The RMB Position and the Mysteries of the China Unemployment Fund

November 12, 2010 Posted by Chris Devonshire-Ellis Reading Time: 8 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

Nov. 12 – Several claims have been made by China recently over the need for it to maintain the RMB position, and that any large correction of its position against the U.S. dollar would have serious impacts on rising unemployment, factory closures, and in the word’s of Li Ruguo, the chairman of the Import-Export Bank of China, that Western nations would have to be prepared to accept an influx of Chinese immigrants. Prices of China made goods would also, naturally rise.

While an increase in the costs of Chinese goods would be absorbed by the global market (people would either trade down in product value, and manufacturers would simply move to cheaper locations to maintain low consumer prices), the Chinese government’s assertion that the appreciation of the RMB would result in unemployment problems – one so severe it would invoke economic migration of millions of Chinese – is an interesting one.

What I will attempt to demonstrate in this article is whether the RMB position against the U.S. dollar would be responsible for the layoffs of thousands of workers, and whether that is an issue that should be the concern of the international business community. I will discuss the official unemployment figures, the effectiveness of China’s unemployment fund, and try and work out the efficiency of these as related to China’s funding and administration of its unemployed workers.

Recognizing Chinese unemployment

A look at how China recognizes employment and unemployment rates is provided below:

The official figures are presented in a somewhat convoluted fashion, but what they are saying is that according to statistical evidence, out of a total working population of 79,812,000, a total of 1,817,000 should be unemployed at any given time. However, the last official figure released for actual claimants (March 2010) showed a number of about half of this total, or 921,000 actual claimants.

Such figures might under-represent the true unemployment rate because they do not consider

The number of people who are working part-time because there are no full-time opportunities available
The number of people who are no longer “economically-active” because they’ve simply given up on finding a job

China appears to be stating that officially, as at March 2010, it had an unemployment rate of 4.2 per cent of the total available working population, or to put it another way, slightly less than 1 million people at any one time claiming benefits.

What isn’t clear from the Chinese data however is the anomaly between the statistical likelihood of 1.87 million people being unemployed against the beneficiary claimants, which is half of this. It may be due to the fact that China only permits unemployment for a period of between 12 to 24 months, depending on which a worker qualifies for. As a result, the longer term unemployed do not show up in the beneficiary data. As China bases its official unemployment statistics on that figure, it would appear potential for actual unemployment, including workers unemployed but also not receiving benefits, may in fact be close to double the official amount.

Assessing China’s unemployment benefit fund – contributors and beneficiaries
In terms of unemployment benefits, both the employee and the employer make contributions to an unemployment fund. In most cities the proportion is less than 1 percent of monthly salary, although in Shanghai the employer’s contribution is 2 percent. If an individual becomes unemployed this insurance will pay a fixed amount every month on the condition that contributions have been made on behalf of the employee for a continuous one-year period prior to the application. It is not related to the amount of money paid by the individual or the company into the fund.

Unemployment benefit fund 2009
Contributors at year-end: 127.16 million
Beneficiaries of unemployment insurance: 4.84 million
Unemployment relief paid: RMB14.58 billion

According to the data above, 127 million contributors, both individuals and their employers, paid into the unemployment fund. During the year, a total of just over 4.8 million workers were able to claim, however just 2.35 million – slightly less than half of those able to – actually did. However, this figure also includes workers who may have claimed on several occasions during the year, as is often the case with agricultural-based workers. China apparently paid out a total unemployment benefit to unemployed workers of some RMB14.58 billion, or US$2.14 billion.

Given that we seem to have two unemployment figures, one of actual unemployed, and another of unemployed receiving benefit, it appears that this money must have been paid out to some 2.35 million individuals who claimed at some point during the year. In which case, they should have received on average some RMB6,240 each in benefits.

Calculating unemployment benefits paid
In terms of workers who do contribute and are registered with the local authorities, unemployment is paid as follows:
1 – 5 years contribution pays 12 months unemployment benefit
5 -10 years contributions pay 18 months unemployment benefit
10 years plus contributions pay 24 months benefit.

How much is actually paid out is also difficult to determine, as this is not based upon a percentage of salary. Instead, the unemployment benefit is calculated as being between the minimum wage and average wage, and is adjusted each year by local city officials accordingly. Accordingly it varies from location to location.

However, it is possible to work out an average. If we take it that each province has a range for the required minimum wage, e.g., Henan has a range of 600-800 RMB; the arithmetic mean of each province’s range is taken, represented as the province’s average, and then each provincial point is taken to compile a nationwide average for China’s minimum wage. This gives us an average minimum wage in China of: RMB686

In terms of average salary, a cross-section of the wealthiest and poorest provinces and municipalities’ average salaries were taken and averaged into an arithmetic mean, and provides an average salary across China of RMB3,866. That is somewhat higher than China’s own statistics, which indicate the average wage of employed persons in urban units as being RMB2,687 according to the 2010 China Statistical Yearbook.

Accordingly, for this exercise, we’ll take the mean average figure, which is RMB3,276.

