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Compensation and Benefits of China

By armywarhorse Feb 28, 2014 1434 Words
Compensation and Benefits of China

The compensations and benefits of China are somewhat surprisingly generous. One

reason China offers them is to attract people from the West to work in China. They want

managers and supervisors from the United States and Europe to supplement Chinese

management. The main compensation and benefits China offers are called the five “insurances,”

although there are five insurances plus a fund.

The five “insurances” covered by the mandatory welfare system refer to: pension,

medical, work-related injury, unemployment and maternity insurances, which have been part of

the existing social security framework in China for a number of years now. In addition to the

insurances they have a housing fund. Its contributions are generally included within the scope of

mandatory welfare because the additional costs are mandatory and come from both the employer

and the employee.

Interestingly, the new law makes a clear distinction between employers (who must make

contributions based on the total wages paid to all their employees), and individuals (who make

contributions based on their gross salary). There is speculation that the legislation has been

drafted in a way to allow the removal of the employer’s contribution cap in the future. However,

at the present time the effective contribution bases for both employer and employee remain


The new law also refers to introducing a pension system for rural workers. This provision

is aimed at reducing the effect of the hukou system, which limits the options available to the

rural Chinese population and is a source of much dissatisfaction in China in recent years. The

realization of an effective integrated system still seems a long way off, and the law provides only

the direction without specifying tangible methods of reaching this ideal situation.

The second insurance of the five insurances China offers is Medical Insurance. Similar to

improvements mentioned in the pension system above, the government is intending to enhance

the overall operation of the Chinese healthcare system. One particular point of note is that the

medical insurance fund will be responsible for directly refunding medical expenses to the

hospital that carries out the treatment, avoiding the situation that happens frequently where the

patient has to first pay treatment fees in advance and later receive compensation from the fund.

The current system has a particular weakness in that when an employee travels and

becomes sick or injured in an area remote from his/her administrative jurisdiction, there are

considerable complications when paying for the treatment and getting reimbursed by the

insurance fund. Article 29 has been implemented specifically to resolve this solution through

creating administrative units to process such payments directly from medical funds to medical

institutions. Once again, this may take a long time to realize in practice.

Work-Related Injury Insurance is the third insurance offered by China. The law mainly

concerns itself with the circumstances under which compensation will be provided, and clarifies

which payments will come from the work-injury funds and which payments from other funds,

such as pension. The most important point relates to the government’s commitment to ensure

provision of treatment for work-related illness or injury even in the absence of contributions

made by employers.

The law states clearly it is the employers that must make the contributions, but in the

absence of such contributions the employee can still claim the relevant treatment expense, the

administrative agency is then obligated to chase up the employer for the cost of the treatment (as

well as, presumably, outstanding work injury insurance contributions).

The fourth insurance is China’s Unemployment Insurance. Most of the law is simply a

generalization of previous laws and circulars. Key points include the length of time that

unemployed people may claim benefit (depending on the amount of time they worked) and the

amount they may receive (to be designated locally, but not related to the salary they used to

receive / the premiums they paid while employed).

One point that has been included to resolve a particular problem is an obligation on the

employer to provide the “termination of employment” evidence to the employee within 15 days

of his/her release from the company. This is to resolve a particular problem whereby the

employer refuses to release such a document for some reason, putting the terminated employee

under unreasonable pressure because without this document they cannot start claiming

unemployment benefit.

Maternity Insurance is the fifth and final insurance in China. There has been an important

change to the rules here. Article 56 of the new law states that monthly payments from the

insurance fund to women during their maternity leave will be made based on the average salary

paid by the company to its employees. This is in contrast to the previous practice, where the

woman on maternity leave received an amount equal to her salary (as defined by the social

insurance contributions made by the company prior to her maternity).

This change will also have a couple of interesting side effects. The first will be that

employees will become aware of the average salary paid in the company. This will cause issues

of confidentiality (especially for small organizations) and also possibly encourage certain

employees to seek salary increases to what they consider to be “fair” levels – no valued

employee wants to know that they are earning way below the company’s average salary. This

policy could also encourage a trend of “maternity arbitrage,” where employees who expect to

become pregnant in the near future consciously look for work at a company paying a high

average salary.

If a female employee’s actual monthly salary level is higher than the company’s

combined average monthly salary, the company shall make up the difference in the two amounts;

eliminating concerns over the possibility that senior-level employees may end up receiving less

benefits during their maternity leave. Whether this policy is rolled out on a national basis

remains to be seen.

In addition to the five insurances China offers a housing fund. China’s housing fund,

although in the strictest sense not a kind of social welfare, is generally included within the scope

of social security because the contributions are mandatory and come from both the employer and

the employee.

As its name suggests, the housing fund is designed to ensure that workers save some

money in order to purchase a house or an apartment. The employer will usually have to

contribute between 7 percent and 13 percent of the employee’s salary. In many cities, the

employee matches this contribution with an equal contribution of their own, although certain

cities have different policies.

When the employee wishes to purchase a house, the money in the housing fund can be

used to pay the initial down-payment on the house, and it can also be used to subsequently pay

back the loan to the bank. By producing evidence that funds have been accumulated in an

individual’s housing fund, the bank may provide a lower rate of interest on the loan. Upon

retirement, any remaining balance in the housing fund account can be withdrawn and used for

any purpose by the individual.

In conclusion, the Chinese government is acutely aware that in the long term it cannot

rely on foreign investment, a cheap labor force and heavy fiscal spending to continue to drive the

economy. What is lacking is an appropriate amount of domestic spending by Chinese


One major reason that Chinese people are reluctant to spend is the lack of an effective

safety net in the event something undesirable happens to them or to a family member, as well as

a general distrust that funds contributed for mandatory pension will still be available when they

reach retirement age. Instead they save, and a side-effect of this phenomenon is, in the absence

of alternative avenues to invest the money that is being hoarded by Chinese households, too

much of the money is flowing into unsustainable real estate investment, creating a potentially

dangerous bubble.

By overhauling the social security system, the government is making an effort to address

the problems as well as related issues affecting Chinese society in recent years. However, as

always in China, the difficulty is in the implementation.

Shanghai: China 2013 Compensation and Benefits Trends

The Conference Board, Council on International Compensation and Benefits

China Human Resource Environment, 2012

China Briefing Magazine and Daily News Service

Global Career Company Initiative

China Development Financial

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