Uncertain Costs, Unclear Benefits: China's Social Insurance System and Foreign Workers

INTRODUCTIONFor companies with a global outlook, establishing a foothold in China is a necessity, not a choice.1A 2014 survey by the U.S.-China Business Council2 showed that 22% of responding American companies view China as their top priority for growth, while 71% say China is among their top five priorities. 3 These same companies, however, list human resources-particularly local talent recruitment and retention-as a top challenge of operating in China. 4 Foreign companies' rapid expansion in China and the relative scarcity of highly trained local talent mean that many foreign companies find it necessary to import talent for their Chinese operations.5 For the past five quarters, Chinese economic growth has slowed to the lowest rate in twenty-five years.6 As the Chinese economy diversifies yet slows, foreign workers offer a resource that is frequently irreplaceable through domestic means.7According to the 2010 census, there are more than 600,000 foreigners living on the Chinese mainland.8 In fact, over the years, China has become one of the most desirable locations for expatriates and the companies that employ them.9 Being an expatriate in China, however, is not always easy, especially in light of the country's fast-changing regulatory system.10In 2010, China's Standing Committee of the National People's Congress issued the Social Insurance Law (SIL).11 The SIL, which came into effect on July 1, 2011, established a national social insurance framework for employees across the People's Republic of China (PRC).12 The SIL requires that all employers in China enroll each employee, including foreign workers, in five insurance programs: pension insurance, medical insurance, work-related injury insurance, unemployment compensation, and maternity insurance.13The new law was a sudden departure from the prior business environment, as SIL effectively increased annual employment costs for companies with expatriate employees in larger cities by approximately $8000 per expatriate employee. 14 It also mandated an additional charge of approximately $2400 against individual expatriates' annual earnings.15 Although the new law applies nationwide, it is still subject to local implementation.16 As is often the case with new laws in China, some cities and localities have moved faster than others in establishing contribution rate schedules and implementing guidelines.17 With implementation details still unclear, expatriates and their employers face uncertain financial and procedural hurdles, which will in turn affect foreign companies' investments-of both financial and human capital- in China.18This Note proceeds in three parts. Part I presents the background and development of the SIL, highlighting the current issues of the PRC social insurance programs for foreign expatriates working in China. Part II discusses the role and importance of bilateral social security agreements in the context of the PRC social insurance programs. Additionally, this section explores the difference between U.S. social security agreements and PRC agreements. Part III recommends that China enter into more bilateral social security agreements with totalization provisions. It also analyzes the various benefits available to the PRC government, foreign companies, and expatriate employees as a result of a more certain and reciprocal system.I. BACKGROUNDA. The SIL and Interim MeasuresOne of the most important aspects of the SIL is the purported mandatory inclusion of expatriate employees in the social insurance system.19 Before the SIL, foreign workers were not required to enroll in the five social insurance systems.20 Consequently, there was no preexisting procedure for the mandatory inclusion of expatriates in these systems, and many questions about the enrollment of foreigners remained unanswered.21On September 9, 2011, the Ministry of Human Resources and Social Security (MHRSS)22 promulgated the Interim Measures on Participation in So cial Insurance by Foreigners Working in China (Interim Measures). …