Social Security Change Could Cause Layoffs and Shave 1.5pc Off GDP in 2019

Talk about your all-time backfires. A change to social security collection was included in the recent tax cut.

ECNS: China's new tax law will benefit poorer, release spending power: experts
Wang Surong, a professor at the University of International Business and Economics, told the Global Times on Monday that "domestic enterprises will pay more in social security funds for their employees under the new law."

Domestic companies were likely to pay social security funds for employees on the basis of their minimum salary before, but now they have to pay the funds based on employees' actual salaries, according to Wang.

"More social security contributions may bring a heavier burden for small and medium-sized enterprises, but they are obliged to do that," Dong told the Global Times on Monday.
What will the change cost? Maybe layoffs and 1.5 percentage points in GDP growth.

iFeng: 央行牵头两场座谈会聚焦企业减税 四大行董事长到场
Introduction: The two symposiums of the recent financial system are a bit interesting.

One was on September 4th, and the People’s Bank of China held a “private business and small and micro enterprise financial service symposium” jointly sponsored by the National Federation of Industry and Commerce. The other was the financial market expectation management expert held by the Finance Committee Office on August 31. forum.

The two forums have two things in common: First, they are led/hosted by the central bank, and the chairman of the four major banks is present. Second, the theme of the meeting was to implement the relevant instructions of Vice Premier Liu He. The former is to implement Liu He’s speech on the first meeting of the State Council’s Leading Group for Promoting the Development of Small and Medium-Sized Enterprises on August 20; the latter is to implement the spirit of the three meetings of the Finance Committee and the expected management of financial markets by Liu He at the special meeting of the Finance Committee. A series of instructions.

This is precisely the two major issues of current macroeconomic regulation and control and financial policy: First, how to unblock the transmission mechanism of monetary policy and open up a virtuous circle between finance and entities? It is very important for SMEs to reduce taxes and reduce burdens and increase financial policy support. Second, how to stabilize the financial market under the impact of internal and external (internal de-leverage, external trade war)? The stable expectation is one of the stable and “stable” determined by the 730 Politburo meeting, and the expectation has largely affected the direction of the financial market.

The high specifications of the two symposiums also reflect the severity of the two major issues. Liu He once said publicly that it is necessary to treat all state-owned and private enterprises equally, and fully understand the importance of promoting the development of small and medium-sized enterprises. However, the ideal is very full, but the reality is very skinny. Under the leverage, private enterprises are difficult to issue bonds, financing difficulties, and financing financial market participants are embarrassed. Today, Wang Qiao, the chairman of the Oriental Garden, who asked questions to Yi Gang at the symposium, has just experienced a bond issue exam.
Liu He is asking for the same thing Premier Li Keqiang (officially #2) has been demanding for the last 5 years: reducing the finance costs for SMEs. Will this time be any different?

And oh by the way, the change to social security laws might be a kill-shot to SME profitability. That's the good news. If the cost falls on workers, GDP could slump 1.5 percentage points.
The social security collection reform that has been raging in the near future (from January 1, 2019, the social security collection will be borne by the tax bureau), which will further darken the tax burden of SMEs in the future, and the social security collection will be stricter. The increase in corporate costs is inevitable and under pressure. In 2019, it is likely to usher in a wave of layoffs. According to Guotai Junan, after the reform of the collection and management system, enterprises and individuals will pay a total of nearly 2 trillion yuan. If the company and the individual share the current rate, it will affect the total profit of the company by 13.4%, which will increase the operating pressure of the company in the short term. If it is completely borne by the individual, it will further reduce the current consumption of the residents, and the cumulative impact on GDP will be 1.5 percentage points.
SMEs have financing costs (interest rates + fees) in the double digits and they may face a double-digit hit to profits for social security next year. Amid deleveraging, a possible trade war with United States and an overall slowing Chinese economy.

Why would China do this now?

