China seeks to close gaps and strengthen information network

A “social credibility system” is the new buzzword as China enters its next-generation reform era. This mammoth bureaucratic exercise of building a complete information network is being touted as the cornerstone of market economy. There is an increasing realisation that restructuring the economy in a sustainable manner can be done only around a vibrant social security framework, for which a hygienic data system is essential.

The “social credibility system” being built for all individuals — from tax records to traffic violations — will join the vital gaps between China’s loose information environment and an efficient social security infrastructure. China faces multiple and severe imbalances — between regions and across classes — even though it has settled into a comfortable growth pace of nearly 8 per cent. However, the current investment-led growth model cannot continue to drive the economy in the long run.

Over the past few years, policymakers have thus tried to rebalance the economy by building an urban social welfare system, aggressively pushing urbanisation in less developed western regions and encouraging rural-urban migration. Since growth is now inextricably linked with the quality of social security net China provides to its many millions, the focus has narrowed down to building viable and profitable social security institutions. Urbanisation, which is a major channel to reduce the income gap, must necessarily be beefed up with welfare schemes for millions of new migrants entering cities, by providing them at least partial access to pension and healthcare services.

Reform, but with state

It is worth noting, however, that any modernisation or reform in China will always involve a central role for government institutions. With “market mantra” on their lips, policymakers have once again fallen back on their time-tested ally — the state-owned enterprises (SOEs). There is a renewed demand to shift the ownership of profitable SOEs to the National Social Security Fund to build the kitty for future pensions.

Economists say there is urgent need to raise huge funds for targeted social investments which can be done only by ensuring that SOEs pay larger dividends into the government budget. They are ready to incentivise top SOE contributors. Other sources of funds can be raised through bonds sold exclusively by the central government, and by broadening tax collection through the introduction of inheritance and capital gains taxes, and expanding property taxes across more cities. Such taxes will go towards addressing inequality and raising the quality of government services.

So urgent is the need to build the social security fund base, that there were even suggestions that the country’s $3 trillion foreign (Dh11 trillion) exchange reserve be used to compensate citizens, but the idea was shot down as “too risky”.

Fund behemoth

The behemoth fund manager in charge of managing this gigantic social security business is the National Council for Social Security Fund, or NCSSF, which is going from strength to strength. This week, the fund declared that its investment revenues hit 64.5 billion yuan and its managed assets topped 1 trillion yuan for the first time at the end of 2012.

NCSSF funding sources include allocations from lottery proceeds as well as capital or equity derived from the reduction or transfer of shares in state-owned enterprises. In future, more profits from state-owned enterprises will be allocated to the national social security fund. China has 118 central SOEs and total profits generated by them was 1.3 trillion yuan in 2012, up 2.7 per cent year-on-year.

Structured in 2000, the NCSSF was designed to serve as a solution for China’s old age problem, as well as a strategic reserve to support future social security expenditures. Various attempts are made from time to time to make the NCSSF more market oriented and invest in equity markets, but policy-makers have remained exceptionally conservative with regard to this fund. Due to its lack of agility, NCSSF is seen as a stuffy old institution, unable to give high returns to an increasingly aspirational middle class. But Chinese policy-makers would rather err on the side of extreme caution.