Shanghai taps state firms for pensions

City government orders SOEs to hand over a third of net profit to the local pension pool, getting the jump on provincial-level peers in reforms

PUBLISHED : Thursday, 19 December, 2013, 1:38am
UPDATED : Thursday, 19 December, 2013, 1:38am

Shanghai has taken a major step in reforming state-owned businesses by making it mandatory for the powerful companies to transfer more profits to the city's pension pool.

The municipality has ordered all major companies owned by the city government to contribute a third of their net profits to the social security system in three to five years.

The city government said the decision was in line with the blueprint mapped out at the third plenum of the Communist Party's Central Committee last month.

"We can't afford to miss the opportunities and regret it in future," Shanghai party boss Han Zheng told a government conference this week. "We have to face the existing problems, understand our tasks and overcome the difficulties through deeper reforms."

Shanghai is the first provincial-level government to roll out its own reform measures on state-owned businesses after the third plenum. The move is in accordance with the mainland leadership's call to improve people's living standards by combating vested interest groups.

On the mainland, state-owned companies, most of which enjoy a cosy monopoly of the market, are regarded as one of the main interest groups. The new leaders, including President Xi Jinping and Premier Li Keqiang, have expressed determination to reform the gargantuan state sector to allow the masses to share in the benefits of their profits.

In Shanghai, local state-owned businesses generate net profits of more than 100 billion yuan (HK$126 billion) a year. Currently, state-owned companies are required to give about 10 per cent of their profits to the pension funds.

Beijing has been striving to replenish its underfunded pension pool as the population ages rapidly. Bank of China predicts that the pension financing gap would swell to 68.2 trillion yuan by 2033, from about 16.5 trillion yuan in 2010.

In 2009, the State Council required all state-owned companies under the direct oversight of the central government that listed on the stock market since 2005 to transfer the equivalent of 10 per cent of their floated shares to the national pension fund - a reserve fund used to replenish the local pension pools. The policy was estimated to have contributed an additional 100 billion yuan to the national pension fund.

"People's benefits were given the top priority in the new round of reform," said an official with a local state-owned company. "The message is clear: the state-owned companies, particularly the top managers, have to curb extravagance while sharing the benefits with the people."

Shanghai has been among the nation's slowest-growing local economies in the past five years as it shifts its focus from manufacturing to financial services.

The city attempted to regain its title as the mainland's economic locomotive with a series of ambitious plans including building a global financial centre and developing the mainland's groundbreaking free-trade zone.

City officials said the government would give full play to state-owned businesses with the goal of creating five to eight giant multinational firms.

Mayor Yang Xiong said the reforms were also aimed at nurturing entrepreneurship among state-owned companies. He pledged the city government would follow a hands-off policy regarding state companies' daily operations.