Caixin Global: In Depth: China’s Social Security Balancing Act
The threat of a pension shortfall is imminent as the population greys. In 2017, China’s pension funds collected 3.3 trillion yuan ($515 billion) and handed out 2.9 trillion yuan in payments. But the system avoided going into deficit mainly because of subsidies from the central government, official data showed.
China beat the USA to permanent entitlement deficits. This is China's 1982/3, except the economy is going into a downturn instead of emerging from the worst recession since the depression and a generational high in interest rates and inflation.

How bad is it for SMEs?
The new rules may lead to a wave of small business closures because of higher costs and will put companies under closer scrutiny by tax officials, critics say. If all companies are required to fully meet their social insurance payment obligations, the average costs for businesses will increase by 30%, according to Wang Dehua, a financial analyst at the Chinese Academy of Social Sciences (CASS), a top think tank.
Chinese payroll taxes are brutal:
Total social insurance payments by Chinese employers and employees amount to 39.5% of payrolls, a rate higher than in many other countries. In 2014, the average rate of OECD, a group of mostly rich countries, was 29%, according to China Social Security Journal.

To reduce costs, it is common for employers to find ways to avoid making the full contributions, for example by dividing compensation into basic wages and bonuses, paying taxes only on basic wages, or by hiring more temporary workers to skirt social security obligations.

Some companies have struggled with the payments amid rising labor costs and slowing business. In July, China’s largest telecom equipment maker, Huawei Technologies Co. Ltd., cut its payment to the housing provident funds in several cities from over 10% of wages to 5%, the lower limit of a national standard. Analysts said Huawei made the move to cut labor costs.
As is ever the case, taxpayers exhaust every avenue of legal tax avoidance. Nearly one-third of companies are finding ways to pay the minimum social security tax:
The methods of tax calculation also vary across regions. Some local authorities have offered preferential policies or reduced social insurance payment requirements to attract investment, Wang said.

That has left some employers leeway to minimize payments by underreporting their wage payments or workforce size, experts say.

A survey by 51Shebao this year found that only 27% of companies have made full payment of their share of social insurance contributions, while 31% paid at the bottom of the range of national standards leaving their employees with the least insurance coverage, according to a research paper published Aug. 24.
Where tax departments are in charge of collections, payments are high. Where the local social security bureau is in charge (also ending), the payments are low:
“Taxation departments have comprehensive information about companies’ business operations, and it is possible for taxation authorities to require companies to fully fulfill their social insurance obligation,” CASS’s Wang Dehua said.

Official data back him up. In Guangzhou, where social insurance payments are already collected by tax departments, more than 90% of registered business taxpayers reported social insurance payments in 2015. In Beijing, where social security departments are in charge of the collection, the figure was only 42.9%.
China's social security system (based on prior rules and enforcement) went into the red in 2014:
China’s basic pension insurance fund is a crucial part of the country’s social insurance system as it accounted nearly 70% of the entire national social insurance collection in 2017, according to figures from the Ministry of Human Resources and Social Security.

While the fund had an aggregate surplus of 4.1 trillion yuan in 2017, that mainly reflected government subsidies, according to CASS professor Zheng Bingwen. Subsidies accounted for 15% of nationwide fund gains in 2016. Without them, the system would have been in the red since 2014, according to an actuarial team led by Zheng.

Without subsidies, China’s pension funds will post deficits widening from 234 billion yuan this year to 534 billion yuan by 2022, according to Zheng’s team.
Not a huge burden against the entire economy's GDP, but a large burden for cash-strapped SMEs who likely make up the bulk of companies paying the minimum tax. Also, the recent business tax cuts only amount to 45 billion yuan.

