New Labor Laws in China Could Hinder Investors' Profit Potential

By Irwin Greenstein

New labor laws in China have forced the manufacturing sector into an ever-tightening vice, giving investors further pause for any significant rebound in the world’s fastest growing economy.

In January 2008, Beijing introduced new workplace legislation called the Labor Contract Law. Its objective was to ensure job security by making cursory dismissals more difficult. The Labor Contract Law comes in on the heels of anti-discrimination labor laws instituted last year, which streamlined the process for workers to file grievances against their employers. As a result, labor disputes have surged by approximately 119% since last year as workers exercise their new rights.

While the global recession throws a monkey wrench into China’s manufacturing engine, the Labor Contract law could compound the crisis by making labor in China more expensive. In fact, there is evidence that factories are already moving to Cambodia, Vietnam and Bangladesh, which promote owner-friendly labor laws.

If in fact this migration turns into a stampede, China’s entire economy could suffer longer term damage than anticipated.

The higher salaries kicked in at a time when China’s manufacturing sector contracted for the fifth consecutive month in December, according to the CLSA China Purchasing Managers Index. In the first 10 months of 2008, 15,661 enterprises in Guangdong, the manufacturing-heavy southern province, shut down. China’s manufacturing shrank for a third month in December as export demand fell, suggesting a long-drawn-out economic slump.

Manufacturing comprises about 40% of China’s economic output. It comes as no surprise, therefore, that the World Bank forecast in November of last year China’s economic growth may slow down to 7.5% in 2009, the lowest since 1990.

While many of the closures are certainly tied to lower exports, factory owners are simply padlocking their doors rather than conforming to the more restrictive and expensive labor laws – often absconding with the employees’ back pay.

The labor laws also sanction the once-unthinkable notion of labor unions in China. All employees are now eligible to join the China Federation of Trade Unions [ACFTU], which is controlled by the Communist Party and has around 170 million members. The ACFTU is legally entitled to negotiate salaries, working hours, holidays, and benefits (although they are now allowed to strike). By the end of 2006, about 50,000 foreign companies in China entered into collective contracts and the ACFTU has said its goal is to unionize nearly all foreign companies in the coming years.

While unionization and labor laws are long overdue for workers, they also create a new investment climate in China that could reduce windfall profits across the entire economy.

Comments

[Dan Harris:]

This article is about six months late and a dollar short. It's like a blast from the past, so much has changed of late.

Yes, some companies left China due to increased labor rates, but almost all of those companies were manufacturers of very low quality items like socks, and rubber duckies. Most of these companies were Chinese, HK or Taiwan owned. Very very few Western companies left for lower wages elsewhere. This article is also late because wages in China are now on a downslide and the government has been spreading the word that enforcement of its new labor laws will be less than rigorous, so long as companies retain their employees.

Jan 20 01:48 PM

[huangthomas:]

The intent of the labor contract law is noble and the Chinese workers deserve it after 30 years of backbreaking labor. It is intended to shift from labor intensive industries to high value added, technology and knowledge-based industries. The Pearl River delta is designated region for this shift and the labor contract law is more strictly enforced. In other areas, the law is more loosely applied especially when unemployment become a more serious problem.

Jan 20 06:13 PM