1 Beijing’s effort to stem social insurance ‘dropouts’ could be counterproductive
SPC releases judicial interpretations on labor disputes
On Aug. 1, the PRC Supreme People’s Court released part two of its interpretations of issues concerning the application of the law in handling labor dispute cases (最高人民法院關於審理勞動爭議案件適用法律問題的解釋 (二]; henceforth referred to as the Interpretations). Per mainland media reports, the Interpretations, which take effect on Sept. 1, 2025, seek to further address practical judicial needs, protect workers’ rights and interests, and maintain harmonious and stable labor relations.
The main provisions and content of the Interpretations include:
Labor relationship confirmation and liability
- In cases of subcontracting or outsourcing to unqualified entities, workers may demand that the original contractor be recognized as the employer and assume responsibility for wage payments and work-related injury insurance.
- In cases of affiliated operations, the entity being affiliated with must bear corresponding liabilities.
- Where multiple affiliated entities employ a worker alternately or simultaneously, courts will determine the labor relationship based on the labor contract or employment facts, and may hold affiliated entities jointly liable for wages and benefits (unless there is a valid legal agreement otherwise).
Recognition of labor relationships for foreigners
- Foreigners working in China may have their labor relationships recognized under conditions such as obtaining permanent residency, securing a work permit and legal residency, or completing procedures as per national regulations.
- Courts may make comprehensive judgments to support recognition, provided the elements of a labor relationship are met.
Litigation status of foreign enterprise representative offices
- Permanent representative offices of foreign enterprises may be parties to labor dispute cases, and the foreign enterprise establishing such offices may be added as a litigation party and bear corresponding liabilities.
Conversion of fixed-term contracts to open-ended contracts
- Clarifies the criteria for determining “two consecutive fixed-term labor contracts,” preventing employers from evading obligations to sign open-ended contracts.
Social insurance contributions and invalid agreements
- Agreements to waive social insurance contributions are invalid, and employers must bear responsibility.
- Addresses social insurance issues arising from affiliated operations or subcontracting.
- The new rules particularly emphasize oversight of flexible employment models, explicitly stating that the platform economy, labor outsourcing, and other new employment models must not evade social insurance contribution obligations in any way.
Non-compete clauses
- Non-compete clauses are invalid if the worker is unaware of or has not accessed trade secrets or intellectual property confidentiality matters.
- Overly broad provisions regarding scope, geography, or duration are invalid to promote talent mobility.
Continued employment after contract expiration
- If a worker continues working after a contract expires and the employer does not object within one month, the worker may demand renewal under the original terms.
- If conditions are met, workers may demand an open-ended contract. Employers terminating such arrangements bear legal consequences.
Special benefits and breach of contract liability
- If a worker fails to fulfill agreed labor obligations after receiving special benefits from the employer, courts may determine compensation based on actual losses, fault, and duration of performance, balancing the interests of both parties.
Also on the same day, the SPC released six typical labor dispute cases to guide the application of the judicial interpretation.
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Mainland media reported that the Interpretations are expected to increase the number of insured individuals by over 20 million annually, significantly alleviating the pressure on pension payments. According to estimates, if the current scale of contribution interruptions persists, the accumulated balance of the pension insurance fund will be depleted by 2035. However, after the implementation of the new regulations, this depletion point could be delayed to 2043.
Mainland media added that enterprises must complete the following three self-inspections by Sept. 1, 2025:
- Eliminate invalid agreements: Abolish all contracts or appendices containing clauses for “voluntarily waiving social insurance.”
- Settle historical arrears: For social insurance contributions not fully paid since 2018, enterprises must complete back payments by the end of 2025, or face penalties stipulated in the new regulations.
- Optimize employment structures: Reassess the social insurance obligations for interns, rehired personnel, part-time workers, and others to avoid legal risks.
