An uncertain victory for China’s workers

Karen Lin, a senior fund manager at Paradigm Asset Management Co. in Taipei, predicts the law will add roughly 25 per cent to the cost of labour in China, which typically accounts for 10 per cent of total manufacturing costs. Companies that fail to adjust will start to feel major pressure on their profits within “five to six years,” Lin said.

“China’s biggest advantage in the manufacturing and processing trade is cheap labour,” admitted Chang Han-wen, director of the National Association of Taiwan Businessmen in Dongguan, an industrial hub in southern China. “But now that’s going to change. Hundreds of small and medium-sized Taiwan-invested firms in Pearl River Delta region will be affected.”

Chinese officials, meanwhile, contend that added costs to businesses will be minimal. During the recently completed 11th National Committee of the CPPCC, Zhang Mingqi, deputy president of the All-China Federation of Trade Unions, refuted claims that the law will add significant costs to business operations in China. He also warned that penalties could impose more costs than compliance.

The majority of criticism, from foreign and domestic companies alike, centers on the 10-year open-ended contract clause. Dubbed the "fire and hire" game, some employers rushed to terminate existing contracts and rehire staff on new contracts in order to restart their length of service before the January 1, 2008, deadline - an apparent effort to circumvent some of the law's key provisions.

In December 2007, Huawei Technologies Co., a telecommunication-equipment giant based in Shenzhen, reportedly offered a bonus to 7,000 employees with at least eight years of service to resign and reapply for their positions. Other companies followed suit, like French discount retailer Carrefour, which reportedly asked more than 40,000 employees across China to re-sign a two-year labour contract before the deadline, regardless of the length of the employees' service with the company. A Carrefour spokesman maintains that the move was simply to “bring the old contracts under compliance”.

In the long run, whether or not the law is successful in curbing worker abuse is another matter. Critics point out that the while the law will add much needed rights for workers, its goal of reducing worker-abuse cases might be difficult.

“The impact it will have on migrant workers’ working conditions will be limited,” says Lauffs. “Simply passing a new law will not guarantee that the local labour bureaus will become more active in enforcing employees’ rights or companies will be more accommodating in coming into compliance.”

A fundamental question is whether Chinese workers will actually make use of their newfound power. “I think many workers will be hesitant to use their full rights under the law” says Zhangjian, secretary at a small electronics manufacturing company in Beijing. “Bringing too much attention to yourself could cost you your job.”

The law is yet another example of how China walks a treacherous economic and political tightrope. While attempting to maintain their grip on power fueled by prosperity, the country’s leaders must create jobs and abuse-free working conditions. However, investors who create jobs and wealth will continue to hunt for cheap labour, either by finding loopholes or relocating factories to other countries.