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Chinese Social Insurance: Will Foreigners Be Able to Opt Out?

By Stanley Lubman, The Wall Street Journal, China Real Time Report

China has expanded the coverage of its social insurance system to include foreigners working in the country in a move that could have significant consequences for Americans and American businesses operating in the country unless Washington steps in to negotiate on their behalf.

The Social Insurance Law that came into effect on July 1, 2011 is China’s first comprehensive law in this area, superseding a wide range of central and local directives, rules and regulations. As often happens in Chinese law-making, the full set of applicable rules has yet to be issued. Instead, the rules are being released in installments. Among the provisions that have been released is Article 97, which in the English-language version of the law issued simultaneously with the Chinese, is rendered like so: “Foreign nationals who take up employment in China shall enrol in social insurance with reference to this Law.”

Trying to decipher what that means in real terms is complicated by competing translations of the Chinese version of the phrase. One popular translation renders the sentence as “Expatriates working in China may participate in social insurance schemes in accordance with this law.” Another translation also circulating widely renders it in a freer translation: “Foreigners employed within the territory of the People’s Republic of China shall participate in social insurance analogically in accordance with this Law.”

The most logical interpretation seems to be that foreign employees are subject to the requirement to enroll, although the conditions applicable to them will vary to an extent that is not yet determined. More detail is beginning to appear, but before considering the available information and some foreign reactions, the law needs to be viewed within the larger context of the Chinese social insurance system.

China’s social insurance scheme is comprised of five separate funds covering pensions, medical expenses, unemployment, maternity, and work-related injuries. Employers and employees must pay monthly premiums into three of the funds (pensions, medical expenses, unemployment) while only employees are required to make contribution to the last two (maternity and work-related injuries). Rates differ from province to province and are subject to caps. (The Australian China Chamber of Commerce provides a useful introduction to the insurance system here, while a comparison of employees’ and employers’ contributions in Shanghai, Beijing and Guangzhou can be found in a short pdf guide to the law by the accounting firm Ernst and Young.)

Although the new Social Insurance Law does not say which insurance types would be available to foreign workers, compulsorily or optionally, a draft document called the “Provisional Measures for Expatriate Employees Making Social Security” Contributions in China issued on June 10, 2011 indicates that foreigners working in China must contribute to the funds for pensions, medical expenses and unemployment. A separate housing fund also exists to which employees and employers contribute, but the provisional measures do not indicate whether foreigners working in China will be required to contribute to that fund as well.

The measures also define the employees to which the Social Insurance Law applies as those directly employed by foreign entities registered in China as well as foreign employees who sign employment contracts with overseas employers and are seconded to work in China. There is no reference to self-employed foreigners.

In comments submitted last month to the Ministry of Human Resources and Social Security in Beijing (pdf), the U.S.-China Business Council (USCBC) argued that requiring foreign employees to participate in the social insurance scheme would be “unnecessarily duplicative,” since employers in China often already provide the five types of social insurance covered in the measures. They also argued that seconded employees should be allowed to opt-out since they remain employed by their overseas employer and are unlikely to enjoy any benefits from the social insurance scheme because they usually work in China for only a short time.

Pointing out that the vast majority of seconded employees return to their home country and long-term employees generally do not retire in China, the USCBC also raised questions about the usefulness to foreigners of participating in the Chinese pension scheme. The measures contain a provision allowing a retiring employee to cash out his or her account, but the USCBC argues that this would be burdensome to administer in practice, and urges that China model the relevant provisions to those of Singapore, where employees are not required to make payments into the pension system.

In addition, the USCBC urges that foreign employees be allowed to opt out of medical insurance if they are otherwise covered and that they not be required to contribute to unemployment insurance for the simple reason that once unemployed, their visas become invalid and they cannot remain in China.

The European Union Chamber of Commerce in China has likewise urged the ministry to make contributions for foreigners optional.

A major issue that has been raised in a number of commentaries on the new requirement is the additional cost of doing business in China that foreigners may have to bear. Citing “employer lawyers,” the Financial Times estimates that companies employing foreigners might have to pay up to 4,325 yuan ($667) per month in social insurance contributions without any opt-out clause. Foreign employees, the article adds, might have to pay “up to a further Rmb1,285.68 per month each in individual contributions.”

According to a recent newsletter issued by the American Bar Association Section on Labor and Employment Law, a further complication is raised because “most cities are not ready to implement the new requirements” and the local policies on these costs may not change in all cities at the same time. Currently, foreign employees in Beijing can only participate in the system for work injury insurance; in Shanghai, they can participate in the entire system but participation is not mandatory.

Under the new measures, only foreign nationals whose countries have already executed bilateral or multilateral social security treaties with China will be exempt from participation provided they can prove that they are continuing to make contributions in their home countries. At the moment, only Germany and South Korea have signed such treaties with China.

For employees of U.S. companies stationed in China or seconded to China to be allowed to opt out of coverage under the Chinese scheme would require the U.S. and China to enter into a treaty. The U.S. has entered into “totalization agreements” with 21 other countries to try to eliminate double social security taxation and combine social insurance from two or more countries.

Jeffrey Wilson, a lawyer with Jun He Law Offices in Shanghai who helped write a submission on the law on behalf of the American Chamber of Commerce in Shanghai, told the Financial Times that he does not expect implementation of the new measures in the short term. But most China-based employment attorneys expect that, in the longer term, inclusion of foreigners is inevitable. Washington should start negotiating a treaty now. Without it, American employees and American employers may have to pay considerable amounts into the Chinese system while continuing to be liable for payments in the own country’s system, and may also have to contribute to a system from which they receive uncertain if any benefits. 8/10/2011