‘Social insurance contribution dropout wave’
The CCP authorities significantly strengthened labor protection measures around 2008 amid the global financial crisis. These measures were known as the “three laws and one regulation,” or the Labor Contract Law, Employment Promotion Law, Labor Dispute Mediation and Arbitration Law, and Regulations on the Implementation of the Labor Contract Law. The measures reinforced requirements for labor contract signing, dismissal protections, social insurance contributions, and labor dispute resolution, leading to increased labor costs for employers and enterprises. As a result, foreign enterprises began gradually reducing investments in Chinese manufacturing.
In 2011, the CCP authorities implemented social insurance reforms, including the “five insurances and one fund” (pension, medical, unemployment, work-related injury, and maternity insurance, plus housing provident fund). The reforms saw social insurance contributions account for up to 46 percent of total wages (contribution base), further amplifying the effect of rising costs. Consequently, many enterprises and individuals paid social insurance based on the minimum contribution standard instead of actual wages.
The CCP authorities’ reform of China’s pension insurance system led to the emergence of the so-called “empty account” problem. The problem refers to the significant gap between the recorded contribution amounts in individual pension insurance accounts and the actual funds available to support those accounts. Essentially, the accounts show a balance based on contributions made by workers and employers, but the actual funds in the pension system are insufficient or missing, resulting in virtual or “notional” accounts without real financial backing. Mainland media reported that there were over 2 trillion yuan in “empty accounts” in 2011. This issue threatens the sustainability of the pension system and public trust in it.
The “empty account” problem appeared to affect the willingness of the public to make contributions. In 2013, about 23 percent of employed individuals discontinued pension insurance contributions; by 2017, this number reached 38 million; and by 2022, the number of people discontinuing or withdrawing reached 81 million. The disruption in contributions was exacerbated during the COVID-19 pandemic years (2020 to 2023), which saw China’s economy worsen and unemployment rise (youth unemployment peaked at over 20 percent). Flexible workers (over 200 million people) had low participation rates, with only about 10 million enrolled. Some individuals and enterprises even reached agreements to forgo social insurance contributions.
Contribution dropouts surged in 2024. According to official data, the number of urban workers discontinuing basic pension insurance exceeded 28 million. Some reports estimated that the total number of withdrawals for the year reached 100 million, with housewives joining long queues at social insurance offices. Mainland media said that the pension contribution discontinuations were due to factors like economic stagnation, a sharp downturn in the real estate sector, a wave of enterprise bankruptcies, and government policies such as the delaying of the official retirement age (which extended the minimum contribution period to 20 years [up from 15 years]) and reducing pension adjustments (3 percent in 2024, reaching a record low of 2 percent in 2025). In the first 10 months of 2024, net pension inflows grew by just 2.3 percent and the growth rate of participants was half that of 2019 (2.65 percent).
In 2025, the number of people discontinuing contributions rose further to over 86 million, with the social insurance fund recording a deficit for the first time in six years. Official audits revealed that local governments misappropriated social insurance funds to cover fiscal deficits, sparking greater public dissatisfaction. Media reports predicted that by 2035, the old-age dependency ratio will reach 36.3 percent, and by 2050, it will hit 53.5 percent. The reports added that China’s social insurance system may collapse and social stability would be threatened if contribution dropouts continue. On social media platforms, posts discussing the “social insurance contribution dropout wave” show that young people “trust themselves more than the state” and prefer to “lie flat” or save for retirement on their own.
China’s social insurance fund is one of the sources of the CCP’s full-caliber fiscal revenue. As the Chinese population ages, social insurance expenditure has become a steadily growing mandatory expense for the CCP’s fiscal budget. In 2024, the fund’s revenue was 8.5 trillion yuan, while its expenditure exceeded 7.6 trillion yuan.
Our take
1. At a glance, the SPC’s Interpretations appear to be a progressive measure by the CCP authorities to safeguard public interests by strengthening the protection of workers’ rights and emphasizing the mandatory nature of social insurance responsibilities. Per the provisions in the Interpretations:
- As flexible employment becomes more popular in China (China has over 200 million flexible workers, but only just over 10 million are enrolled in social insurance), the Interpretations’ enforcement of mandatory back payment of social insurance appears to be a measure to prevent flexible workers from being left without support in their old age.
