Episode 8: Payroll in China

Luisa Rollenhagen (0:07): 

Hi everyone, welcome back to another episode of Payroll Around the World! I’m your host Luisa Rollenhagen. Payroll Around the World is your all-inclusive guide to understanding how payroll operates across different countries. We explore the unique aspects of each nation’s payroll system, with insights from ADP experts on the ground and locals who share their experiences with work and pay in their home countries. In order to truly understand payroll on a global scale, it’s essential to know the local nuances at play. Today, we’re going to China. Although India recently usurped China’s title as the world’s most populous country by a couple million, its 1.4 billion citizens and a GDP of around 18 trillion US dollars make it a political and economic powerhouse. It’s also cultivating quite a diversity when it comes to its economic offerings.

Lily Ma (1:07):

China’s economy is one of the largest in the world. So it’s rapid growth, evolving and diversification. So the key industries we identify with rapid growth are manufacturing, technology, service, and green energy. So manufacturing is still a cornerstone of the economy with electronics, textiles, and machinery being prominent sectors. Technology, rapid advancement in technology, particularly in areas like generative AI, fintech and e-commerce have positioned China as a global leader. The service sector is expanding quickly, particularly in finance, healthcare, and education. Green energy, China is investing heavily in renewable energy and electronic vehicles, aiming for sustainability.

Luisa Rollenhagen (2:10): 

China has a rich and complex history, and coupled with the country’s economic prowess, the opportunities, as well as the payroll challenges, are plentiful. China’s labor landscape is characterized by a sophisticated social insurance system and evolving labor laws designed to keep pace with its changing workforce. On top of this, multinationals need to keep in mind that China’s 23 provinces and four municipalities have different rules when it comes to taxation and social contributions.

Junbin Li (2:41):

The tricky part is coming when, because China has different provinces, different cities, so the percentage, the way of contribution, the timeline will be very different

Luisa Rollenhagen (2:51): 

Employees in China are entitled to a housing allowance, better known as the Public Housing Fund.

Dongdong (2:58):

Most people, they get the housing fund, like each month of your salary, your company pays 7% of your salary and you pay 7% of your salary every month. So this money is not cash, it is an amount in your housing fund account.

Luisa Rollenhagen (3:22): 

We’ll get into all of that soon enough. But first, I want to introduce the people you just heard. Dongdong, a teacher in Shanghai, will be telling us more about her housing fund later in the episode. The other two voices you heard? Those are our experts for this episode, Lily Ma and Junbin Li! Welcome, Lily and Junbin! Would you mind introducing yourselves to our listeners?

Lily Ma (3:46):

I am Lily Ma. I am the general manager of North Asia. I’m based in Shanghai.

Junbin Li (3:54):

My name is Junbin Li. I’m also based at the Shanghai office. I’ve been with ADP for 10 years. Currently, I am taking the service and operation director position for North Asia.

Luisa Rollenhagen (4:08): 

​​Thank you for joining us, I’m excited to learn a bit more about payroll in China today. So Lily, at the beginning of the episode, we heard you talk a bit about how China’s economy is diversifying and expanding in certain sectors. What effect does this have on China’s workforce?

Lily Ma (4:24):

The labor market in China is diverse and complex, with a high number of skilled workers, especially in urban areas. There’s a growing emphasis on innovation and technology-driven roles, which influence the hiring trend.

Luisa Rollenhagen (4:44): 

I see. And Junbin, you already hinted earlier that China’s many provinces can be tricky to navigate since they often have their own regulations regarding contribution and taxation deadlines. Could you expand on that?

Junbin Li (4:57):

For example, for Shanghai, the pension plan is… what this percent, but for Shenzhen it’s another percent. And also when we calculate this, we have upper limits and lower limits for the base of this calculation. And for different cities, the base is different and it’s not always changed at the same time in the year. For example, in Shanghai and Beijing, this base is normally changing every July, but for Shenzhen, it changes monthly. So monthly, they have a new base and for the contribution rate, it’s also different.

Lily Ma (5:17): 

China has a large geography and over 30 provinces and over 400 cities, each city and province has their own policies and the adjusting time window. So that brings some difficulties to enterprises to navigate all the regulations, and the social security benefit to get their employee and their enterprise to stay compliant.

Junbin Li (5:46):

For example, we also take Shenzhen for example, Shenzhen, they have two different contribution rates for pension plans, which is divided by Hukou. Hukou means are you a local citizen in Shenzhen. If you’re born in Shenzhen, you are a local in Shenzhen, your percentage is this rate. If you are working, coming to Shenzhen for the job then you have a different percentage. So there’s still many things like this in the rules, in the calculations, which will impact the social benefits calculation. So that’s why I’m saying that’s a bit complex.

