China's Social Security System - China Labour Bulletin
China's Social Security System - China Labour Bulletin
The two-week strike by around 40,000 workers at the Yue Yuen shoe factory in Dongguan
(http://www.clb.org.hk/en/content/pressure-local-authorities-forces-many-yue-yuen-strikers-back-work) in
April 2014 was a watershed moment in Chinese labour relations. Not only was it the largest strike in recent
history, it, crucially, highlighted the numerous problems endemic in China’s social security system.The strike
was triggered when workers discovered that the company had been underpaying social insurance
contributions for years on end, leaving thousands of employees, who had spent much of their working lives at
the company, with a much smaller pension than they were entitled to. In some respects, the Yue Yuen
workers were lucky to have any kind of pension: Despite government attempts to increase pension and other
social insurance coverage, the majority of workers still lack an effective social welfare safety net, and, as the
workforce gets older, strikes and protests over the failure of employers to pay social insurance have now
become a regular occurrence across China.
The problems in China’s social security system can be traced back to two key events: The break-up of the
state-run economy, which had provided urban workers with an “iron rice bowl” (employment, housing,
healthcare and pension), and the introduction of the one-child policy in the 1980s, which meant that parents
could no longer rely on a large extended family to look after them in their old age. In other words, as the
economy developed and liberalized in the 1990s and 2000s, both the state and social structures that had
supported workers in their old age, ill-health and during times of economic hardship gradually vanished,
leaving a huge vacuum to fill.
The Chinese government sought to create a new social security system based on individual employment
contracts that would make employers, rather than the state, primarily responsible for contributions to
pensions, unemployment, medical, work-related injury and maternity insurance. In addition, the government
established a housing fund designed to help employees, who no longer had housing provided for them, buy
their own home.
The new system emerged piecemeal through a series of specific regulations and provisions in the 1994
Labour Law (劳动法) and 2008 Labour Contract Law (劳动合同法) etc. It was not until 2011, however, that these
separate parts were codified into a comprehensive national framework in the Social Insurance Law (社会保险
法 (http://www.gov.cn/flfg/2010-10/28/content_1732964.htm)). The basic principles of China's social security
system, as outlined in the Social Insurance Law, are as follows:
◼ All employees, including rural migrant workers, should be covered by the social insurance system.
◼ Both employers and employees are required to make contributions (at different rates) to a pension fund,
unemployment insurance fund and medical insurance fund, as well as the Housing Provident Fund.
Employers, but not employees, are also required to contribute to the work-related injury and maternity
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◼ The various insurance funds are managed by local governments and are pooled into provincial or
municipal funds. Usually it is the local labour or human resources and social insurance departments that
manage the social insurance funds, while the Housing Provident Fund is managed by the local
government’s Housing Provident Fund Management Committee.
◼ The funds collected must only be used for the specific purpose intended, namely the provision of social
insurance for workers and retirees.
◼ The pension and medical insurance funds are composed of pooled components, which can be used to
benefit any eligible employee, and personal accounts that benefit the individual employee concerned,
when they become eligible.
◼ Social insurance benefits should remain with workers when they move. However this provision has
proved very difficult to implement because of the highly localized nature of the social welfare system in
China. Getting different jurisdictions to share information is fraught with bureaucratic and technical
difficulties, especially for workers coming from rural areas of China.
In general, as with nearly all labour legislation in China, enforcement of the Social Insurance Law, even its
most basic provisions, has been very lax, and the majority of workers are still denied the social security
benefits they are legally entitled to. The government has sought to resolve this issue, not by enforcing the law,
but rather by introducing new insurance schemes based on individual contributions from urban and rural
residents, and by seeking to encourage compliance of the Social Insurance Law by gradually reducing the
contributions employers and employees have to make to the various insurance funds
(http://www.mohrss.gov.cn/gkml/xxgk/201604/t20160419_238366.html). It seems that the government has to
some extent accepted that it has failed to create an effective employee-based social insurance system and is
now moving towards a system that relies more on individual contributions, essentially letting employers off
the hook.
