Tax breaks key to fund growth
By Jiang Yan (China Business Weekly)
Updated: 2005-03-26 09:24

China's occupational pensions fund totalled US$6 billion by the end of last March, indicate statistics from the Ministry of Labour and Social Security (MLSS).

More than US$12 billion has been added to the fund in the past nine months, Rui Lixin, an official with MLSS' legal affairs department, told a seminar on social security legal systems earlier this year.

That raised the value of occupational pensions in China to US$18 billion by the end of last year.

Occupational pensions, which supplement the basic pensions sponsored by the State and commercial retirement insurance paid by employees, are provided by enterprises as a retirement benefit.

Employees also contribute to the pensions.

The rapid growth of the occupational pensions is likely to continue. A World Bank estimate suggests China's occupational pensions may reach US$1.85 trillion by 2030.

That would mean the average annual increase will exceed US$70 billion over the next 26 years.

Looking at the numbers, the market is exciting. But, in reality, tax incentives are missing. That might leave enterprises, and their employees, less enthusiastic about participating in the occupational pension programme.

Many analysts are urging the government to produce a nationwide, tax-cut policy to accelerate the growth of China's occupational pension fund.

He Ping, director of MLSS' social securities research centre, said a tax cut of 1 yuan (12 US cents) could produce 5 yuan (60 US cents) for occupational pensions.

He suggests the government should include tax incentives as an important policy to boost the development of occupational pensions.

However, an MLSS official contacted by China Business Weekly said such a policy is unlikely in the near future.

The government seems to be trying to strike a balance between increasing occupational pensions and decreasing fiscal revenues as a result of more tax incentives.

But many tax analysts argue the occupational pensions, when increased and put into investments, will quench the thirst of China's capital market and, hence, propel the economic engine higher.

That would stop the growth of China's fiscal revenues.

MLSS in 2000 released guidelines that encouraged various municipalities and provinces to work on their individual preferential tax policies. Those governments can give enterprises tax breaks on 4 per cent of their payrolls, provided the money is used for occupational pensions.

Some municipal and provincial governments including Shanghai, Fujian, Anhui, Hubei, Shanxi, Yunnan, Guangdong, Shandong and Zhejiang have taken their first steps in this regard.

"We implemented a preferential tax policy in the second half of 2003, and expanded the amount to 5 per cent, 1 percentage point higher than the national level," said Pan Zhongdi, deputy director of the Zhejiang Bureau of Labour and Social Security.

Racing for licences

A pilot programme is being carried out in Northeast China's Liaoning Province. The provincial occupational pension development centre, a public institution that used to manage the occupational pensions for local enterprises, has transferred the business to Taiping Life Insurance Co Ltd.

The move was widely considered a significant step towards the market operation of China's occupational pensions.

Since last May, the central government has announced a slew of new guidelines and regulations to set a clear code of conduct in the fledgling sector.

The most recent regulation, on what qualifies as an occupational pension management institution, took effect on March 1.

The regulations stipulate insurers, fund-management firms, securities brokerages, trust companies and banks can also play their roles. They are now competing for the first batch of licences to provide occupational pension services, which is very important for them if they are to secure their shares in the market.

The development and opening of occupational pensions to market players is likely to result in a reshuffling of the financial services sector, analysts predict.

"We have applied to the ministry, and are waiting for approval," said Liu Jun, an official with China Merchants Bank, which was the first bank to win approval from the China Banking Regulatory Commission (CBRC), the country's banking watchdog.

She declined to comment further.

All applicants must receive approval from both the regulatory commissions and the MLSS to conduct the business.

Some financial institutions have received the go-ahead from regulators, and are waiting for final approval from the MLSS.

Xue Qinglin, secretary to the general manager of Taiping Life Insurance's pension subsidiary, offered a similar response when contacted by China Business Weekly.

Taiping Life is one of two insurers approved by the China Insurance Regulatory Commission (CIRC) to conduct pension business in the country.

Some further regulatory details must be clarified before MLSS begins its approval process, which may take another month, Xue said.

As management of occupational pensions involves various kinds of financial service providers and various government departments including MLSS, CBRC, CIRC, the China Securities Regulatory Commission, the Ministry of Finance and the State Administration of Taxation it is essential that efficient co-ordination and communication be established between the government policy-makers, Shenyin and Wanguo Securities Co Ltd wrote in a research paper.

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