China faces welfare reform test as court ruling hits jobs, small firms

China's top court ruling that makes it illegal for businesses and employees to avoid social insurance payments is stoking fears about jobs and the survival of small firms, forcing Beijing to confront the risks of long-promised welfare reform.

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The ruling, analysts and one government adviser say, aims to replenish depleted pension coffers in ageing regions and lay the groundwork for more generous welfare, helping China transition to a growth model that relies more on consumer demand and less on debt-driven infrastructure and industrial investment.

The Supreme People's Court said this month the levies have always been mandatory, but acknowledged patchy enforcement. In practice, millions of workers informally agree with factories, construction firms, delivery services, restaurants and other small businesses not to pay into the scheme so they can keep the money.

Hit by higher US trade tariffs this year, some factories have fired full-time staff and rehired them as day labor to save on pension, unemployment, medical and other insurance payments.

Analysts say the court ruling, which is effective Sept. 1, could bring Beijing closer to meeting its longstanding pledge to bolster the safety net in the world's second-largest economy, but it also poses a difficult test to the government's broader reform ambitions as it creates immediate risks to economic growth if businesses and workers have less to spend.

Jia Kang, founding president of the China Academy of New Supply-Side Economics, told Reuters the decision could be "a matter of life or death for many small firms."

Societe Generale estimates the costs to firms and consumers at about 1% of gross domestic product if the ruling is enforced.

"China is confronting the core question of who pays for reform," said Joe Peissel, an analyst at research firm Trivium.