A new measure that requires foreign companies and workers to pay a social insurance tax on their income will raise the already high costs of hiring foreign workers for multinational corporations and further shrink China's cost advantages.

According to the Ministry of Human Resources and Social Security, all foreign companies and workers must pay the tax beginning Oct. 15. In exchange, foreign employees receive the same benefits as Chinese workers – retirement pension, basic medical coverage, workplace injury compensation, unemployment benefits and maternity leave.

Employees will see their incomes taxed an additional 11 percent, while employers are taxed at 37 percent. But the maximum amount paid by the employer per worker cannot exceed triple the average salary of where the company is located.

Rising costs

With rising salaries and the depreciation of the U.S. dollar, China's low-cost operating advantages are no longer as significant as before. An added social insurance tax will send operating costs skyrocketing and further reduce its cost competitiveness.

Forbes China magazine last week released a list of the top 25 cities with the highest operating costs. Shanghai topped the list, and incidentally also had huge insurance costs. Qingdao, a coastal city in eastern China, rocketed to 10th from 21st last year as its costs for insurance also increased.

Under such circumstances, what kind of pressure will companies face with the compulsory tax on foreign staff? An unidentified accountant told the National Business Daily that most companies will likely pay the employee's portion of the social insurance tax, as well.

Meanwhile, much of the benefits covered by the social insurance tax will unlikely be used by foreign workers. Many foreign workers buy their own international medical insurance, which often has better coverage than the Chinese national scheme. Also, they are unable to renew their residence permits if they lose their jobs, making the social security pension and unemployment benefits inaccessible to them in reality. And few foreigners actually live in China long enough to reach retirement age that would enable them to collect the pension.

"The new policy needs further details and clarification, such as whether the foreigners can get the money back after they leave China," said Chen Biran, a high-ranking manager from Singapore.

Hard to give up the Chinese market

According to Boston Consulting Group, the rising of cost of human resources in China, higher efficiency in the United States and the depreciation of the dollar will push some American companies to move their factories back to the United States over the next 10 years.

But Chinese economists blame economic development for the rising labor costs. "It's dogmatic and simple to say that rising labor costs will lead to the loss of competitiveness," said Zhang Huiming, director of the Enterprise Management Research Center of Fudan University. "If foreign capital is only attracted to China's low labor costs, it's natural for them to leave here when the cost is no longer low," Zhang said.

Instead of leaving, multinational corporations see the solution to higher operating costs to be an upgrade of their products and industries with more advanced technology and higher added value.

"In five to eight years, China will finish its upgrade from the low end of the industry chain to the middle and high end, as well as from low-price competition to differentiated competition," said Yi Feng, an associate professor in management at East China Normal University. "If MNCs want a piece of this big cake, they must keep up with the transformation."

Meanwhile, some companies see China's economic development itself as a way to offset the added costs.

"The burden of insurance is not as difficult as the hard time during the financial crisis," said Kathy Tian, director of human resources of Danfoss China. "Many companies have made it through the financial crisis and have good prospects in the Chinese market, and the profit will offset the human resources costs."

The Chinese market still has appeal for foreign companies because of its huge market capacity and stable economic future, she added.

Source:China.org.cn