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There follows a detailed look at each component of China’s current social security system and the particular
problems and challenges for each of those components. In addition, we look at the specific problems
encountered by rural migrant workers in getting their legally mandated welfare benefits, and assess the
future development of the system.
Pensions
The basic framework for China’s pension system was set up in 1997 under the State Council Decision on the
Establishment of a Unified Basic Pension System for Enterprise Workers (国务院关于建立统一的企业职工基本养
老保险制度的决定). Both employees and employers are required to make contributions to the pension system.
Workers contribute based on their individual wage, at a rate of up to eight percent, while employers
contribute a percentage of the total wages paid to their workforce, usually around 20 percent. There is usually
a cap on contributions for both employers and employees and exact contribution rates vary from region to
region. In mid-2016, however, several provinces and cities, including Beijing, started to reduce employer
contributions by one percent (http://bj.people.com.cn/n2/2016/0601/c233088-28433683.html) from 20
percent to 19 percent.
Workers’ contributions are paid into a personal account. On retirement, the balance of the account, including
interest, is divided into 120 instalments to be paid out monthly over a ten-year period. In addition to the
benefits paid out from the personal account, the worker also receives general pension payments, payable
until death. The general pension payments are determined by the number of years of employment, the
average wage in the locality, and life expectancy. These general pension payments are ostensibly funded by
the employer’s contributions, but the government is legally obligated to cover any shortfalls.
Workers become eligible for pension benefits when they reach the statutory retirement age but only if they
have participated in the scheme for at least 15 years. Those who have participated for less than 15 years may
delay retirement until they have contributed for 15 years, pay the remaining required contributions, transfer
their pension plan to a plan for non-employed rural or urban residents, or receive the entirety of their
individual account, including interest, in a lump sum payment.
For decades in China, there was a separate pension system for civil servants and other government
employees such as teachers, who did not need to pay their own pension contributions and were entitled to a
generous government-subsidized pension on retirement. However, in January 2015, the State Council in its
Decision on the Reform of the State Employee Pension System (国务院关于机关事业单位工作人员养老保险制度
改革的决定) introduced a new pension plan designed to equalize the private and public-sector systems. Under
the new scheme, public sector employees will also have to make their own contributions to the pension fund.
However, the authorities have stated that the basic salaries and pension benefits of civil servants and
employees of public institutions will be augmented accordingly to offset any financial losses for employees
under the new system.
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One of the biggest problems with the current pension system in China is the statutory retirement age; 60-
years-old for men and 50-years-old for women workers in enterprises, 55-years-old for women civil servants.
These limits were established in the 1950s and are clearly no longer realistic in a country where the average
life-expectancy is now 75 years and there are already about 200 million people over the age of 60.
Government officials have announced that detailed plans for increasing China’s statutory retirement age will
be unveiled in 2017 (http://blogs.wsj.com/chinarealtime/2015/03/10/china-sets-timeline-for-first-change-to-
retirement-age-since-1950s/), although these measures will take at least five more years to go into effect.
Despite the declining workforce and rapidly aging population, pension fund revenue currently still exceeds
expenditure in most provinces, particularly in coastal provinces like Guangdong, which had a yearly surplus of
77 billion yuan at the end of 2014. However, provinces in the northeast of China that have an excess of
retirees and a shortage of young people are already feeling the strain. In Heilongjiang, for example, pension
pay-outs exceeded revenue by more than ten billion yuan in 2014, with the overall account balance standing
at just 33 billion yuan.
Official figures from the Ministry of Human Resources and Social Security (2015年度人力资源和社会保障事业发
展统计公报
(http://www.mohrss.gov.cn/SYrlzyhshbzb/dongtaixinwen/buneiyaowen/201605/t20160530_240967.html))
show that in 2015, only 262 million workers, about one third of China’s total workforce of around 775 million,
actually had a basic urban pension. See the graph below.
To supplement this shortfall, the government has been promoting a basic pension for urban and rural
residents who are not necessarily formally employed. This scheme requires residents to pay contributions
into an individual account for at least 15 years before becoming eligible for a pension on retirement. The fund
is subsidized by the government but monthly pay-outs, especially in rural areas, are generally very low.
