The social security system is a key issue in the Government Work Report. A comparison between reports for 2016 and 2017 reveals critical information about this system.

The Government Work Report suggests that the official document for the transfer of SOE shares might be ready for issuance and implementation. We believe the document will specify the amount of SOE shares to be transferred, as well as the transfer methods and management. When talking about this topic, the 2016 Report indicated the government’s plan to formulate a transfer document, while the 2017 Report implies that the document might have been completed, as it no longer mentions the formulation process. Another piece of evidence is from XIAO Yaqing, the head of SASAC, who said at a press conference that SASAC would transfer its SOE shares in strict accordance with the document to be issued by the central government. Thus, we believe that the long-awaited transfer of SOE shares to social security funds will likely begin in 2017.

Transferring SOE shares to social security funds is of greater significance than other social security reforms. In a report issued in December 2015, we highlighted the feasibility, necessity and implications of this reform initiative.

It may help further reform SOEs, making them more competitive by improving their equity structure and corporate governance.

Social security contribution rates could be lowered to reduce corporate burdens. Considering just the dividends from SOE shares, we estimate that transferring 6% of SOE shares to social security funds would support a 1ppt reduction to basic pension contribution rates for companies. Since 2015, China has slashed contribution rates by 4.5ppt for pension, unemployment, maternity and occupational injury insurance funds, as well as the housing provident fund. This has reduced corporate costs by Rmb130bn and lowered the median corporate contribution rate from over 44% to less than 40%. Even so, an international comparison shows that China’s social security contribution rates are still too high and could be further lowered.

The capital market may also benefit and see healthier growth. If social security funds become the country’s largest, most professional and long-term institutional investor, long-term return could become the market’s prevalent investment paradigm, while the design and implementation of market rules may become more efficient.