent or lower.

Cutting costs for businesses

The move to slash employers’ social insurance obligations is one part of China’s broader agenda to reduce costs for businesses, together with cutting taxes and administrative hurdles.

At last week’s meeting, the State Council encouraged the rapid implementation of value-added tax (VAT) cuts, and suggested that there could be more tax cuts on the horizon.

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According to Liu Kun, China’s Minister of Finance, these cost-cutting policies will combine to reduce costs for businesses by nearly RMB 2 trillion (US$298.3 billion).

The efforts to lower burdens on businesses comes amid a slowing domestic economy and ongoing negotiations to resolve the US-China trade war.

China has been hit with a flurry of negative economic news in recent months. According to data released on March 27, for example, China’s industrial profits slumped to their lowest levels since 2011.

While lowering social insurance premiums might not actively stimulate the economy in the face of serious economic headwinds, they will still help lower costs for businesses of all stripes – which the government hopes will stabilize employment.

At the same time, however, local governments may become stricter in the collection of tax and social insurance obligations as they face fewer sources of revenue.

As with many policies in China, the social insurance cuts will be expressed differently based on the local government’s priorities and the economic situation it faces.