Indeed, official figures show that the average pay-out for the 148 million people receiving benefits in 2015 was
just 1,432 yuan for the whole year. The average annual pay-out from the basic urban pension fund by contrast
was 28,363 yuan in 2015. The individual residents’ scheme has the potential to grow and provide more
extensive benefits in the future but it currently has little real impact.
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Unemployment insurance
The State Council’s 1999 Regulations on Unemployment Insurance (失业保险条例) established a framework for
contributions to and payment of unemployment insurance that was largely affirmed by the Social Insurance
Law. Both workers and their employers pay into the unemployment insurance system, originally at rates of
one and two percent respectively, however many provincial and municipal governments have now
substantially cut contribution rates as a means of reducing costs for businesses. In Guangzhou, for example,
the employer rate dropped from 1.5 percent to 0.8 percent and the employee rate was cut from 0.5 to 0.2
percent effective 1 May 2016.
At the end of 2015, 173 million workers, including just 42 million rural migrant workers, had unemployment
insurance. Those covered are eligible for benefits, including continuation of medical insurance, in the event
that they become unemployed. The duration of benefits depends on the length of time the employee has paid
into the system, with a maximum of 24 months of benefits for those who have been employed for ten years
or more.
Although employee contributions are based on salary, the benefits paid out are very low. The 1999
Regulations state that unemployment benefits must be lower than the local minimum wage, which is already
set at a very low level and can in no way be considered a living wage. See section on Wages and Employment
(http://www.clb.org.hk/content/wages-and-employment). Although the Social Insurance Law stresses that
unemployment benefits are transferable and can be claimed in any location, structural reforms will be
necessary for such a policy to become a reality, especially in rural areas that currently do not have a system
for disbursing urban unemployment benefits. At present, many local authorities address the issue by
providing migrant workers with a one-time payment amounting to much less than they are legally entitled to.
Medical insurance
The framework for China’s employee medical insurance system was first set out in the 1998 State Council
Decision on the Establishment of a Basic Medical Insurance System for Urban Staff and Workers (国务院关于建
立城镇职工基本医疗保险制度的决定). Both workers and employers are required to make payments to the basic
medical insurance scheme which, like the pension scheme, combines an individual account with pooled funds.
Though the amounts vary from region to region, workers typically contribute two percent of their individual
wages - all of which goes directly to their individual account - while employers usually contribute between six
and 12 percent of their workforce’s salary, a proportion of which (usually 30 percent) goes into the workers’
individual accounts while the remainder goes to the public fund. Once the worker has paid into the system for
the requisite number of years, they are eligible for benefits without having to make additional contributions.
The worker’s individual account is supposed to cover the cost of any medical treatment that amounts to ten
percent or less of the local average annual wage. The pooled insurance funds cover any costs above ten
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percent of the average annual wage, capped at five times the average annual wage. If an employee does Got
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have sufficient funds in their individual account to cover ten percent of the average annual wage, they have to
make up the shortfall out of their own pocket. It can take low-paid employees several years to reach the ten
percent threshold and as such many insured workers still end up paying for their own minor treatments
regardless. Likewise, at the other end of the scale, employees have to pay for any medical expenses in excess
of five times the average wage.
The Social Insurance Law stresses that the medical insurance fund should cover workers’ medical costs by
paying service providers (usually hospitals and clinics) directly. However, in most cases, workers have to pay
up-front and request reimbursement from the authorities later. Moreover, to be eligible for public insurance
funds, hospital treatments must be on a pre-approved government list - treatments outside of the pre-
approved list must be paid out of either the worker’s individual account or their own pocket. Coverage for
outpatient treatment and medicines is even more limited. This means that people who need outpatient
treatment and medicine often have to buy additional private medical insurance, pay for treatment out of their
own pocket or forego treatment altogether.