Luisa Rollenhagen (6:21):

Yes, I can imagine. I want to pause really quickly to explain what Hukou means, since I had no idea before I heard about it from Junbin. Hukou is a household registration system in China, which indicates that you’re a registered permanent resident of a specific place. Please continue!

Junbin Li (6:39):

You do need to have a local experience and you need to handle the local scenarios, especially for very special cases. For example, if your employee got injured during work, how to apply the working injury, that will be even more complex. You need the experience, you need how to follow the process and it will get more difficult if the employee is not local. So if he or she’s coming to your city to work for you, but he’s not having the local Hukou. So how to handle that? So you need to understand local policies and the better you understand the relationship with different provinces, how they handle in real scenarios.

Luisa Rollenhagen (7:20):

Is there a province or city that’s particularly complex when it comes to these things?

Junbin Li (7:24): 

I can give you an example. For example, I’m not sure if you’ve heard of Guangdong in Southern China, which is close to Hong Kong. So this province, they’re famous for their manufacturing. They have a lot of factories and make all different stuff. Their employees are coming and going. The turnover rate, you can imagine, the blue-collar workers’ turnover rate is very high. So within this province, many of these cities, they have the rules of when you terminate, or if your employee leaves, you need to immediately pay the last salary, otherwise your employee might lose contact with the factory. So the most common, I remember, is within seven days, seven working days. But this creates an extra challenge for the HR person, because normally the practice is if someone leaves the company, we calculate it and pay together in the next month’s salary. But for Guangdong, it’s very different and this is the labor law.

Lily Ma (8:26):

Yeah, the complexity also shows on the medical insurance, as probably some people are working in this province, for example, Shanghai, but he or she’s from Jiangxi or other provinces. So the medical insurance coverage needs to cross provinces to pay. So that also creates the difficulties for the enterprise, to understand what’s the medical insurance and how to claim the expense of the employee to support the employee’s well-being.

Luisa Rollenhagen (8:57): 

And it’s quite common for a company to have employees across various provinces?

Junbin Li (9:01):

Yeah, it really depends on the size and industry of the business. You can imagine, if you are a retail company or you’re a sales company, you definitely have companies and employees across many provinces.

Luisa Rollenhagen (9:14): 

Got it. Something else that came up while I was doing some research was about how complex China’s income tax system can be.

Junbin Li (9:22):

Yeah, for the individual income tax, I think the difficulty is really coming from three factors. Firstly, we have changed the individual income tax from 2019. So now it’s not doing monthly calculations, it’s more based on the year-to-date income. So for example, let’s say we go to October, November: The calculated base is on the whole year from January to the current months, the total income. And based on this income you have a different tax rate.

Luisa Rollenhagen (9:55): 

Right, because China has a progressive taxation system and employers are required to withhold a certain percentage of wages, depending on the tax rate. So employers must calculate the total taxable income for the year so far, determine what’s owed based on the annual tax rates, subtract the income tax that’s already been paid, and withhold the remaining amount for the current month.

Junbin Li (10:19):

But this is getting difficult for example, for both employee or HR to do calculations, because they can easily get the current income, but they need a system maybe to having accumulated one.

Lily Ma (10:31): 

China has the progressive tax rate, so that creates the complexity for the enterprise to calculate the individual income tax for their employees. And also China’s government is promoting the contribution, the collection of the tax, together with the social insurance fees. So this also creates the complexity for the different systems to be integrated. So that also needs to be considered. And recently, the government is using big data and some AI technology in the backend. So they search, for example, I bought our house with the mortgage and I can claim as a deduction for my income tax, but one family can only claim once. So if I claim that, my husband also claim that, they will detect there’s a clash on that and they will reach out to the enterprise to find the individual, you and your husband has the duplicate deduction claim that’s not compliant, et cetera. So that’s the government is completing the system to collecting all the data and they also use the backend, the data mining to verify and detect any of the issues.

Luisa Rollenhagen (11:58):

Ah, so there’s already some sort of internal check happening. What about tax deductions, how do those work?

Junbin Li (12:04):

For China we have announced several factors: You can get a deduction on your tax, for example, you have elder parents to take care, you have little infant babies, need to spend some extra efforts and money on the babies, or to get education or rent. So how, as a company, as an employer, HR, how can they get this data correctly and including them into the tax calculation? That is a challenge. We saw that this is a challenge, but the local government, China’s government, solved it pretty smoothly. They have an app called China Tax and that runs pretty okay and employees in China now get used to put their special deductions from their mobile phone and this information goes to the tax system and so you can download it from there and do the company level calculation. And also the third challenge is the different tax types. For example, in China you definitely have salary tax, you have also annual bonus tax which apply to a different rate. But the tricky thing is the government saying, if you got for example this total amounts of annual bonus as employee, you can choose to combine your annual bonus into your total salary to apply the salary tax, or you can choose to apply to annual bonus tax. So this become difficult because for example, if you get higher annual bonus but lower regular income, you probably choose one option. If you get lower bonus, but very big regular income, you probably want to do it differently, but you need to calculate and know what to do with your tax. So there’s many factors like this for individual income tax which creates some challenge for HR person, but that’s the regulations in China.

