Chinese companies need support amid restructuring

By Zhou Dewen Source:Global Times Published: 2018/9/11 22:18:40

Illustration: Xia Qing/GT


Social security in China will change big time in 2019 as tax bureaus are given the power to collect social security contributions. With the social security bureau responsible for collection, only a limited number of Chinese companies, especially privately owned small and medium-sized enterprises (SMEs), have made the correct payments for employees. Stricter enforcement is expected under the tax bureau.

The timing of the new social security rule is debatable. If the economy is on the rise, the reform is right choice. But the Chinese economy is facing downward pressure and some SMEs are weighed down by high debt ratios and higher tariffs. It is not wise for the policymakers to burden them further at this moment.

The majority of SMEs may fail due to waves of new technology. SMEs have come to a situation that's unseen since the era of opening-up began. The macroeconomic structural adjustment and deleveraging have been tough on SMEs, and these companies - which already find it hard to borrow from banks - may struggle merely to make interest payments.

The intensifying trade conflict with the US is adding costs and it may also burden SMEs. Since tariffs were raised by both sides, China's export value has maintained steady growth. But if the punitive tariffs extend to more products, SMEs will have to seek alternative markets or clients.

Policymakers have taken steps to cut taxes and fees for the SMEs, trying to create a better business environment. Given pressures on the domestic and foreign sides, tougher enforcement in collecting social security will no doubt burden SMEs by pushing up their operational costs. Higher costs will make their outlook even worse.

An initial problem may be unemployment. Higher labor costs will hit the labor-intensive light industrial sector worst. China already has a large population and many more people join the labor market each year. A surge in labor costs can be an incentive for companies to replace human labor with machines and robots. But this transformation won't happen overnight, so many workers need to be absorbed somewhere.

By the beginning of next year, many SMEs could make layoffs, and those already on the brink of bankruptcy may just give up. A higher unemployment rate and fewer employers could jeopardize social stability and economic development, which are make-or-break issues.

If companies don't cut jobs or reduce their production quality, then they have no choice but to reduce the real wages of their employees. In the next several months, price of commodities could go up, leading to a decline in living standards. There's no way to guarantee living standards if wages get cut.

The purpose of macro-level adjustment is to ensure stable growth of the economy. Structural reforms are supposed to motivate companies to plan for the long run and make high-quality, high value-added products. But first, companies have to survive.

The social security policy itself is well-intentioned. Making the correct payments for employees can safeguard their retirements, medical care and so on. With the growth rate of China's population near a tipping point, an aging society is on its way. Making sure people have solid social security funds is vital.

But good policies can backfire and burden companies, and even for employees, the change is a slow remedy that won't address immediate needs. Although workers may have to pay more out of their own funds, most employees hope their companies do well. Moreover, letting people have somewhat equal access to medical and nursing resource is more prominent issue, rather than adding a far-fetched benefit that may have side-effect.

China is at a decisive moment for its economic restructuring. Any policy should be pursued with caution and in line with economic trends. Some SMEs, and even large private companies in some regions, are in danger of going out of business. Companies need more supportive policies to pull through the hardship, not more burdens.

Policymakers have promised to ensure companies don't pay higher taxes overall, and there's also talk that the government may lower the security premium rate. Companies are still being instilled with hope to navigate through the economy's restructuring.

The author is deputy director of the Central Economic Committee of the China Association for Promoting Democracy and director of Zhejiang Private Investment Enterprise Association.


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