The number of workers and retirees covered by the basic medical insurance scheme has increased steadily
over the last decade but still only stands at about 289 million. The number of rural migrant workers with basic
medical insurance in 2015 was just 52 million, a slight decrease over the previous year. By contrast, the
number of urban residents (mainly non-working spouses and children) who are covered by the Urban
Resident Basic Medical Insurance Scheme has increased sharply to stand at 377 million in 2015. See chart
above. The scheme, which was introduced in 2007 and aims cover the majority of inpatient medical costs for
participants, is based on individual contributions together with local and central government subsidies. A
similar program, the New Cooperative Medical Scheme operates in rural areas and individual contributions
are usually set at a very low level. However, the vast majority of rural residents will still have to travel to major
cities for treatment in serious cases because of a lack of high-quality medical facilities in their home area.
The number of workers covered by work-related injury insurance more than doubled in the decade from 2006
to 2015. See chart below. However, the current total of 214 million employees still only accounts for 28
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percent of the entire workforce in China. Moreover, only 27 percent of rural migrant workers, who do the
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most dangerous jobs and who need work-related injury insurance the most, are actually covered. According to
official statistics, 75 million out of 277 million migrant workers in China had work-related injury insurance in
2015.
Contributions to the work-related injury insurance fund are paid solely by the employer at rates of between
0.5 percent and two percent of payroll; varying according to the health and safety risks of specific industries
and locations.
Workers are eligible for work-related injury compensation if they can prove they have an employment
relationship with their employer and that the injury sustained is in fact work-related. This is often a far from
straightforward process. Once, a work-related injury has been confirmed however, the local authorities assess
the level of work disability on a scale from one to ten, with one being the most serious. Workers suffering
serious injuries are entitled to considerably more compensation than those with relatively minor injuries. The
exact amount of compensation to be paid, and importantly the responsibility for paying, it are largely
determined by the Social Insurance Law, the Work-related Injury Insurance Regulations and the Law on the
Prevention and Treatment of Occupational Diseases. However, local implementing regulations and selective
enforcement of certain provisions means that the actual payout varies considerably from region to region.
Moreover, disputes between the employer and employee and the local authorities over the level of
compensation and who should pay are a regular occurrence. If an employer fails to pay the required work-
related injury insurance contributions, they are legally obliged to cover all expenses themselves. However, in
most cases, delinquent employers refuse to pay anything more than basic medical costs for the time the
employee is in hospital, if that.
Occupational disease cases are particularly difficult for workers to resolve because the disease often
manifests itself after the worker has already left their place of employment, and migrant workers in particular
are unlikely to have a contract with that employer anyway. According to the China Labour Statistical Yearbook
only 21,462 workers were certified as suffering from an occupational disease in 2013 compared with just over
one million workers who were certified as having been injured in a work-related accident. There are an
estimated six million workers in China with the deadly lung disease pneumoconiosis but only about ten
percent of them have ever been certified as having an occupational disease. See CLB’s research report Time to
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Maternity insurance
Employees are not required to contribute to the maternity insurance fund, while employers make
contributions at rates determined by individual local governments. In the city of Beijing, for example,
employers contribute 0.8 percent of total wages paid to eligible employees, in Guangzhou it is one percent of
the average monthly wage in the city, while in Chengdu, the rate is 0.6 percent of the total wages of all
employees. Maternity insurance covers all maternity-related medical costs, including birth control, prenatal
check-ups, delivery and antenatal care, as well as allowances to be paid during maternity leave. According to
the Special Provisions on the Protection of Female Employees (女职工劳动保护特别规定), which went into effect
on 28 April 2012, women are entitled to 98 days of maternity leave allowances at a rate equal to at least the
average wage at her employer. In addition, some local governments require employers to provide additional
allowances for employees earning more than the average wage.
The number of employees covered by maternity insurance has increased steadily over the last decade to
stand at 178 million at the end of 2015, according to official figures. However, the number of employees
actually benefiting from maternity insurance fund is still limited because many employers screen out
prospective employees who might get pregnant and find ways to get rid of employees who are pregnant. In
2015, only about 6.4 million employees received maternity benefits totalling 41.1 billion yuan, an average pay-
out of 6,422 yuan per employee.
