Is Reform on the Horizon for China’s Weak Social Safety Net?

By Brad Hebert

While the COVID pandemic has impacted people in every corner of the world, not everyone has suffered equally from the subsequent global recession. As bills go unpaid and evictions loom large, nearly 56.2 million Americans have filed for unemployment since the onset of the crisis. The financial burden has fallen disproportionately on working-class people, particularly those serving as “essential workers.” Given the widespread mismanagement of COVID in the US, many observers have pointed to China’s extreme lockdowns, which – despite the initial coverup in Wuhan back in January – have been largely successful in mitigating spread and preventing economic collapse, as further proof of Beijing’s ongoing attention to the crisis. But despite Beijing’s use of such authoritarian control measures and its general view of itself being a nominally socialist country that champions workers’ rights, its most vulnerable workers have also suffered tremendous hardship under the pandemic’s economic fallout.

Unlike many Western countries, China has avoided issuing direct cash transfers or increasing budgets for unemployment insurance in its coronavirus aid relief. Instead, it has largely stuck to measures that waive or defer taxes paid by enterprises and those that continue to attract trade and foreign direct investment. The rationale is that healthy enterprises can support their workers more efficiently than direct transfers could. For wealthy Chinese who had accumulated savings, their consumption mostly rebounded to normal levels, while much of the working class continues to struggle to afford monthly necessities. Spending on cars and luxury goods in China skyrocketed as the lockdowns ended in March, with many luxury retailers reporting double-digit revenue growth during the second quarter of this year compared with 12 months earlier. In a survey conducted in June on household wealth, high-income earners bringing in more than RMB 300,000 per year (approx. USD 44,000) saw their incomes grow year on year in the second quarter. In contrast, according to a February survey, a third of Chinese households earning annual incomes of between RMB 10,000 (USD 1,461) and RMB 30,000 (USD 4,384) expected their earnings to drop significantly this year. In the absence of stimulus checks or increased funds for unemployment insurance, the pandemic is exacerbating income inequality in China. It has exposed a fundamental dichotomy between official Communist Party ideology and to what lengths the CCP is willing to go to offer financial relief for workers amid an ongoing economic crisis.

When compared to economically developed countries, China has a relatively weak social welfare system. This isn’t to say it is nonexistent; since 2007, China has run one of the world’s largest means-tested forms of basic income, known as dibao (short for “minimum livelihood guarantee”). People whose incomes fall below their locality’s set poverty line are eligible for a supplemental, unconditional cash transfer to help them reach the dibao standard. And before widespread reforms of the state-owned enterprise system that culminated in the late 1990s, many Chinese workers enjoyed job security and full cradle-to-grave benefits under what is deemed the “iron rice bowl” system. Advanced pensions, on-site hospitals, and fully funded childcare were commonplace benefits. However, since the reforms, China has yet to bolster its social safety net with a strong unemployment insurance program to compensate for the gap in its system. Economists estimate as many as 80 million people were left jobless during the worst of China’s strict lockdowns earlier this year, with this number falling to between 33 million and 40 million by May. Notably, this metric does not account for underemployment, including pay cuts and reduced hours. While there are signs of a slow recovery, the pandemic has shined a light on the inadequacies of the social welfare system and the structural inequities it fails to relieve.

First, structural gaps in the stated requirements for unemployment insurance leave millions of Chinese workers ineligible for coverage. China’s current social safety net favors urban white-collar workers, specifically those working full-time. Today, only 200 million Chinese workers are covered by their employers for unemployment insurance. This does not include the employees of most small and medium enterprises. Another factor limiting coverage is that workers at large firms must also pay into the unemployment insurance system for twelve consecutive months before becoming eligible, and they must have formal contracts with their employers. The system also leaves out the vast majority of China’s low-income laborers, covering less than 20% of the estimated 300 million migrant workers. To be eligible for official employment, one must hold an urban hukou, or household registration. Think of this as an analogous system to the one the US uses to issue visas to foreign workers; the Chinese government similarly uses the hukou system to manage domestic migration and employment. Employment in China is thus highly restricted by one’s hukou status. A rural worker from Guangxi can relocate to Shenzhen to work for a construction company, but his lack of urban hukou precludes him from receiving any benefits offered by Shenzhen’s social safety net. These workers are thus systemically shut out from China’s exclusive urban welfare state. Nearly 300 million migrants seeking work in Chinese cities are now the most vulnerable segment of the population, despite being much more likely to face layoffs due to the pandemic. One additional issue with the hukou system is how it affects the unemployment figures reported by China’s National Bureau of Statistics. By looking solely at China’s surveyed unemployment rate of 5.7 percent in July, the big picture of unemployment is overlooked. This number is systematically lower than what is reflected in reality since such a wide swath of workers are precluded from officially filing their status as unemployed workers.

