## China strives to adapt social protection to the needs of a market economy

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**Canonical URL:** [China strives to adapt social protection to the needs of a market economy](https://www.imf.org/-/media/files/publications/fandd/article/2018/december/social-protection-in-china-wills.pdf)

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### Context and political framing
- Xi Jinping’s October 2017 address at the Communist Party’s National Congress: framed the “principal contradiction” as “between unbalanced and inadequate development and the people’s ever-growing needs for a better life.”
- Xi boasted that China had lifted some 60 million people out of poverty in the previous five years and set a goal to end rural poverty by 2020.
- Policy direction: reassertion of the role of the party and the state, favoring the public sphere and strengthening state-owned enterprises relative to the private sector.

### Evolution of China’s social protection system
- Historical trajectory:
  - 1949: founding of cradle-to-grave welfare state under Mao Zedong.
  - 1980s–1990s: Deng Xiaoping’s market-oriented reforms began untethering parts of the economy from state control.
  - Late 1970s onward: shift of social services from state enterprises to local governments; thin social security system established.
  - 1994: guidelines drafted for a multitiered system of social insurance, social welfare, and an individual savings program.
  - Late 1990s: unemployment insurance, living allowances, and minimum income guarantees introduced; basic pension system and initial health-care coverage instituted.
  - 2001: WTO accession accelerated reforms and large-scale dismissals from state-owned enterprises.
  - 2005: typical retired urban worker received two distinct pensions—one from accumulated employer contributions and another from individual contributions.
  - 1998–late 2009: expansion of health insurance coverage to urban workers, then students, children, the urban jobless, and rural residents.
  - Late 2000s (post-global financial crisis): stimulus measures expanded social welfare coverage, affordable housing, progressive tax reforms, and rural-targeted spending.

### Coverage, inequalities, and structural gaps
- Population and coverage:
  - “Most of China’s 1.4 billion people are now covered,” but the system is uneven and exacerbates inequalities.
  - Health insurance coverage: “Ten years ago, most people in China did not have access to health insurance; today 96 percent or so are covered in one way or another.”
- Inequality indicators and poverty:
  - Gini coefficient remained stubbornly above 0.4.
  - Government reports some 30 million people—“almost 2 percent of the population”—below the poverty line, defined as earning the equivalent of about 95 cents a day.
  - World Bank estimates highlight nearly 500 million people living just above the poverty line, on less than $5.50 a day.
- Structural fragmentation:
  - Pension system reshaped into five distinct pension scheme classes, strengthening the link between benefits and contributions and privileging the better off.
  - Hukou system ties people and benefits to a particular locale, complicating migrant access to services.

### Recent policy shifts under Xi and implementation dynamics
- Reversion toward state control:
  - Reimposition of capital controls after 2015 stock market plunge; increased role of party members on private and public company boards.
  - Preferential credit and stimulus measures for state-owned enterprises; restrictions on corporate lending that disproportionately affected private companies.
- Urbanization and relocation policy:
  - 2014 plan to shift some 250 million people to cities by 2026 via redrawing municipal boundaries, relocation, and building new cities to boost urbanization and domestic consumption.
- Fiscal and programmatic choices:
  - Central government poverty-reduction funds in Xi’s first term were “more than double the total spending of the previous five years,” allocated primarily to infrastructure, agricultural subsidies, and discounted loans.
  - Spending on the minimum living standard program (dibao) has been declining as a percentage of GDP (Ministry of Finance figures).
- Implementation gaps:
  - Local officials prioritize restoring growth over expanding pensions, improving education, or relaxing hukou; limited integration of social goals into local performance evaluations.

### Major challenges and fiscal pressures
- Demographic pressures:
  - State Council projects about a quarter of the population will be over 60 by 2030.
  - Estimated pension funding shortfall within the next few years ranges from $130 billion to $175 billion.
- Policy responses and trade-offs:
  - Government measures: directed some large state-owned companies to transfer 10 percent of their stock to pension funds; steps to remove regional disparities in benefits; potential use of general revenues.
  - Other options discussed: invest funds more effectively to boost returns; cut benefits (risking alienation of pensioners); raise contribution rates for companies and individuals (noting current rates are high compared with other countries).
- Structural risks:
  - Automation and investment in robotics threaten large-scale unemployment in industries that historically provided lifelong jobs.
  - Streamlining of state-owned enterprises may displace workers into less generous national benefit plans or lower-quality jobs.

### Findings and policy implications (extracted from text)
- Findings:
  - Expansion of social protection has been substantial (health coverage to “96 percent or so,” most of 1.4 billion covered), but the system remains uneven and stratified.
  - Urban–rural, coastal–inland disparities persist; Gini above 0.4.
  - Short-term fiscal interventions and preferential support for state-owned enterprises can boost growth but may reduce efficiency and add nonperforming loans.
  - Demographic aging creates a looming pension funding gap of $130 billion to $175 billion.
- Policy implications and options highlighted in the source:
  - Use central fiscal resources (general revenues) to fill pension shortfalls.
  - Transfer assets from state-owned enterprises to pension funds (example: 10 percent stock transfers).
  - Improve fund investment strategies to boost returns.
  - Consider benefit adjustments or increased contribution rates, understanding political and social risks.
  - Integrate social objectives (pensions, education, hukou reform) into local officials’ performance evaluations to improve implementation.

*Source: “China strives to adapt social protection to the needs of a market economy,” Ken Wills, FINANCE & DEVELOPMENT, December 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/december/social-protection-in-china-wills.pdf_