- The joint liability provision targets subcontracting abuses and protects vulnerable groups by allowing them to claim unpaid wages and avoid bearing work injury costs.
- Provisions on non-compete restrictions, converting fixed-term contracts to open-ended ones, and continued employment after contract expiration also appear to be targeted at safeguarding labor rights.
However, grassroots laborers have long faced difficulties recovering wages and lack welfare protections. If the CCP authorities genuinely and strictly enforce the law, most of these issues could be resolved within the existing judicial system. But in reality, grassroots governments often side with enterprises in order to protect their tax base.
Given China’s continuous fiscal revenue issues and the current state of the social insurance fund, the CCP’s issuance of the Interpretations at this time is clearly aimed at arresting the phenomenon of people opting out of social insurance contributions (“social insurance contribution dropout wave”). In the first half of 2025, the full-caliber fiscal deficit reached 5.25 trillion yuan, up nearly 45 percent year-on-year. Of this, the government fund deficit (including social insurance funds) was 2.68 trillion yuan, a 71.1 percent increase. In contrast, the first half of 2024 saw a full-caliber fiscal deficit of 3.63 trillion yuan, up 5.6 percent from a year ago, with a government fund deficit (including social insurance) of 1.57 trillion yuan, down 20.4 percent year-on-year. Meanwhile, in the first half of 2025, social insurance contribution interruptions exceeded 42 million people (a 50 percent increase from 28 million in 2024), with net fund inflows at only 2.3 percent and a deficit emerging for the first time (estimated at over 200 billion yuan).
2. The CCP’s attempt to forcibly increase social insurance participation rates through the Interpretations ignores the root causes of contribution dropouts and will likely lead to counterproductive outcomes.
As seen from the segment above, the “social insurance contribution dropout wave” is not a sudden or recent phenomenon. Rather, the phenomenon has been building up over decades due to sustained public distrust in the social insurance system and stagnant incomes at the grassroots level.
First, public distrust in the pension system is deeply rooted. The CCP previously implemented a very unfair dual-track system for social insurance (with pension replacement rates of 80 to 90 percent for government and public institutions, but only 40 to 60 percent for enterprise workers). The dual-track social insurance system was merged in 2015, but disparities persist.
The CCP’s delayed retirement policy has heightened public skepticism. Media reports suggest the social insurance fund may face difficulties by 2030, yet local governments, facing fiscal shortages, have misappropriated funds (a 2024 CCP audit revealed 13 provinces misappropriated 40.6 billion yuan of pension funds for debt repayment). The delayed retirement policy further fuels fears and the mentality that “contributions go to others’ pensions while I get nothing,” leading people to prioritize “living in the moment” and dropping out of the social insurance system.
Second, declining incomes at the grassroots level have led to hopelessness about the future. Official data shows that in the first half of 2025, the average per capita disposable income for urban residents was about 4,807 yuan, but 600 million people in China earn only 1,000 yuan monthly. Mandatory social insurance contributions make it harder for grassroots workers to find jobs and further reduce their income.
Third, most people stop paying into social insurance because they need the funds to sustain their current livelihoods or businesses. Even for those able to pay, saving the same amount for private pensions may feel safer and offer more flexibility. Take freelancers, for example. Assuming a monthly salary of 5,000 yuan and paying social insurance for 20 years (at the 20 percent rate for flexible workers), the total contribution would be 240,000 yuan. In return, they may receive about 498,400 yuan over 20 years of retirement. However, if they instead deposit the same amount in a bank (2.5 percent fixed interest for 20 years) and then withdraw the same monthly amount over 20 years (with the remaining balance still earning 2.5 percent interest), they could receive a total of 502,300 yuan. If they invest in conservative financial products with an average 4 percent return, they could receive 782,900 yuan, and with a return rate over 6 percent, the total could exceed 1 million yuan. Moreover, the family members of individuals get to inherit private investments if they are not fully withdrawn in 20 years.