Unemployment benefit is measured as being “somewhere” between the average minimum salary (RMB686) and the average salary (RMB3,276). That should give us a figure of RMB1,981, however, we suspect that in line with unemployment benefit protocols traditionally being stingy, that mean is probably rather high. I suspect that an average unemployment benefit figure to probably, as a national average, be less than RMB1,000. It’s difficult to be accurate here, but I estimate an average of RMB980 should be typical as a national average. However, we find that the 2.35 million who did claim received a total of RMB14.58 billion, or on average some RMB6,240 each in benefits over the year. That in fact works out at RMB520 a month – which is less than China’s average minimum wage. Clearly the mandate of unemployment being a figure based between the minimum wage level and average wage level is not being met. Unemployment benefit, it appears from China’s own figures, is less than the average minimum wage.

What cannot be done is to work that figure into the total unemployment benefits paid. The reason is because some people will only claim once, while others will claim an entire year. It therefore becomes extremely subjective when trying to work out China’s true unemployment numbers by dividing an average unemployment benefit number into the total number of payments made. The figure ends up unrepresentative.

Unemployment inefficiencies and migrant labor
The other reality however is that the application procedure to be paid unemployment benefit is quite arduous. It is bureaucratically difficult to obtain approval, and there may also be social stigma attached. Many professionals simply will not bother, as they may find alternative employment relatively quickly, while others will rely on their families to support them rather than the government. Clearly, although China has a social security system in place, it is highly inefficient at getting funds to the unemployed, and is expensive to operate.

China’s unemployment issue then is difficult to ascertain from the official statistics presented. They don’t seem to add up. Where the question of assessing the nature of Chinese unemployment does become more tangible is in the understanding of who may claim.

There are several issues concerning the registration for unemployment payments in China that impact upon the official figures of both the statistically likely unemployed, and actual claimants. First, is that a worker has to be registered as a worker with a hukou (China’s system of migratory passage). This discounts all of China’s migrant workforce – literally millions of workers – from being able to claim unemployment benefits, as they often are not officially registered in their place of work and thus do not qualify to register for unemployment in the place where they are working. Hukous are issued at the place of birth, and registrations for social security can only be made there. If you leave, you either need to transfer the hukou to another city (difficult to do) or give up on several rights – including the payment and receipt of unemployment benefits. There is also the issue of China’s unofficial inhabitants – the second child denied a hukou, and denied all access to the Chinese state system. The population of such people – they live, breathe, eat and work – range from anything from 100 to 200 million people. None of them appear in any official data.

The estimates of how many migrant workers there are across China is difficult to assess, but in cities such as Beijing and Shanghai, it is likely to run into 2 or 3 million, and into the hundreds of thousands perhaps in the second tier cities. Yet none are eligible for unemployment due to the hukou system preventing it, and many of them do not even officially exist.

China also has a remarkably inefficient unemployment system. Again, according to China’s official figures, the unemployment fund for 2009 achieved:
Revenues: RMB58.04 billion
Expenses: RMB36.68 billion
Benefits Paid: RMB14.58 billion
Total fund balance at end of 2009: RMB152.36 billion

For every RMB1.4 paid out, China’s expenses in doing so amounted to RMB3.7. Or, another way of roughly putting it, for every RMB5 paid into the unemployment fund, only RMB1.5 goes to the unemployed.

A lack of infrastructure
Clearly, the official unemployment statistics are not telling the whole story. Officially, China doesn’t seem to have much of an unemployment problem according to its own statistics. If the data were accurate, China’s unemployment would appear manageable, so why the concern over more laid-off workers and a rise in the RMB leading to the closure of Chinese factories and the threatened migration of “millions”?

What is apparent from this exercise is that China does indeed have an unemployment problem. More seriously, on top of that, it also has an infrastructure problem with the hukou system that excludes millions of people from being able to receive unemployment benefits. These are the workers that Li Ruguo was referring to when he mentioned “millions of migrant workers would flood the West” if further numbers of workers were made unemployed in China. However, linking the problem to Chinese unemployment to the RMB/U.S. dollar position is somewhat disingenuous. China’s unemployment problem, and the getting of benefits to its own work force is a Chinese internal and structural problem that should be the Chinese governments responsibility to address and solve.

The fact that a safety net has not been put in place, and that it not only threatens the stability of the one-party state, but also that of the global economy, is a matter of serious concern. China’s leadership has been lax in not fixing this infrastructure. They have the mechanisms through the China postal service – with some 37,000 branches – which would be capable of handling benefits payments to at home workers. China also has the money. It sits on the largest amount of currency reserves ever recorded, some US$2.5 trillion. The fact that the workers have not been able to register for a hukou and apply for unemployment benefits and proper treatment within China’s own labor laws, and consequently have ended up both exploited, and out of China’s social security network is hardly the fault of those pressurizing China to revalue the RMB. It is an unrelated matter to the currency position, yet one for the Chinese government to solve as a matter of priority. Linking it to foreign pressure over the RMB position just pushes the stark reality of China’s migrant worker unemployment under the carpet and lays the blame for China’s lack of attention in dealing with its own problem at the feet of foreign governments.

Yes, China is likely to face serious unemployment issues if the RMB position alters. That is likely to create social problems within China. Yet the fact that China has not put the infrastructure in place to deal with this eventuality is a matter for its own internal security and social welfare reform. The solving and reforming of these issues should be more of a priority than refusing to move the currency.

Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm’s China practice in 1992. The firm now has ten offices in China, five in India, and two in Vietnam. For advice over China strategy, trade, investment, legal and tax matters please contact the firm at info@dezshira.com. The firm’s brochure may be downloaded here.

Chris also contributes to the Asia Briefing publications India Briefing, Vietnam Briefing, and 2point6billion.com.