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RR RUEHCN RUEHGH
DE RUEHBJ #0971/01 1530344
ZNR UUUUU ZZH
R 020344Z JUN 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 7375
INFO RUEHC/DEPT OF LABOR WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHCN/AMCONSUL CHENGDU 6402
RUEHGZ/AMCONSUL GUANGZHOU 0658
RUEHGH/AMCONSUL SHANGHAI 4774
RUEHSH/AMCONSUL SHENYANG 6226
RUEHHK/AMCONSUL HONG KONG 7514
RUEHIN/AIT TAIPEI 5636
RUEHGV/USMISSION GENEVA 1129
LABOR/LABOR COLLECTIVE

UNCLAS SECTION 01 OF 04 BEIJING 010971 
 
SIPDIS 
 
DEPARTMENT FOR EAP/CM, DRL/IL 
DEPARTMENT PASS USTR FOR KARESH, ROSENBERG 
LABOR FOR ILAB HELM, LI ZHAO, SCHOEPFLE 
TREASURY FOR OASIA/INA-DOHNER AND KOEPKE 
USDOC FOR 4420/ITA/MAC/MCQUEEN 
GENEVA FOR CHAMBERLIN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ELAB EFIN KPAO PHUM PGOV CH
SUBJECT:  MOLSS Mulls Management of 31 Billion RMB in Rural 
Pension Assets 
 
Ref:  A) Beijing 6611 B) 05 Beijing 9536 C) 05 Beijing 4121 
 
Sensitive But Unclassified; Not for Distribution Outside U.S. 
Government 
 
¶1.  (U)  Summary:  China's Ministry of Labor and Social 
Security (MOLSS) is working to establish a pension system for 
rural and migrant workers that will require low contributions, 
be portable and have broad coverage, according to the Deputy 
Director General (DDG) of the Ministry's Rural Pensions 
Division.  Migrants with stable jobs have the right to 
participate in the urban pension system with contribution rates 
of 28 percent and comparatively high benefits.  However, to 
provide pensions for rural residents and those migrants who 
travel from place to place, the rural pension system will 
require an enterprise contribution of 10 percent of the 
worker's salary, of which 6 percent will be placed in the rural 
or migrant worker's individual account, plus a worker 
contribution of 5 percent of salary, all of which will go into 
the individual account.  Portability is difficult to achieve 
because urban system "legacy" pensions, those owed workers 
under the planned economy, easily deplete the pooled accounts 
from which current pension benefits are paid, necessitating 
"borrowing" from the individual accounts; information 
technology could help solve the problem by tracking both 
"borrowed" funds and individual accounts as people move from 
place to place.  Rural pension funds, which currently total 31 
billion rmb (At mid-May exchange rate of RMB 8:USD 1, rural 
pension funds amount to approximately USD 3.9 billion) in 
assets (Note: In a related document, reference was made to 70 
billion rmb (USD 8.75 billion) in assets. End Note.), are 
managed at the county level.  There is recognition that pension 
funds must earn a higher rate of return.  MOLSS officials hope 
to travel to the United States to better understand how the 
United States manages pension funds.  If travel does not occur, 
Laboff will again propose to MOLSS that the Embassy arrange a 
digital video conference to allow Washington agencies and 
interested others to address some of MOLSS' questions.  End 
Summary. 
 
¶2.  (U) Econoff met with Liu Conglong, Deputy Director General, 
Rural Pension Division, Ministry of Labor and Social Security 
(MOLSS) on May 17 regarding China's progress toward 
establishing a rural social security system.  DG Liu noted that 
his work had been given support and impetus by the Government's 
2006 Document Number 1 setting out guidelines for building the 
new countryside.  The National People's Congress included the 
development of a rural pension system, on which MOLSS is 
working with the Ministry of Finance, in the 11th Five Year 
Plan.  The Number 5 document issued by the Government also 
called for solving the problem of migrant workers. 
 
¶3.  (U)  The Government's Number 29 document, according to DDG 
Liu, requires the establishment of a social security system and 
an occupational training system for farmers whose land has been 
taken for development.  MOLSS must issue the guidelines for 
this program within one year, DDG Liu said.  To prepare for 
these programs, MOLSS has calculated that there are currently 
200 million farmers who have left farming to become workers. 
Of these, 130 million farmers-turned-workers work in township 
and village enterprises (TVEs) near their place of residence. 
An additional 70 million migrants migrate back and forth from 
the cities.  (Note:  There is probably overlap between these 
two figures, as some migrants move back and forth between rural 
areas to work.  However, the number cited for migrants in the 
cities differs from other estimates Embassy has seen.  MOLSS, 
based on an April 2004 survey, has published estimates that 
there are approximately 100 million rural migrants currently 
working in cities.  The National Bureau of Statistics, based 
upon results of a 2004 sample survey, estimated that there were 
approximately 120 million rural migrants working in the cities. 
The Ministry of Agriculture, in an undated study, concluded 
that approximately 130-140 million migrant workers and their 
 
BEIJING 00010971  002 OF 004 
 
 
family members work and reside in the cities.  End Note.) 
There is a rural social security office established in MOLSS. 
In addition, a State Council Joint Coordinating Committee on 
migrant workers, headed by Secretary General Hua Jianmin has 
been established. 
 
