> > Financial Times (London) > > November 13, 2000, Monday Surveys CHI1 > > --------------------------------------------- > SURVEY - CHINA: Switch to a funded system: SOCIAL WELFARE by James Kynge: > The government needs to support an ageing population and workers laid off > as lumbering state enterprises are restructured > > By JAMES KYNGE > > Twenty thousand laid off miners smashing windows, burning cars and defying > the orders of armed police for several days would, in any country, be an > event expected to concentrate the mind. > > In China, where fear of social instability is fundamental, it was a seminal > moment. The riot in February in Yangjiazhangzi, a blighted mining town in > the north-eastern province of Liaoning, helped galvanise the government on > what is, arguably, its most crucial economic project. > > The riot helped crystalise a government perception that if it is to > accelerate the restructuring of some 300,000 lumbering state-enterprises > before post-WTO competition intensifies, then it must create a > comprehensive social security net to provide for millions of newly laid off > workers, officials said. > > The establishment of an adequate social security system would also have > important macro-economic implications. > > It could help liberate the government from a sense that GDP growth rates > above 7 per cent are necessary to keep social instability at bay, thus > allowing more flexibility on how often Keynsian reflation packages need to > be launched. > > Not only have four fiscal stimulus packages issued since 1998 put > considerable strain on China's feeble stream of tax revenues, much of the > money earmarked for infrastructure projects has been wasted or embezzled. > > "When China enters the WTO, it will be more urgent for China to build its > social security system because in the process of competition, more and more > enterprises will be eliminated or go bankrupt," says Liu Zhongli, minister > at the state economic restructuring office (Scores). > > Charged with sorting out China's social welfare system, Mr Liu's office has > devised some ground-breaking strategies. Several details are still under > review but, broadly, Beijing appears set to establish funds to cover > unemployment, pensions and medical care benefits. > > The Asian Development Bank, which opened its first representative office in > Beijing this year, plans to extend a Dollars 300m loan next year for a fund > that will help recapitalise China's social security network. The government > also plans contributions, some from the sale of equity in state-owned > companies listed on domestic markets. > > The creation of such funds will have a profound effect on the > liberalisation of domestic capital markets because a variety of investment > instruments will be essential for fund managers to spread risk. > > Already, a Nasdaq-style second board is scheduled to be launched, and > measures to develop domestic bond markets and stock futures and derivatives > products are under consideration. > > In addition, Beijing is planning to invite foreign financial institutions > to help manage a pool of domestic pension funds that Mr Liu said would be > worth at least Rmb3,000bn in 30 years from now. Industry analysts have > called this figure "extremely conservative", noting that China's population > is ageing so rapidly that 400m people are expected to be over 60 by 2050. > > The expertise of foreign financial institutions would allow China to > "tremendously increase the value of our pension funds", says Mr Liu, who > also holds open the possibility that foreign institutions may be allowed to > invest in overseas stock markets once Beijing liberalised its closed > capital account. > > The ministry of finance is drafting rules on how pension funds might > allocate assets between domestic bonds, domestic stocks, industrial > projects and overseas stocks. "Personally, I do think many famous overseas > companies are very good in terms of their reputation, quality of service > and operating mechanisms. They have rich expertise and experience," says Mr > Liu. > > Many of China's state owned enterprises are still employing the old > socialist system of paying pensions out of current revenues. In many cases, > this is the single biggest burden they face because the number of > pensioners on a factory's books can often nearly equal the number of > workers on the active payroll. > > Tackling the issue of unemployment benefits is also pressing. > > Hu Angang, a respected economist, says that the unemployment rate in urban > areas has risen to between 8 and 10 per cent, or about 15m people. "The > increase in the numbers of laid off workers has become a flood. This is the > main source of instability within the country," Mr Hu says. It is not clear > yet how the funds planned to finance unemployment benefits will be > invested. But with the amount of the central budget allocated for > unemployment payments rising to more than Rmb20bn, new sources of funding > are being studied, says Lou Jiwei, a deputy minister of finance. > > The finance ministry plans to raise the social security contribution rate > paid by companies, and double the amount of revenue it receives from > holding public lotteries to about Rmb30bn next year, Mr Lou says. > > The sale of state-owned assets, which he estimates to total Rmb1,500bn, on > domestic stock markets would have to be pursued gradually. "We won't sell > this too quickly because it will cause huge pressures on the market. We > will sell some state assets to raise money for the social security fund, > but this part will not be huge," Mr Lou says. > > Ultimately, the effectiveness of China's switch to a funded social welfare > system will depend on boosting the depth, breadth and sophistication of its > under-developed capital markets. > > Beijing knows that, in the future, any cases of corruption or incompetence > among fund managers handling the nation's pension funds could precipitate > much the same type of unrest as witnessed in Yangjiazhangzi. >
