China has experienced dramatic social and economic changes since adopting an open-door policy in 1978. Before that, the Chinese government mainly followed the principles of socialism, according to which the needs of workers and their family members, such as medical care, housing, education and retirement, were met by state-owned enterprises (SOEs). This is because all means of production were in the hands of the Chinese Communist Party (CCP); full employment had been achieved at the expense of surplus labour in state enterprises. Under the work unit welfare system, public welfare was restricted to the ‘three no’s’ – people with no income, no family support and no working ability. In other words, only marginalised groups such as disabled persons, widows and older people without any family support and with limited working ability would receive social assistance. Under this type of welfare system, there was no room for unemployment services; public welfare in the form of social assistance was also less developed, being restricted to certain deprived groups.

However, economic changes under the open-door policy have generated tremendous welfare pressure on the Chinese government. Economically, China is no longer a planned economy but a mixed economy. The Chinese government has recognised the importance of free market forces to economic growth. The Economist (2004) rightly points out that ‘China's leaders still call themselves communists, but they have become capitalists in practice’. As a result of local and foreign investments, China's gross domestic product (GDP) increased by nearly seven times between 1983 and 2003, from US$227.4 billion to US$1,412.3 billion (World Bank Group, 2005). Its annual GDP growth rate was as high as 8.6% from 1993 to 2003 (World Bank Group, 2005). China has received the second largest amount of foreign direct investment after the USA, being the world's sixth largest economy. As Jiabao Wen, the Chinese prime minister, points out: ‘The Chinese people have, on the whole, begun to lead a life of moderate prosperity’ (People's Daily, 2004d).

In order to enhance the cost-effectiveness and efficiency of SOEs, a large number of surplus workers in the SOEs have been laid off. A total of 25.5 million workers were laid off from 1998 to 2001 (Xinhua News Agency, 2002). As a result of these economic changes, the previous ‘work unit’ welfare arrangement has been under severe attack. Laid-off workers from SOEs have lost welfare benefits previously provided by their employers.