Note: For our most recent update on social insurance regulations read here

Introduction

China’s new Social Insurance Law was passed by the Standing Committee of the National People's Congress on October 28, 2010 and will come into effect on July 1, 2011. The law is the first attempt to bring together and amplify laws and regulations that were previously spread across different administrative bodies and levels of government. The law defines a framework for social security that is based on five areas of insurance:

1) Pension

2) Basic Medical

3) Unemployment

4) Work-related injury

5) Maternity

Does the new law require foreign workers to participate?

In its current form, yes, although further detail on implementation is expected.

On 10 June, the “Draft Interim Measures for the Participation of Foreigners Employed in China in Social Insurance” were released by the Ministry of Human Resources and Social Security. The short document clarifies the participation in the new scheme of foreign nationals who are “legally employed by enterprises, public institutions, social groups, privately-owned non-enterprise units, foundations, law firms and accounting firms which have been incorporated or registered in line with the laws in China”.  This shall include employees from Hong Kong, Macao and Taiwan.

Further, the measures outline that those foreign nationals contracted to the China representative offices or branches of foreign employers should also participate in the scheme. In each case, the onus is on the employer to register the employee in accordance with relevant regulations.

Citizens of countries that have entered into treaties with China in relation to social insurance (currently only South Korea and Germany) shall be handled in accordance with that treaty.

Key Issues

The new regime raises many questions and creates serious challenges for agencies, employers and employees:

• Although the rates of contribution for foreign employees and employers have not been stated, it appears they will be the same as for Chinese nationals with contributions capped according to local regulations. If so, the system in its current form will lead to a substantial increase in the cost of hiring foreign talent. Under current rates, the maximum employer contribution would be RMB 51900 in Shanghai and RMB 49150 in Beijing, for employees RMB 15430 in Shanghai and RMB 15915 in Beijing.
   
• While many countries require foreign workers to contribute to social insurance schemes, the Chinese health system does not operate at a standard many foreign workers are accustomed to. Unless more bilateral and multilateral treaties are concluded with China in relation to social insurance, employers will be faced with an increase in local insurance obligations in addition to demand from foreign workers for expensive expatriate insurance policies.
   
• Foreign workers are required to leave the country if/when their working visas are terminated, so it remains unclear how they will benefit from obligatory unemployment insurance.
   
• The law contains a provision for pension contributions to be refunded on application when a foreign worker leaves China but is scant on detail.
   
• China’s social insurance agencies are already understaffed. Conservative estimates suggest that the number of social security management agencies needs to be doubled to manage the new system.
   
• Social insurance is new in China. The lack of experience in managing not only the implementation of the new system but expectations of end-users will present great challenges. As with many regulatory aspects of doing business in China, the effectiveness of the system will depend on how committed the government is to wide-scale implementation and enforcement.

Recommendation

Clearly, there remain many questions for employees and employers in the implementation of these new laws and regulations. The Interim Measures have only recently concluded a period of public consultation. While it is too soon to advise any firm strategy, we suggest clients to remain alert to the possibility of an impending increase in foreign labor costs.

For more details, please speak with your S.J. Grand advisor.