John Zhao and Charlie Wei are both unhappy with how their factory in southern China has responded to a landmark top court ruling in one of Beijing’s biggest reform steps in recent years — but their objections could not be more different.
From September last year, the court made it illegal for workers and employers to avoid social insurance payments, setting the stage for a long-term redistribution of resources from producers to consumers via the welfare system.
To minimize costs, the auto parts supplier based in Dongguan, China, restructured salaries to pay contributions only on a base wage of about one-third of 12,000 yuan (US$1,739) monthly income, said the workers, who now have to pay their share as well. They declined to name their employer.
Wei, 23, prefers “more money now,” rather than the better longer-term deal when the firm’s contributions into his social insurance account are factored in. Zhao, 37, wants the payments to reflect his full income.
“No one thinks they need a safety net until something goes wrong,” Zhao said, as the two shared a “drunken goose” meal, a southern Chinese cousin of coq au vin. “Younger people don’t understand that.”
Economists see the Supreme People’s Court ruling as a pivotal test of Beijing’s efforts to improve household finances and rebalance an export-reliant growth model that causes trade tensions and fuels disinflationary pressures.
Six months on, workers, employers and economists say compliance remains partial, raising questions over China’s ability to pursue structural economic shifts as parliament is due for its annual meeting — the most-watched gauge of Beijing’s reform momentum.
The Chinese Ministry of Human Resources and Social Security and the Cabinet did not respond to requests for comment. In January, ministry spokesperson Cui Peng-cheng (崔?程) said social insurance reform has been “steadily promoted.”
Reuters interviews with more than a dozen workers and factory owners show firms responded to the ruling mostly in ways that minimize their own payments, in some cases even by lowering wages.
Most make payments based on a lower base wage rather than the full salary, having restructured the balance as bonuses or other benefits. Some workers and one factory owner said they still do not pay at all, because they cannot afford the contributions.
Such examples “encapsulate the policy dilemma facing China’s leaders: Can you accept short-term pain for long-term gain? The answer, in this instance, seems to be no,” said Nick Marro, an Asia analyst at the Economist Intelligence Unit.
“This could be instructive when thinking about other difficult market-based reforms,” he added.
By making the contributions mandatory — roughly 25 percent of income for employers and about one-10th for employees — the ruling aims to bolster the social safety net, a key step toward encouraging workers to spend more now, rather than save on their own for rainy days.
However, it also raises labor costs. Avoiding such contributions historically has strengthened China’s competitiveness, turning exports into a major growth driver.
Richard Yarrow, fellow at Harvard Kennedy School’s
Mossavar-Rahmani Center for Business and Government, said that firms struggle to comply because low domestic demand, tariffs, high debts and price wars triggered by endemic industrial overcapacity hurt their revenues.
“If your competitors avoid paying for social insurance, then you have even more reason to avoid complying,” Yarrow said.
The owner of an industrial valves manufacturer, asking not to be named to speak frankly about the ruling’s impact, said he did not expect pressure from authorities to comply, because that would “crush” factories like his.
A furniture factory owner said he was paying higher contributions, but below the legal requirement.
“The burden on our company is already quite heavy,” he said.
Marro said authorities have “to some extent tacitly allowed companies to cut corners,” because of thin margins.
“This reflects the difficult trade-off authorities face,” he added.
Many workers feel they earn too little to contribute.
With debt to repay, Daniel Zhang, 27, works 10-hour shifts for 5,000 yuan monthly at a Shenzhen-based LED screen factory, then delivers food nightly for an extra 3,000 yuan.
“I’m in a bad state now, I feel very tired,” he said over beers, peanuts and oysters with his manager at a hawker stall. “Paying 300 to 500 yuan every month would add a lot of pressure.”
His boss, who owns shares in the factory and only gave his surname, Zou, “turns a blind eye” as 30 percent of workers insist, like Zhang, on informal contracts to avoid payments. He said the factory might close if it loses money “again” this year.
“It’s hard to fully enforce” payments, Zou added. “China is too big.”
Some employers try their best.
Maria Wang, 28, said her boss at an engineering firm in the southern city of Guangzhou sold some of his apartments and cars to cover social insurance for 50 staff.
However, the firm now struggles to pay suppliers, Wang said.
A survey of 6,689 firms in August last year by human resources firm Zhonghe Group found only 34.1 percent were “fully compliant.”
Reuters could not find more recent surveys, but revenues into the biggest social insurance scheme, urban pensions, increased 5.77 percent to 7.8 trillion yuan last year, an insignificant change over 2024’s 5.61 percent rise.
One labor lawyer said firms tend to underpay using lower base wages, which could still be illegal.
“They know there’s a risk, but they treat it like a probability problem,” said the lawyer, asking for anonymity.
Some workers bear costs greater than their mandated contributions.
Finance worker Yu, 26, took a 27 percent net income cut under threat of being laid off. To meet payments, her employer reduced her wage by 800 yuan to 4,000 yuan. Yu now also contributes 500 yuan.
Garment worker Xia, 39, is resisting a similar demand, together with her colleagues.
“We’re all from rural areas, our wages are already low. If they deduct 600 yuan, what’s left doesn’t even cover living costs,” Xia said.
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