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May 20, 2011

China Social Security System and its Social Security Fund

The social security system in China is based upon guidelines issued by the central government, although the specifics and administration of the system is managed at the local level.

All over urban China social insurance is broken down into five distinct categories. These are:

1. Pension
2. Medical insurance
3. Unemployment insurance
4. Maternity insurance
5. Occupational injury insurance

Total assets of China's social security fund increased nearly tenfold over the past 10 years, as the government strives to keep high investment returns amid the country's high inflation.

The fund's total assets rose to 856.69 billion yuan ($131.7 billion) in 2010, up from 80.51 billion yuan in 2001, the National Council for Social Security Fund (NCSSF) announced Thursday. The total assets of the fund are to reach 1 trillion yuan by the year's end and 1.5 trillion yuan by 2015 through sounder and refined management.



The NCSSF currently allocates 45 percent of its capital in fixed income investments such as treasury and corporate bonds, 30 percent in stocks, and 25 percent in private equity (PE) funds and other sectors.

Pension

* contributions on a monthly basis from both the employee and the employer.

* The portion contributed by the employee goes into a personal fund (the contribution directly accrues to the individual) and after retirement the individual can draw on the funds in this pool directly.

* the contributions made by the employer go into a social pool. Funds in this pool are distributed to all citizens that have made contributions into the system during their working life.

* even citizens that have used up the personal portion of their pension will have some income on which to support themselves (although it is likely to be only several hundred RMB per month).

* In terms of the amount of contributions that need to be made each month by both employee and employer, pension is generally the largest component of social insurance.


Unemployment insurance in China

A small fixed amount that varies depending upon the city and is not related to the persons salary.

Employers in all major cities are expected to make a contribution towards unemployment insurance and most cities also require a contribution from the employee.

A newly unemployed person can make a claim if they contributed for the past year. The benefits can be received for a maximum of 24 months.

Medical insurance
By contributing to the medical insurance fund Chinese citizens can defray some of the costs of medical expenses in the event of illness or injury. Both employees and employers are required to make contributions to this fund.

Unlike in some countries where medical treatment is provided for free, in most cities in China the patient is required to bear a certain percentage of the total hospital fee.

In addition, each month individuals receive a small amount of money onto their medical insurance card. The funds can be used to purchase medicine or other goods at pharmacies, or to pay small medical expenses at hospitals.

China can add $1.9 trillion to global consumption by 2025, McKinsey finds

If China's leaders committed themselves to a more aggressive program of comprehensive reform, they could raise private consumption above 50 percent of GDP by 2025 China's consumption-to-GDP ratio—36 percent—is only half that of the United States and about two-thirds those of Europe and Japan.

McKinsey doesn't believe that better health and pension guarantees would raise private consumption significantly before 2025. Even a fully fledged program to expand China's health and retirement benefits wouldn't raise private consumption's share of GDP significantly as government will have to provide the majority of the funding. We estimate that, at best, such improvements would boost private consumption by only a percentage point above the 2025 base-case projection.

More jobs and better pay
Over time, a stronger social safety net and improved access to better goods and services will encourage China's households to save less and spend more. But the country can't hope to increase its consumption rate meaningfully unless it reverses a major current trend: Households have a relatively small and shrinking share of the national income. Any significant rise in household incomes will in turn require far-reaching policy changes that would transform some of the economy's most basic structures.

Ultimately, China can't hope to unleash the power of its consumers unless the economy creates more jobs and pays higher wages, so fiscal and regulatory policies must change. Banks should be encouraged to support the services sector as well as small and medium-sized enterprises. Dividend policies for state-owned enterprises should be changed and the development of equity markets encouraged. By 2025, a comprehensive effort to restructure the economy along these lines could add 3.5 to 6.0 percentage points to consumption's share of GDP, breaching the 50 percent barrier.


Unleashing the Chinese Consumer (74 pages, 2009)

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