Employers often ask prospective female workers about their family plans or require them to agree to illegal
contract conditions, such as taking pregnancy tests or signing guarantees they will not get pregnant. Many
employers find ways to coerce pregnant workers into resigning by requiring them to work unreasonably long
hours or by assigning them heavy or dangerous workloads. Other employers simply refuse to grant maternity
leave and then fire employees on the grounds of absenteeism. More and more women are now taking legal
action against such blatant rights violations. For example, a Beijing shopping mall counter manager, Yin Jing,
was awarded 62,237 yuan in compensation by a Beijing appeals court on 5 November 2015 after she had
been illegally fired while pregnant. However, for most women, especially low-paid factory workers, going to
court or even labour arbitration is simply not an option because they cannot afford the time and money to do
so. See Gender Discrimination in China (http://www.clb.org.hk/content/workplace-discrimination#gender) for
a more in-depth discussion of this issue.
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Housing Fund
The Housing Fund, also known as the Housing Provident Fund, is not officially part of China’s social insurance
system: It is administered by the Ministry of Housing and Urban-Rural Development rather than the Ministry
of Human Resources and Social Security. However, it is often grouped together with the five official social
insurance programs since it functions in a similar manner, with benefits funded through contributions paid by
employers and their employees.
The fund was first established in 1999, a time when tens of millions of workers were being laid off from state-
owned enterprises (SOEs) across China. The government could no longer rely on SOEs to meet the housing
needs of workers so the Housing Fund was promoted as a means by which employees could pay for and
maintain their own home. Contributors to the housing fund can apply for preferential rate mortgages, cover
housing repair and maintenance costs and get rent subsidies. If unused, the fund can be redeemed upon
retirement, and as such it actually functions more as a secondary pension. In addition, recent local
amendments have allowed housing funds to be used for non-housing related expenses such urgent or
serious medical treatment costs.
The Regulations on the Administration of Housing Funds (住房公积金管理条例) state that employee and
employer contribution rates are to be determined by the local government but should not be lower than five
percent of the average wage at the enterprise. In Beijing, for example, employers have to contribute 12
percent of the average wage during the previous year and employees contribute 12 percent of their monthly
salary. In Shanghai, employers contribute seven percent of the average wage during the previous year and
employees contribute seven percent of their average monthly salary in the previous year. In all cases,
contributions are made on a monthly basis and are tax-deductible.
Unlike the five social insurance schemes, which have seen regular and
substantial increases in coverage over the last decade, the number of workers
contributing to the housing fund seems to have fluctuated around the 100
million mark for the last decade. In 2008, there were reportedly 110 million
workers in the scheme. The number of participating workers reportedly went
down to 91 million in 2011 but was back up to 107 million by the end of
August 2014 (http://www.gs-zy.com/house/2014-10/15/content_1664125.htm).
The total accumulated fund, as of August 2014, was just over seven trillion
yuan, according to figures from the Ministry of Housing and Urban-Rural
Development. Most of the participants in the scheme are government
workers, public servants and professionals in the private sector. Given soaring
property prices in China, the housing fund has been seen by the vast majority
of low paid workers as irrelevant. Most factory workers for example live in cheap and cramped rented
accommodation close to their place of employment, see photograph of factory worker housing in Shenzhen
above, and the prospect of owning their own home in the city is a pipedream. That said, some workers,
particularly older employees, are now demanding the payment of housing fund contributions in arrears, as
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well as their social insurance contributions when they are laid off during factory closures etc. This is not
necessarily because they want to buy a house but more likely because they want to maximise every benefit
possible before retirement.
Article 95 of the Social Insurance Law states that “Rural migrant workers in urban areas are to be covered by
social insurance in accordance with the provisions of this law” (城务工的农村居民依照本法规定参加社会保险).
However, the social insurance system was clearly not designed with migrant workers in mind. It is a highly
localised system that assumes employees remain in the same place throughout their working life and
retirement. Although more and more migrant workers are now getting social insurance, actual coverage rates
are still only about half the national average. The annual survey of migrant workers
(http://www.stats.gov.cn/tjsj/zxfb/201405/t20140512_551585.html) by the National Bureau of Statistics found
that in 2013, only 15.7 percent of the 166 million rural migrant workers employed outside of their home area
(外出农民工) had a pension and 17.6 percent had medical insurance. See chart below. Separate figures from
the Ministry of Human Resources and Social Security suggested that in 2015, 20 percent of migrant workers
had a basic urban pension and 18.7 percent had medical insurance.