Turning back to Liu He's orders and the iFeng article up top:
At present, China's small and medium-sized enterprises have the typical characteristics of “five six seven eight nine”, contributing more than 50% of tax revenue, more than 60% of GDP, more than 70% of technological innovation, more than 80% of urban labor employment, more than 90% The number of enterprises is a new force for national economic and social development. It is an important foundation for building a modern economic system and promoting high-quality economic development. It is an important support for expanding employment and improving people's livelihood, and is an important source of entrepreneurship. Doing a good job in small and medium-sized enterprises is of great significance to stabilizing employment, stabilizing finance, stabilizing investment, stabilizing foreign investment, stabilizing foreign trade, stabilizing expectations, and enhancing long-term economic competitiveness. (Liu He August 20)
Private businesses want yuan-depreciating RRR cuts. They want credit growth.
From the information disclosed so far, some private entrepreneurs participating in the symposium have publicly called on the central bank to further direct the RRR cut and maintain ample liquidity; some appeals (He Qiaonu) - "Now private enterprises are too difficult, if I can get a bank approved, I will save those companies in the pool of blood, one by one to save."
They also want clear expectations and market signals:
In fact, the key to stabilizing expectations is that the government's policy logic must be consistent. It can't be shouted for leverage, and it will stimulate the release of water for a while. The chaotic policy signal will only lead to more chaotic market expectations. The expectation of stable market formation lies in the “expectation wall” between the government and the market to open up information asymmetry and trust barriers. Each policy should be fully market-guided, expected to be laid and buffered.

If information asymmetry and trust barriers are not eliminated, the gradual introduction of policies will lead to greater confusion and mistrust. Recently, the fiscal and taxation system, in the hotspots such as social security collection and venture capital LP tax rate adjustment (including individual tax reform), the policy was unprepared, fully reflecting the lack of market makers in market communication.
China's private business sectors are not pleased with the government's communication:
Taking venture capital LP tax as an example, our tax laws do have imperfections, especially in terms of capital gains. (So is the social security collection reform, the burden of private enterprises is too heavy, and social security has long been missing or underpaid) . Therefore, the policy adjustment originally had certain rationality, and also broke the previous gray blank state. However, policy makers did not consider practicality. For example, many venture capital projects have been withdrawn for many years, and the collection is not very operational; and social security contributions also have such practical problems. This has led to the policy not yet officially implemented, and the market has already cried.

Policy makers did not communicate with the market almost before the policy was introduced. It seems that the impacts that have been made so far have not been reasonably explained by policy makers. This is the most terrible thing to destroy/impact the market expectations.
There's love for the PBoC though:
From this perspective, the financial management department led by the central bank should be praised. This also reflects the distance between different macro management departments and the market.
Ministry of Finance: not so much.
Among the four powerful domestic macroeconomic policies: the strongest is the National Development and Reform Commission and the Ministry of Finance, followed by the central bank and other central ministries, once again the major state-owned enterprises and local governments, the weakest are the various capital funds of the capital market and various Scholar experts and media. The greater the impact, the lower the frequency of speeches in the public media. Conversely, the weaker the influence, the more it needs to create momentum in the media.

The arrogance of the fiscal and taxation system has always been the case, and it has been particularly evident recently!
The words 13.4 percent of profits, "wave of layoffs" and "1.5 percent of GDP" no not often appear together in Chinese new articles. It's very possible private business is whipping up a media storm. As the article says, "Conversely, the weaker the influence, the more it needs to create momentum in the media." If not, the global growth story is about to have an very unhappy ending.

Related: 关于社保征管改革的23个问答 (23 Questions about Social Security reform)
Second, the impact of policy changes:

1. According to the data of the State Administration of Taxation and wages, after strict law enforcement, the state can collect more than 2 trillion social security income in one year, and the net profit of private enterprises is more than 2 trillion. After strict law enforcement, most private enterprises will not. profit, mainly affected are labor-intensive enterprises , service industries including logistics, hotels, restaurants, hotels, sea fishing while Hong Kong stocks listed on the pay of the past three years, 88 million Social Security, the manufacturing sector will also be affected, very many businesses in the past Labor costs account for 40% of revenue and may reach 60% after strict implementation . In the next step, there may be housing accumulation funds, etc., which are also strictly enforced, affecting corporate profits.

2. For the laborer, the individual needs additional expenses. In order to retain the laborer, the enterprise may also need to raise the salary budget.

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