Luisa Rollenhagen (14:01):

I see. Is there anything else that multinationals should know about when it comes to compliance in China?

Lily Ma (14:07):

So China’s own data privacy law creates several challenges for multinationals. First, the complex regulatory compliance requirement, China has a set of data privacy laws including the cybersecurity law, CSL, the data security law, DSL, and the personal information protection law, PIPL. So multinationals need to understand and comply with all these laws simultaneously. The second is focusing on the data localization and requirement. So the data storage within China, we can see Chinese laws often require that certain types of data, especially sensitive personal information of Chinese citizens, be stored within the country. This pose challenges for multinationals that have a global data management system and may need to establish a separate data storage and processing facility in China to comply this law and requirement. For instance, companies may need to transfer data from their overseas server to local servers in China, which involves a technical, logistical, and a cost consideration. And some of the regulations restrict the cross-border data transfer. There are strict regulations on cross-border data transfer for some sensitive data or important data. So companies need to obtain consent from the individual and meet the specific security assessment and approval from the government. So that creates a complexity for enterprise for multinationals. And also the penalty and legal risk are quite high. So we are seeing some severe financial penalty. Non-compliance with China’s data privacy law can result in significant financial penalty fines can be up to 5% of the company’s annual revenue.

Luisa Rollenhagen (16:24):

Oof, nobody wants that. So what is ADP doing to help clients navigate these challenges?

Lily Ma (16:29):

So for compliance or the data localization, we have a compliance expert and our partners in China to help our client and ourselves. And then we also keep updated on the regulatory change or the new interpretation, best practice in the market. So we are also doing some research on the trend for the policies and the enterprise and employees wellbeing that’s also impact the compliance or regulatory change in the future.

Junbin Li (17:07):

We developed a new feature in our software, which we can transfer the local policy change, the regulatory policy. For example, I mentioned the lower limitation, the upper limits, what they change because some change annually, some change monthly. So no matter what are the change, we will collect them and push through our social benefits system to the payroll system, then to the client’s HR portal so they can see if there’s new regulations change in their company’s province. So avoiding them to make any calculation mistakes or wrong understanding of the regulation.

Luisa Rollenhagen (17:46): 

That’s good, because it sounds like making a mistake in that department can be very costly. I want to change course for a minute. We briefly mentioned the importance of contributing to social benefits, both for employees and employers. One of the things that really fascinated me about working in China was the prevalence of specific allowances for employees. One of those allowances is the housing allowance, known as the Housing Provident Fund. So how does that work, exactly?

Junbin Li (18:16): 

So yeah, this is a bit unique in China. I think the idea is, housing is, I think, the most important, or at least one of the most important, factors for the whole society. So for employer you need to help your employee to contribute a little bit of the money to their housing. So it’s kind of mandatory saving by the law. So you need to contribute a little bit percent of, for example, I think 8% in Shanghai, another percentage in different cities. So this percent you need to save as an employee. And the employer will also put another portion to put into your public housing fund account. And this one is different than the pension plan. If you remember I told the pension plan, they have two accounts. One is sharing with the society, one is belongs to you. Public housing fund, every penny belongs to you. This is your money, you can use it in the future for mortgage, for rental, or you can, for example, you have a declaration, if you can claim that my house is old, I want to do renovation, it can also use this public housing fund. But it can only used for housing related factors. You cannot use it for any other usage. For example, if you lose your job, you want to withdraw for your living expense. No you cannot. So this is basically the idea of public housing funds. And I did see discussions within different province about how this will change. For example, in some province, if this employee is in very serious illness and not having enough income, some province say yes, in this situation you can get your public housing funds for your usage, but not all provinces allow this.

Luisa Rollenhagen (20:03):

Right, it’s a specific employer-supported savings account just for housing-related expenses. When do people usually take advantage of this fund?

Junbin Li (20:13):

The most common practice is when you retire. So if you reach your retirement age, you can withdraw this money. So basically this is the idea of public housing fund, but still there’s many different regulation, different province. For example, if you want to change your job from, say from Shanghai to Guangdong, can you withdraw the public housing fund? Yes you can, but what is the documents you need to provide? Can you take them as a cash or you have to transfer to the new public housing fund accounts? That’s varied. So this is the PHF, public housing fund.