¶4.  (U) DDG Liu described the social safety net of programs 
that has been established, and in which enrollment is being 
expanded, to protect migrant workers: 
 
--  Workers' Compensation:  Employers are required by a 2004 
regulation to enroll all migrant worker employees in the 
workers' compensation insurance program.  MOLSS is especially 
targeting construction and mining industries where many 
migrants work. 
 
--  Medical Insurance:  A medical insurance program for 
migrants has also been mandated.  This program is intended to 
insure migrants against the costs of 1) major illnesses, 2) 
hospitalization; and 3) illnesses and injuries for which 
immediate treatment is needed.  (Note:  A May 19 article in the 
China Labor and Social Security News reported that the Shanxi 
provincial government had established such a medical insurance 
system for migrants.  The article stated that all employers 
must pay 3 percent of the insured's wage to the local Labor and 
Social Security Bureau, out of which 3 percent, 2.5 percent 
goes into a pooled account for basic medical insurance, and the 
remaining 0.5 percent goes into a pooled account for 
catastrophic expenditures.  According to the article, migrants 
with long-term, stable working relationships may enroll in the 
urban medical insurance system.  End Note.) 
 
Rural Pensions:  Portable, Low Contributions, Wide Coverage 
--------------------------------------------- -------------- 
 
¶5.  (U)  DDG Liu said that a system of pensions for rural and 
migrant workers in China must have three characteristics: 
 
--  Portability:  Pensions should be portable, benefiting 
individual participants and the system as well, DDG Liu said. 
Currently, the few pension systems in which migrants and rural 
residents can participate are not portable.  As a result, 
migrants do not want to pay into the system because when the 
migrant changes jobs, he cannot take his pension contributions 
or the contributions of the employer, with him.  (Note: The 
contributions remain in the local system, while the migrant 
moves on, never meeting vesting requirements in any given place, 
and never receiving a pension benefit. End Note.)  Currently, 
some local systems may allow portability within a restricted 
area, but the individual must remain within that area in order 
to receive benefits.  Finally, most systems require that the 
migrant or rural worker pay into the system for 15 years before 
gaining the right to receive a pension upon retirement.  Few 
migrants remain that long in any given place, DDG Liu said. 
 
--  Low Contributions:  Migrant contributions should be low 
because migrant workers are systematically underpaid.  This is 
the case, DDG Liu said, because current minimum wage 
regulations state that the minimum wage should be set at a 
percentage of the average local salary.  However, he said, that 
is not the case. 
 
--  Wide Coverage:  As many rural and migrant workers as 
possible should be included in the system. 
 
Stable Employment Allows Participation in Urban Pension System 
--------------------------------------------- ----------------- 
 
¶6.  (U)  For analytical purposes, MOLSS has divided farmer 
workers into two types:  1) those with stable employment, and 2) 
those whose employment is not stable.  The first group should 
be treated like urban workers, and given the right to 
participate in the urban pensin system, DDG Liu said.  However, 
 
BEIJING 00010971  003 OF 004 
 
 
the urban system requires that workers contribute to the system 
for 15 years before having the right to draw a pension at 
retirement.  This is a problem that must be solved for migrant 
workers, whose work life often does not span a full 15 years. 
To accommodate the frequent changes of employment experienced 
by migrants who do not have stable employment, MOLSS has 
decided that contributions by both the employer and the 
employee will go into the individual account, and that the 
individual account will be portable. 
 
¶7.  (U)  The urban pension system is not suited to the needs of 
migrants and farmers because the urban pension system has been 
burdened with the cost of "legacy" pensions, pensions for 
individuals who were entitled to pensions under the old planned 
economy.  In order to be able to afford to pay those legacy 
pensions, the newly established urban pension system levied 
high contribution rates for current participants. (Note: 
Contribution rates are approximately 28 percent of wages; 20 
percent is deposited into the pooled account from which current 
pensions are paid, and 8 percent, the employee's contribution, 
is paid into the individual account. End Note.)  Migrants and 
farmers who do not have stable employment are unable to 
contribute at these rates, DDG Liu said.  However, if a migrant 
has stable employment, he may decide he wants to participate in 
the urban system.  In Shanxi, for example, an enterprise might 
have urban workers and migrant workers with stable employment, 
both of whom can participate in the urban system, as well as 
local farmers or migrant workers who can elect to participate 
in the rural pension plan, and to have their contributions made 
into their individual account. 
 