By contrast, the funds in China’s social insurance system are likely to come under pressure and face deficits as China ages and the elderly dependency ratio rises. This entails significant risks regarding whether retirees get to receive their full pensions in the future.
3. The Interpretations’ requirement of mandatory back payments for social insurance could potentially increase costs for small and medium-sized enterprises by as much as 10 to 30 percent. This means that SMEs face even greater losses amid pressures from the Sino-U.S. trade war, resulting in more bankruptcies and unemployment. More unemployment in turn leads to fewer social insurance contributors, decreased social insurance revenue, and an increased burden of social welfare spending for the CCP authorities — further exacerbating deflation.
Currently, SMEs (53 million, accounting for 90 percent of enterprises) contribute 60 percent of GDP (about 80.94 trillion yuan), 60 percent of tax revenue (12 trillion yuan), and 80 percent of employment (376 million jobs). Based on this, if the SME bankruptcy rate rises by just 10 percent, it could lead to:
- GDP reduction of 8.09 trillion yuan.
- Tax revenue reduction of 1.2 trillion yuan.
- Unemployment increase of 37.6 million.
- Social relief burden of 0.38 trillion yuan.
- Social insurance revenue reduction of 0.6 trillion yuan.
- CPI decline of 0.5 percent.
4. We believe that the Interpretations are more likely to backfire on Beijing, particularly given the system deficiencies of the CCP system, and become another instance of governance failure.
The Xi leadership appears helpless in addressing China’s many economic problems and is resorting to short-term fixes that could create larger crises down the road. Popular dissatisfaction with Xi Jinping and the CCP will mount if Beijing’s attempt to boost social insurance funds instead leads to the collapse of numerous SMEs, rising unemployment, and growing social instability.
2 Political tone of Sichuan protest hints at underlying frustrations with the CCP
Protests in Sichuan over bullying case take on political hue
July 22
A video of a 14-year-old girl from Sichuan’s Jiangyou City being slapped, kicked and forced to kneel by three other minors (all female, aged 13, 14, and 15) went viral in China. Later, one of the girl’s assailants boasted about entering and leaving police custody multiple times (“I’ve been in more than 10 times and I’m out in 20 minutes”) without being punished. According to some accounts, the victim’s phone was allegedly stolen and sold for a profit. Some online rumors also claimed that the mother of the main perpetrator is the deputy police chief of the Jiangyou public security bureau (PSB).
Aug. 4
The Jiangyou PSB issued a notice identifying the victim as having suffered only “minor injuries.” The three girls involved were given a “reprimand and education,” with their guardians ordered to strictly discipline them. Two of the main perpetrators were sent to a specialized school for “corrective education.”
The public expressed dissatisfaction with the lenient handling of the case, questioning the injury assessment and the disciplinary measures. Many saw this as a reflection of judicial injustice and official misconduct. The victim’s mother, who is hearing-impaired, had repeatedly sought help to no avail. Video of her and her husband kneeling and pleading for justice before the authorities further fueled public resentment, with netizens viewing her as a symbol of “kneeling in vain.”
That same day, thousands gathered outside the Jiangyou city government building to protest, demanding a full investigation, accountability for those derelict in duty, and public disclosure. Protesters shouted slogans like “Down with the Communist Party” and “Down with Xi Jinping.” Some protesters also sung the PRC national anthem, “March of the Volunteers,” which includes the lyrics: “Each one forced to give a final roar — Rise up! Rise up! Rise up!”
Police blocked off roads, and around 4 p.m., began arresting demonstrators, using trucks with iron cages to transport them. The protests continued into the night. The local authorities deployed large numbers of riot police from other regions to forcibly clear the scene, and the riot police used pepper spray, tear gas, and stun grenades against the protesters. Violent clashes and bloodshed ensued.
The following morning, the city entered a state resembling martial law. Protest-related topics disappeared rapidly from Weibo’s trending searches. Nevertheless, many netizens left messages of support like “Stay strong, Jiangyou” in the comment sections and bullet chats of unrelated videos on social media.
