Economist: cut firms' social expenditure obligations

China should not only cut the corporate tax burden, but also reduce various expenditure obligations by corporations, in order to counter sagging corporate profits and cooling willingness to invest in the country, said a leading Chinese economist.

Liang Hong, chief economist of China International Capital Corp, noted that a comprehensive gauge of corporate tax and fee burden has risen since 2010 to nearly 50 percent of their pre-tax revenue, despite deteriorating financial performance since then. The burden not only includes taxes but also various administrative fees, social security expenditure and housing provident fund enterprises pay for their employees.

"We're surprised to learn that social security expenditure (including pension fund, medical insurance, housing provident fund and so on) totaled 6 trillion yuan（$940 bn） last year. By comparison, total profit of major industrial firms was just 6.5 trillion yuan," said Liang.

"Tax and fee cuts should be an integral part of the 'proactive' fiscal policy," she said.

Firms' contribution to pension fund payments should be reduced, she suggested. Chinese firms now pay 20 percent of an employee' salary to the fund while employees pay another 8 percent. The total 28 percent contribution ratio is "unreasonably high" as world average is just more than 10 percent.

To reduce this ratio while keeping enough firepower to address the aging society and rapidly growing numbers of retirees, the government has previously mandated state-owned enterprises to raise its dividend payout to pension funds, and gradually convert part of their equities to bolster the funds.

CICC suggested SOEs continue to raise their share of profits contributed to pension funds. It found that if SOEs convert 10 percent of their equities to pension funds every five years, the government can afford to reduce corporate contribution ratio to the funds by 5 percentage points.