Chinese Employees and the Olympic Delusional Syndrome

Includes: CAF, FXI, GXC, PGJ
by: Brian Schwarz

Similar to many other parts of the world, the labor market in China is ice cold with many companies laying off staff or implementing hiring freezes. But don't tell that to university graduates in China. A new study by Shanghai's prestigious Fudan University finds that graduates in Shanghai still expect high salaries, and want the security and guaranteed income that comes from working for government agencies. As Frank Mulligan writes at the Talent in China blog, many are experiencing a bad case of Beijing Olympic Delusional Syndrome.

The symptoms are an irrational belief in the ability of China, and the Chinese government, to weather the economic storms that are buffeting the world economy, and ultimately come up smelling of roses. Chinese exceptionalism, if you like.Twenty years of solid economic growth, or 10 years of continuous employment for every professional that you know, will do that to you. Success breeds complacency. It should come with a government warning that says it 'may cause blindness'.

Mulligan writes graduate employment is a huge issue for the government because there are tens of millions of new graduates coming on-stream in China, and they are capable, vocal, and bored.The challenge that many companies in China have right now is that they must maintain their skills base for when orders start to come in again. They will do whatever is necessary to keep capable employees on board, and this is the feedback I get from the majority of General Managers in China. Staff reductions might keep the business profitable for the current quarter but the long-term effect might be to set the seeds for destruction later in the year.

The internal momentum is definitely in favor of higher salaries, simply because staff will expect to see increases that are in line with previous years (9%). . . . . The hard part is explaining to staff why you are only offering a salary increase of 4% or even 0% this year. Many will never have seen this low an increase before, and in a bizarre way some will regard 8-9% as a kind of 'right'.

Higher salary expectations are not the only concern HR managers based in China are worried about. As I noted in my Seeking Alpha article last week, managing a business in China is becoming increasingly difficult because of the global economic downturn and a new labor law that has made it more costly for employers to hire and fire workers.

In a January 16 story entitled "Factory Closures Strain China's Labor Law," the Wall Street Journal reports Chinese labor activists say officials are turning a blind eye to the new requirements. While local governments deny they are becoming lax, complaints against employers mount as many are simply shuttering their factories.

"The enforcement of the Labor Contract Law is facing new problems," Hua Jianmin, chairman of the National People's Congress Standing Committee, China's top legislative body, said last month at a meeting on the law. One problem is that China's manufacturing sector contracted for the fifth consecutive month in December, according to the CLSA China Purchasing Managers Index. "Pressures from the labor law may encourage factories to close rather than pay what they owe to workers under the law," says Liu Kaiming, executive direct at the Institute of Contemporary Observation, a Shenzhen-based labor group.

Dan Harris, partner at the Seattle-based Harris & Moure law firm, has repeatedly warned businesses in China to resist the temptation of turning a blind eye. At his always insightful China Law Blog, Harris makes two key points: Our advice is to continue following the laws to the letter and we base this largely on two things. One, just because one government official says one particular government entity is going to be lax on enforcing the labor laws does not mean much. This one government official may believe in lax enforcement, but that does not mean all of his cohorts do. Also, it does not mean Beijing does either.

Two, one of the biggest risks of not following China's labor contract law is a private lawsuit by a disgruntled present or former employee. A local government may be able to bring about a decline in private lawsuits and more favorable rulings from the administrative bodies or courts that rule on such lawsuits, but I do not believe such lawsuits will be extinguished completely and I also think foreign companies will continue to fare rather poorly in such lawsuits. Down economy or not, a Chinese worker suing a foreign company will always go in with an advantage.

Disclosure: None