Backdrop
Per incomplete data, multiple large-scale public protests have occurred across China this year, with some escalating into clashes with police. For example:
Pucheng Vocational School Incident in Shaanxi (Jan. 5 to Jan. 7, 2025)
- A 17-year-old student allegedly died due to bullying at a vocational school in Shaanxi’s Pucheng County. The local authorities claimed that the student’s death was a suicide but withheld the body and evidence, raising suspicions of a cover-up. The incident triggered a gathering of thousands of people. Protesters smashed school property, assaulted the principal, fought off the police, and were met with baton suppression, leaving many with head injuries and bleeding. The local authorities imposed a three-day lockdown, and dozens were arrested.
First High School Incident in Ruzhou County, Henan (March 8, 2025)
- Dissatisfaction with school management at a high school sparked a student unrest. Hundreds of students tore books and damaged property, and the incident escalated into student confrontations with the school authorities. The police were later called in to disperse the crowd.
Our take
1. The CCP has enhanced its “stability maintenance” mechanisms under Xi Jinping and currently boasts one of the world’s most sophisticated monitoring, surveillance, and censorship systems. However, the CCP authorities still struggle to prevent protests like the one in Jiangyou City from breaking out when public outcry and grievances become too great, and demonstrations are sufficiently spontaneous. In the case of the Jiangyou protest, Chinese netizens were able to get international eyeballs on the incident and apply pressure on the CCP by circumventing the Great Firewall and spreading the news on foreign social media platforms, which led to it being covered by overseas Chinese media and Japanese media.
The public response to the Jiangyou bullying incident and the frequency of grassroots protests in general suggest that even minor grievances can trigger significant public backlash when overall resentment reaches critical levels. More importantly, the public’s ability to get information out despite tight censorship and gather for protests shows that the CCP’s techno-totalitarian controls are far from foolproof.
The Jiangyou protest was sparked by a bullying incident, but its roots appear to lie in widespread frustration with judicial corruption. In particular, the image of the victim’s mother being ignored while pleading for justice was poignant enough to go viral on the internet.
2. With the exception of the 1989 Tiananmen Square demonstrations, PRC citizens have historically avoided directly calling out the CCP and its leaders during protests as they believe that the regime is politically legitimate and fear greater repression. Instead, protesters often use symbolic gestures such as signing the PRC anthem or waving the PRC flag to express their loyalty to the Party and the regime even as they seek reform and demand justice. An example in recent years is the 2012 Shifang molybdenum-copper mine protest where demonstrators emphasized their “patriotism” and avoided politicization of the movement.
However, the 2022 White Paper Protests against COVID-19 lockdowns and the authorities’ mishandling of a deadly fire in Xinjiang saw protesters becoming more comfortable with calling out the CCP and its leaders. Demonstrators in Shanghai, Beijing, and other cities chanted “Xi Jinping step down” and “CCP step down,” and discussed issues such as freedom, human rights, and anti-authoritarianism. Likewise in the Jiangyou protest, demonstrators have chanted, “down with the Communist Party” and “down with Xi Jinping,” signaling a shift from appealing to the Party and recognizing its authority to openly questioning its legitimacy. The bold expression of anti-Party sentiment also suggests that public anger is outweighing fear of reprisal as economic and social conditions deteriorate in China, and the Xi leadership continues to produce governance failures one after the other.
3. Xi and the CCP will face more protests like that in Jiangyou if they cannot resolve the many overlapping crises plaguing China, including a rapidly worsening economy and high unemployment (particularly among the youth), widening social disparities and the rich-poor divide, and the persistence of social injustices perpetuated by the CCP system. Social tensions in China are likely to be further exacerbated by the CCP’s intense political indoctrination campaigns and repressive policies.
Long-simmering anger in the populace threatens to break out when incidents like the Jiangyou bullying case occur. The subsequent public unrest signals a broader challenge to Beijing’s authority and heightens the political risks that Xi and the CCP face.
