China as a Payroll Processing Center for MNCs in Asia

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By Dezan Shira & Associates
Editor: Jake Liddle

As Asia’s largest economy, China has an established history of serving as the main operational center for many multinational companies’ (MNCs) operations in Asia. Since its economic reform and opening up in the late 1970s, the country started to operate and compete on free market principles, and consequently, more and more MNCs have been able to use China as an operations base.

Since then, the country has continued to liberalize and has developed its infrastructure significantly, easing and facilitating more trade and commerce as a result. With this, China has shifted its focus from being largely dependent on manufacturing, to a more service-based economy.

This means that China’s labor force is becoming more service-oriented, and education levels have followed suit. As of 2015, there was an estimated 32,000 university graduates who specialized in HR management.

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The government endorsed IT development in its 13th Five Year Plan, which it released in 2015. IT systems play a major role in how payroll is processed. As more and more IT-literate resources flow into the labor pool, IT systems and infrastructure for managing tasks such as payroll have reached the kind of advanced standards that would be expected in more developed economies..

What’s more, China has incubated many HR clusters where large companies station their HR and payroll processing operations, providing  preferential tax policies to encourage BPO development in certain cities such as Dalian, Chongqing, and Chengdu, for example.

In recent years the government has made efforts to encourage MNCs to establish regional headquarters in China. The most recent was a circular that details the support and simplification of establishment in Shanghai, and clarifies the applicable business scope and assessment criteria of regional headquarters located there. Steps like this further promote the incentives for centralizing payroll processing and wider regional HR functions in China.

Of course, China still has some disadvantages. With its rapid development and shift to a service based economy, labor costs have increased significantly, and are no longer as competitive in terms of cost as other Asian countries such as Vietnam or India. However, it is worth noting that losses from labor expenditure could be regained from a more effective and centralized payroll system.

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Language barriers may also pose a challenge to MNCs, as English is not as widespread in China as in other countries such as India. That said, as more students in China travel overseas for education, the internationalization and innovation of China’s talent pool has increased, and these hurdles are not as pertinent as before.

Nevertheless, as a payroll processing center, China provides a strong balance between skilled and affordable labor, especially for MNCs who are expanding their business scale in Asia.

Payroll-processing-in-ChinaThis article is an excerpt from the April issue of China Briefing magazine, titled “Payroll Processing in China: Challenges and Solutions.” In this issue of China Briefing magazine, we begin by laying out the challenges presented by China’s payroll landscape, including its peculiar Dang An and Hu Kou systems. We then explore how companies of all sizes are leveraging IT-enabled solutions to meet their HR and payroll needs, and why outsourcing payroll is the answer for certain company structures. Finally, we consider the potential for China to emerge as Asia’s premier payroll processing center.

 

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