Contributing to its strained budget, the Chinese government also continues to pursue a costly, far-reaching grand strategy that diverts funds from the pocketbooks of its citizens. In the wake of China’s ambitious projects on the global stage, its most vulnerable populations are reminded that all resources have an opportunity cost. While tax revenues collected by the central government continue to grow at high rates, these savings are not returned to the populace in the form of a strong social safety net. Xi Jinping’s goals of the “great rejuvenation of the Chinese nation” and global preponderance have instead driven him to spend elsewhere. China’s fiscal revenues are today used to invest in advanced technologies, military modernization, and infrastructure projects abroad. As Barry Naughton notes, China’s “political commitment to grand steerage is intensifying, the magnitude of the effort is accelerating, and the difficulty of disengaging from any particular initiative is increasing.” At the same time, Beijing also faces intensifying demographic changes that will lead to a declining workforce and an aging population over the next decade. With this, China’s working class is due to suffer the gravest consequences of a poorly funded unemployment insurance system in the absence of any meaningful reform.

While these factors paint a bleak reality for a Chinese working class that still receives paltry unemployment benefits, several signs from top CCP officials indicate that change could be on the horizon. The party is actively acknowledging that labor reforms are necessary and that it must act quickly to accelerate reform of the unemployment insurance system. In April, the State Council asked local governments to broaden the coverage of unemployment benefits to include migrant workers. In May, Premier Li Keqiang pledged to continue support for the country’s social welfare programs. “We will adopt a policy to see rural migrant workers have equal access to employment services in the cities where they work," Li said. Since this proclamation, accelerated disbursement of unemployment insurance with moderate extensions to migrant workers has taken place. In August, a reporter for Caijing Magazine wrote that more than a dozen provinces have now raised unemployment insurance premiums and handed out increased unemployment subsidies, including Hubei Province, the center of the coronavirus outbreak in China. And lastly, but perhaps most notably, with the end of the year approaching, Xi is set to wrap up his poverty alleviation campaign to virtually eliminate poverty within China. According to journalist He Huifeng, “The country’s poverty rate – defined as the percentage of people living on the equivalent of US$1.90 or less per day – fell from 88 percent in 1981 to 0.7 percent in 2015.” For this campaign, the Chinese government allocated 91 billion RMB (13 billion USD) of poverty alleviation funds for 2019. A cornerstone of Xi’s agenda, the promise of his poverty alleviation campaign offers hope for the most vulnerable members of the population.

But despite the broadened coverage of unemployment insurance benefits announced by CCP officials, the additional money will not be able to fully encompass all of China’s migrant workers. For China’s working class, the recent announcements do, however, indicate the government may be willing to accelerate much-needed reforms to its unemployment insurance system. Looking forward, with the prospect of an uneven recovery dragging on into 2021, many may find Beijing’s stimulus-fearing, debt-wary policies to be prudent. If, however, the Chinese economy can rebound and the poverty alleviation campaign pans out successfully, Xi will have succeeded in two crucial goals, along with perhaps the most important of them all—controlling the spread of the coronavirus. As governments around the world are tasked with formulating the right combination of fiscal and monetary policies to minimize disruptions to their economies, China has made the case that the best fiscal policy to support its working class is pandemic control. Here, unlike the US, Beijing has already succeeded.

Brad Hebert is a former intern with the Freeman Chair in China Studies.