Rural System:  11 Percent of Salary to Individual Account 
--------------------------------------------- ------------ 
 
¶8.  (U)  MOLSS has decided that the appropriate contribution 
rate for the rural pension system should be from 5 to 10 
percent of salary.  The enterprise contributes 10 percent of 
salary, of which 6 percent is placed in the rural or migrant 
worker's individual account.  The worker himself pays a 
contribution of 5 percent of salary, all of which goes into his 
individual account.  Therefore, a total of 11 out of 15 percent 
is paid into the worker's individual account.  The remaining 4 
percent of the employer's contribution is retained in a fund 
from which "adjustments" can be made. 
 
Rural Pensions Pooled and Administered at the County Level 
--------------------------------------------- ------------- 
 
¶9.  (SBU)  Currently, there are 1,900 county level units 
participating in the rural system of pensions, which covers 54 
million persons.  Of this 54 million persons, 420,000 are 
farmers and the other approximately 53.5 million persons are 
migrant workers.  The total accumulation of pension funds has 
reached 31 billion rmb. (USD 3.9 billion) (Note:  In a paper 
describing a hoped-for delegation to the United States by the 
Department of Rural Social Insurance, the total value of assets 
of the Chinese rural social insurance system was described as 
70 billion rmb. (USD 8.75 billion)  End Note.) 
 
¶10.  (U)  County governments, which manage the rural pension 
funds, have been asked to make contributions to the system, and 
have complied by paying in.  (Note:  Although DDG Liu did not 
so specify, these contributions are likely contributions in 
lieu of an employer's contributions for farmers who continue to 
farm and who are not otherwise employed.  End Note.)  In 
Beijing, the municipal government has contributed 15 million 
rmb to enroll migrant workers in the system, thus encouraging 
participation.  In the Daxing District of Beijing, the District 
pays 15 million rmb (USD 1.8 million) every year for the 
participation of 50,000 farmers; the district's pension system 
has a total of 230,000 farmers enrolled. 
 
"Legacy" Pensions Make Establishing a Portable System Difficult 
 
BEIJING 00010971  004 OF 004 
 
 
--------------------------------------------- ------------------ 
 
¶11.  (U)  Establishing a portable system is difficult, DDG Liu 
said, because the problem of urban pensions has not yet been 
solved.  Even with high contribution rates, the urban system's 
pooled accounts have not accumulated sufficient funds to pay 
current pensions; as a result, the localities have "borrowed" 
from the individual accounts.  As a result, the individual 
accounts in many if not most parts of the urban system are 
unfunded.  One way to resolve this problem is to have a 
nationwide information technology (IT) system for the social 
security system to keep track of amounts "borrowed" as well as 
to track individual accounts as people move from place to place. 
 
Pension System Needs Investments Yielding High Rate of Return 
--------------------------------------------- ---------------- 
 
¶12.  (U)  There is also recognition, DDG Liu said, that the 
system must ultimately allow for investments that will make the 
funds increase in value.  A 1999 regulation says that social 
security funds should be invested in bank accounts and bonds. 
However, MOLSS is actively seeking a safe way to invest in key 
projects that provide a higher rate of return.  MOLSS is 
studying the possibility of using the banks, including the 
Agricultural Bank of China, as a way to manage the funds. 
 
¶13.  (SBU)  China wants to understand the U.S. experience in 
investment of pension funds, DDG Liu said.  Mr. Lu Haiyuan, 
Director of the Department of Rural Social Insurance, MOLSS, 
has studied the U.S. experience, and written a book about how 
pensions in the United States are managed; many of his 
suggestions were included in China's 11th Five Year Plan. 
(Note: Individuals subsequently suggested for travel to the 
United States to study the U.S. system include MOLSS officials 
and asset management company personnel.  End Note.) 
 
¶14.  (SBU) Comment:  This savvy Deputy Director General's 
comments reflect his understanding of the numerous challenges 
he faces in making the rural pension system viable.  Clearly, 
one of his high priorities is improving the rate of return on 
pension funds.  MOLSS' Rural Social Security Office has for two 
years announced its interest in traveling to the United States 
to study how pension funds are managed, but travel has so far 
not occurred.  Laboff will again propose to MOLSS that the 
Embassy arrange a digital video conference to allow Washington 
agencies and interested others to address some of MOLSS' 
questions. 
 
Randt