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AsianFin -- A landmark ruling by China’s highest court has sparked a wave of public backlash, with businesses and workers warning it could push up costs, trigger layoffs, and worsen the country’s already deep economic inequalities.
The Supreme People’s Court ruled that, starting September 1, employers and employees will no longer be allowed to bypass mandatory social insurance contributions through informal agreements. The decision effectively closes a loophole long used by small and medium-sized businesses (SMEs) and some workers to reduce costs in a system where compliance rates remain low.
According to Société Générale SA, strict enforcement could add costs equivalent to about 1% of China’s gross domestic product, placing new financial strain on companies and households alike.
The ruling, issued on August 1, quickly went viral on Chinese social media. Many users expressed fears of business closures, job losses, and wage cuts.
“Of course that is going to cause anxiety and panic,” said Tiandiren Zhuo, a lawyer with a large following on Douyin, in a video liked over 20,000 times.
One restaurant owner in a video viewed more than 30,000 times on Weibo said he planned to shut down once the new rules take effect, unable to afford the payments. “This move will simply force employers to take from employee salaries to make the mandatory payments,” wrote Weibo user Awuxiaoxie in a widely shared post.
Others questioned the fairness and sustainability of the pension system. “The money I pay now is taken by the elderly — but if no one is having children, who is going to pay social insurance to support me?” asked one user on the platform.
The court framed its decision as a step to protect workers’ rights, disperse employment risks for employers, and address the challenges of an aging population. The move also aligns with Beijing’s broader push to expand social support as it pivots toward a consumption-driven economy.
China’s government has pledged to strengthen its welfare safety net to boost household confidence and encourage spending. Social spending in the first half of this year reached its highest level in almost two decades.
Mandatory contributions have often gone unenforced, especially among smaller businesses and gig workers. Cracking down is intended not only to expand coverage but also to replenish the country’s pension funds, which are under mounting pressure as the number of retirees grows.
Over the next decade, more than 20 million workers will retire annually, even as a record-low birth rate shrinks the number of contributors. A 2019 study by the Chinese Academy of Social Sciences warned that the main state pension fund, which operates on a pay-as-you-go model, could run out of money by 2035 without reform.
While China now operates the world’s largest social security network, covering more than a billion people, the benefits are unevenly distributed.
State sector workers are estimated to receive pensions nearly twice as large as their private-sector counterparts. In 2023, the average monthly pension payout for private enterprise workers was 3,162 yuan ($440), compared with just 214 yuan for rural residents and unemployed urban dwellers.
“It’s not that people don’t want to pay social security,” said Douyin user Zhouyaojin in a video liked over 40,000 times. “It’s that they feel it doesn’t have much to do with them.”
The rise of the gig economy has further complicated the picture, leaving many flexible workers without adequate coverage.
Informal arrangements to avoid contributions are common. A survey of more than 6,000 companies last year by Zhonghe Group found that only 28% were fully compliant with social security laws.
For many SMEs, the employer’s share of contributions — which covers pensions, medical insurance, unemployment insurance, and other benefits — is a significant burden. The new rules threaten to squeeze already thin margins, particularly in low-cost, labor-intensive industries.
“If a company cannot even make mandatory social insurance payments for the employees, what’s the purpose of their existence?” Zhouyaojin said.
Analysts say the backlash could prompt authorities to soften or delay implementation. Société Générale economists Michelle Lam and Wei Yao noted that if the impact proves “significant,” the government might extend the compliance deadline or introduce measures to ease the burden on struggling firms.
“If social security laws are strictly enforced, this will no doubt raise costs for employers who have avoided making contributions in the past, likely resulting in job layoffs or wage cuts to minimize the impact on their revenue,” they wrote in a report. “Another shock to the labor market is the last thing policymakers would like to see.”
China has 84 million new-form workers and more than 200 million flexible workers in total. According to the 2024 Gig Economy Analysis Report, the number of flexible workers reached 265 million last year, with 175 million relying on online platforms for income.
These jobs provide flexibility and absorb labor market shocks, but they are often low-paid. The median wage for flexible workers is less than half the national average, well below the threshold for employee social insurance contributions. As a result, many trade away future security for immediate earnings, sometimes opting for rural resident pensions that pay as little as 217 yuan per month—enough to replace only 14% of average rural consumption.
The ruling places Beijing in a delicate position. On one hand, it aligns with the government’s commitment to strengthening social protections and addressing demographic challenges. On the other, it risks destabilizing smaller businesses at a time when China’s post-pandemic recovery remains fragile and unemployment, especially among young people, is elevated.
With property prices slumping and consumer confidence still shaky, policymakers are trying to boost domestic demand by ensuring citizens feel financially secure. Expanding social insurance coverage could be a step toward that goal — but only if it does not trigger widespread job losses or wage cuts in the process.