Luisa Rollenhagen (20:48): 

That sounds like a very useful scheme, especially since the contributions that employers and employees make to the fund accumulate over time and earn interest. In addition to learning about the fund from Lily and Junbin, I was curious to learn how employees feel about the fund. Remember Dongdong, the teacher who you heard at the beginning of the episode? She’s going to tell us a bit about how she and her husband used their housing fund to buy a house. In her case, they actually used the fund to secure a loan at a very favorable interest rate.

Dongdong (21:22):

My name is Dongdong. I’m a Mandarin teacher, a Chinese teacher. My husband and I, we’ve lived in Shanghai around 18 years and we have two kids. So now we want to get more stable and we think okay, so after 16 years, I think Shanghai is the place where we live longer. So I think it’s the right time. My husband had a housing fund for about 16 years. And I have the housing fund for nine years. So we use our housing fund because now have a very good, attractive policy, so we can get the highest maximum, the highest loan and with the lowest interest rate. Before we bought the house, we thought it is very complicated, but actually it’s so simple. After you buy and after you sign the contract with a real estate company and they will give all the home, house buyers a selection of banks. You can choose your preferred banks. And then one day, just one day, all the house buyers, they gather together. You get the bank advisor, they will calculate how much you want to get a loan from the commercial bank and how much you can get a loan from the housing fund. Most people, they want to get the max, as much as possible. You can get the housing fund. They can get the loan from the housing fund. Then the rest they can loan from the commercial bank. That’s why the housing fund is very attractive, because of the interest rate.

Luisa Rollenhagen (23:03): 

In fact, first-time homeowners can get loans from the housing fund at an interest rate of 2.35% if the loan is for five years or less. And when it’s time to start paying off the loan, the payments are deducted from the housing fund. But once that’s depleted, home buyers must use their personal bank funds to continue paying. Currently, Dongdong and her husband are using the funds in their housing fund to pay off their loan. And while they won’t be able to pay off the full loan with their fund, they still continue to make contributions to the fund to offset some of the repayment costs.

Dongdong (23:41):

It can keep for 11 months, and then, every month, and then we pay by ourselves from the bank. But meanwhile, after the money runs out and every month we still have the seven percent so we can pay some money, some part of the money every month. And so meaning, the money we pay to the bank is less than the total amount.

Luisa Rollenhagen (24:07):

Listening to Dongdong’s story made me wonder what happens to people’s housing funds if they move around a lot. Dongdong and her husband have lived in Shanghai for a long time and plan to stay there, but not everyone stays put for so long. I went back to Lily and Junbin to learn more.

Lily Ma (24:23):

The housing fund is based on the location you are hired, which means the contract, the labor contract you signed with the company, in which city. For example, I’m from Beijing, my Hukou is in Beijing, but I work in Shanghai and my labor contract with the company is in Shanghai. So my housing fund is stored in Shanghai. I can’t combine the Beijing account and Shanghai account together before I retire. So the only usage of Shanghai’s account money is to buy a house, real estate or housing-related purchases in Shanghai. So I can withdraw Shanghai’s housing fund if I leave Shanghai, go back to Beijing or go to other cities, other provinces.

Luisa Rollenhagen (25:23):

But once you retire you can combine them? 

Lily Ma (25:26):

I can withdraw all the money from each account of the housing fund.

Luisa Rollenhagen (25:31): 

Interesting, thanks for sharing! I think we’re going to start wrapping up, but before we do, I’d like to know: What do you two find exciting about payroll in China?

Lily Ma (25:42):

Understanding and complying with the local labor laws and the tax regulation requires an in-depth knowledge and skills. Successful helping business adhere to this regulation can be rewarding and give you a competitive edge. So the opportunity, I like the part of interactive with our client and see the impact working closely with a different type of clients from startup to established cooperation allows you to understand their unique need and tailor the solution accordingly to seeing the positive impact of our service on the company’s HR operation and the employee’s satisfaction can be highly fulfilling and exciting.

Junbin Li (26:34): 

Working on China payroll, you can immediately feel China is a developing modern society, but plus, there’s still something traditional, which is interesting. So within my team, I’m not looking only for China, we can also see payrolls, for example, Hong Kong, Taiwan, Macau, and more, like Vietnam, Japan. So you see these things changing in different markets, different countries, and you somehow understand what is the logic behind the change. And that gave us always interest and surprise to this industry. So that’s pretty exciting to working in China payroll.

Luisa Rollenhagen (27:16):

Thank you so much to both of you, I appreciate you sharing your expertise with us today. It was really interesting to learn more about the housing fund and the ways in which Chinese citizens use it to make homeownership a reality. I hope we were able to give you a bit of a deeper insight into how payroll in China works today. If this episode has piqued your interest or your company is considering expanding into China and you want to learn more about payroll there, please go to the ADP China website: adpchina.com.

And don’t forget to subscribe to learn more about payroll around the world with each new episode.

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