In 12 months' time, the number of people in China over the age of 60 will reach 1.30 million, the size of the entire population of Britain and France combined. By 2050, this group will account for 25 percent of China's entire population, including 160 million who will be at least 80 years of age. The problem of an ageing population is affecting China at a frightening speed.
This transformation of demographics forced the government in the 1980s to initiate a reform of the system of pension provision. Under the old system, companies put aside a certain amount from their profit and loss account to cover their pension liabilities due to their retired workforce. Such a method of provision proved to be a huge financial strain on those old industries whose pensioners would sometimes outnumber workers on the payroll. For example, in the textile industry where the majority of the work force are women who tend to live longer than men, payments to pensioners could easily be delayed for months.
Any reform of pension provision in the state-owned sector causes concern among the general public, old and young alike. In mid-September, local newspapers were bombarded with telephone enquiries about rumours circulating on the internet that there would be a sharp decrease of payouts guaranteed by the current pension system once a new scheme starts. Concern was so high that the Ministry of Labour and Social Security had to act quickly to reaffirm its cornmitment and refute the rumours.
The ongoing pension reforms which started in the 1980s "are aimed at creating a unified pension provision system," according to Mr. Song Xiaowu, director-general of the allocation and social security system department under the State Commission for Economic Restructuring. The intention is that all retirees, no matter who their former employers were and how well they are now performing, will have a pension to live on. But at the moment, the reforms are only focusing on the state-owned sector. Statistics from the labour authorities show that pension provision coverage was 95 percent in state-owned enterprises at the end of 1996, 51 percent in collective enterprises and only 27 percent under other forms of ownership. Farmers don't have any state pensions at all.
The government's immediate goal is to set up standardised pension schemes at the provincial level across the country. Declining economic growth and rising unemployment have added to the urgency and complexity of the issue. Another impediment is the lack of administrative, supervisory and legislative infrastructure By July, nearly US$1bn-worth of pension funds were reportedly misappropriated, causing payout delays to more than two mil-lion pensioners. This prompted Vice-Premier Wu Bangguo, in charge of industrial reforms, to call for "a thorough check of irregularities" within the system.
According to the latest figures available, the rolling balance of funds at the end of 1997 was Yn78bn (about US$9.4bn), of which 21 percent was invested in government bonds and 63 percent deposited with banks and financial institutions. Because of the large proportion of bank loans which are non-performing, it is inevitable that some of the ‘bank deposits' on the books of pension funds have already wound up as bad debts.
Pensions fund professionals
Commercialising the banking sector in the true sense of the word would appear crucial in assuring that risks are properly assessed before loans are made, thus ensuring the security of income and capital growth of pension funds, according to Mr. Zhang Zhigang, assistant managing director of Shanghai City United Bank. "Reforms in the state-owned sector goes hand-in-hand with the reforms of the financial sector," he says.
So far, the financial sector reforms have not yet produced a new breed of professionals to manage pension funds. Instead, the Shanghai municipal pension fund, for example, is deposited with the state-run Pudong Development Bank, which guarantees a return of two percentage points above standard bank interest rates. The bank, in turn, invests the bulk of the money in treasury bills, with a small portion in selected state-owned enterprises. Pension funds are strictly forbidden from venturing into stock markets which, internationally, have proved to offer much better returns in the long term than any other financial instrument.
Despite this restriction, foreign mutual fund firms such as AXA of France, Invesco and Schroders are queing up to enter the Mainland pension market. The World Bank recently predicted that China's pension assets could reach US$1,800bn by 2030, putting it in the world's top five. Some observers predict that joint venture pension funds may be allowed to invest in A-shares in the first quarter of 1999.
In the first radical change of pension provision in the late 1980s, the government tried to reduce the direct link between employers and pensioners, encourage individual savings for retirement and redistribute pension funds at provincial level. As a result, social security bureaux were set up to manage a pool of pension funds contributed jointly by the state, employers and employees.
Companies now contribute an equivalent of 25.5 percent of their total wage bills to the pool while four percent is deducted from individual salaries to a special retirement account. All pensioners receive their payments from the pool, thus guaranteeing a minimum living standard, even though their old companies may have gone bankrupt. The government intends to further reduce the bur-den on employers by slashing their contribution to 13 percent of their wage bills and doubling individual contributions to eight percent of their wages by the year 2000.
However, only certain provinces and municipalities have so far established their own pensions schemes. These tend to be the more industrially developed areas such as Beijing, Tianjin, Shanghai and Fujian. These pension pools are able to transfer their funds anywhere within the municipalities in a flexible manner. For example, if an individual company or district has a short-term cash-flow crisis and is unable to contribute its pension liabilities to the general pool, the municipal or provincial government would be able to redistribute surplus funds from other districts or companies.
In less industrialised provinces, it is common for the pension schemes to be administered only at a city or county level, where closed blocks of funds are formed with limited redistribution power. The county pools have less room for manoeuvre when it comes to covering for shortfalls in pension pool contributions. Often they have to resort to issuing IOUs to pensioners when there are insufficient funds to cover the liabilities.
The government is committed to establishing a network of provincial-level pension pools so that the Ministry of Labour and Social Security will be able to supervise the provision and payment of pensions across all regions. "We must ensure that new arrears do not occur while making up past ones as soon as possible," Minister Zhang Zuoji was recently quoted as saying.
Relying on family ties
With the constant changes in pension reforms, employees still believe that their children are their best security for old age. This is true of workers in the state sector, private sector and especially for those working on farms.
A recent national survey showed that various forms of support from children provide the bulk of income for their parents and other elderly relatives. Only one percent of those over 60 live in social welfare centres or homes for the elderly. But this traditional form of security is unlikely to be sustained in the long run as a result of the reforms which have led to millions of people being laid off. Laid-off workers, particularly if they are the only child in a family, are in no position to provide for their retired parents.
The government believes that it will take five years to establish a social security system and employment mechanisms suited to a more market-oriented economy. But such optimism may very well be misplaced, given the scope and size of the tasks it faces.
For those middle-aged workers about to join the massive army of pensioners, only one thing is certain: the period of financial uncertainty is likely to be long and hard.
Logistics licence for European lines
Two of the world's largest container shipping lines, Maersk Line of Copenhagen and Anglo-Dutch conglomerate P&O/Nedlloyd Container Lines, have been granted licences by the Chinese authorities to operate their own logistics centres in inland regions.
The centres will provide the lines with their own ancillary operations connected to mainhaul and local container trade traffic. Future services will include the stuffing and stripping of containers for in and outbound cargoes, warehousing, and signing, and the issuing of cargo receipts.
The agreement signed between the government authorities and the two shipping lines primarily allows for the operation of the service centres through local representative offices. However, it is expected that both European lines will press for permission to be granted comprehensive operating licenses in the logistics field.
Several months back, the US carriers Sea-Land Service and APL received approval from Beijing to run their own logistics centres for container transportation in China. The American lines came away with a deal that allowed them to operate up to six centres across the country.
Both Maersk and P&O/Nedlloyd see the developments as "a positive move," and "one in the right direction.”