Employers have routinely claimed in the past that they have not paid social insurance contributions for
migrant workers because the workers themselves are not interested in a pension. They cite the high
contribution rates and the lack of transferability of pension accounts as the main reason why migrant workers
do not find the system attractive. However, such obfuscation completely ignores the obvious fact that
employers have a legal obligation to provide every employee with social insurance. Moreover, the underlying
reason migrant workers are unhappy about making pension contributions is not because the rates are too
high but rather because their basic salaries are too low and any deductions will have a major impact on their
day-to-day living standards.
A key point to note is that the migrant worker population is getting older: More and more workers are middle-
aged and already planning for their retirement. The annual survey of migrant workers in China showed that
the proportion of workers aged 16 to 30-years-old fell from 42 percent in 2010 to 33 percent in 2015, while the
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proportion of workers over 40-years-old has jumped from 34 percent in 2010 to 45 percent in 2015. Over the
last few years, many of these older workers have been at the forefront of workers’ demands for payment of
social insurance. As the migrant workforce continues to age, those demands will only get louder.
Conclusion
After China embarked on its much vaunted economic reform and development program, the government
gradually abdicated its authority in labour relations to business interests. As the private sector expanded,
employers could unilaterally and arbitrarily determine the pay and working conditions of their employees,
keeping wages low and benefits largely non-existent. The national government sought to protect the interests
of workers by implementing legislation, such as the 1994 Labour Law and 2008 Labour Contract Law, however
local governments either could not or would not enforce the law in the workplace.
Under these circumstances, creating a system where employers are primarily responsible for their employees’
social security was doomed to failure. Employers could often simply ignore their legal obligations and
continue with business as usual, often with official connivance. As Reuters reported in February 2015, after
the 2008 financial crisis, the central government allowed struggling companies to delay social insurance
contributions (http://uk.reuters.com/article/2015/02/04/uk-china-labour-idUKKBN0L82HO20150204) for up to
six months. The policy was never formally rescinded. It was only when the workers themselves started to
demand payment of social security (most notably in the 2014 Yue Yuen strike) that employers were forced to
comply.
The failure of the Chinese government to enforce the law and create a social security system that covers
everyone has not only disadvantaged China’s workers, it has severely hampered the government’s own ability
to push ahead with and accomplish other important policy goals.
One of the key policies regularly enunciated by the government over the last few years has been to boost
domestic consumption as a means of ensuring more stable and balanced economic growth in the future.
Much of China’s consumption power however remains in the hands of the wealthiest one percent and that
has led to huge capital outflows rather than increased domestic spending. The majority of workers are still
reluctant to spend because, lacking a pension or medical insurance, they tend to set aside what they can in
bank savings and other riskier investments in order to try and secure their future and shield themselves from
adversity.
The fact that only a fraction of the social insurance contributions that should have been made over the last
two decades or so have actually been made, means that the various social insurance funds are under much
more pressure than they should be. With China’s rapidly aging population, this is a particular problem for the
pension funds and medical insurance funds. As noted above, the government now accepts that it needs to
increase the retirement age if there are to be sufficient funds are to cover all expected pension and medical
expenses in the future.
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However the government is reluctant or unable to force employers to comply with existing social insurance
obligations. Rather, the government is trying to reduce the social insurance burden faced by employers and
shift the burden of pension and other social insurance contributions onto individual workers, whether they be
formally employed or not.
Instead of running away from the problems of employee-based system, the government needs to find a way
to accommodate the competing interests of labour and capital in creating a realistic and stable social security
system; one that looks after workers during poor health and old age but also helps to create a content and
well-paid workforce that in turn can help develop the domestic economy through greater innovation,
productivity and consumption of goods and services.
This article was first published in August 2012. It was last updated in June 2016.
Story Highlight
It is the duty of the union to represent workers in negotiations with employers, it should not just sit on its hands. Neither should
the Trade Union Law just exist on paper. The union should shoulder its legal responsibilities towards workers by defending their
rights.
(http://www.clb.org.hk/content/pushing-trade-union-take-
gender-discrimination-china-seriously)
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