‘Iron Rice Bowl’ returns in China

HONG KONG: A contentious new labour contract law in China, which will take effect from January 1, will introduce job security provisions and other employee-friendly measures, whose absence, until now, has driven the supernormal growth of the country’s low-wage manufacturing economy.

The law, which will apply equally to every domestic and foreign company doing business in China with even one employee, marks an ideological victory for the New Left hardliners within the Chinese Communist Party, who oppose the flexible “hire and fire” provisions that have created the world’s largest underpaid - and overexploited - working class.

The proposed measures have prompted concerns that China’s competitiveness, derived from labour-cost advantages in low-end manufacturing, could be undermined; they could even trigger a flight of manufacturing to other low-wage economies that don’t have labour law rigidities of the sort that China is now contemplating.

Apart from reinforcing existing laws that provide for minimum wages and stipulate 40-hour work weeks and holiday and overtime pay, the new labour contract law “does what earlier laws didn’t: it gives employees their own right of action to enforce the provision,” notes Steve Dickson of international law firm Harris & Moure.

“Secondly, it provides for an employment-for-life scenario when an employee has been in service for a certain period of time in a company.”

One of the most contentious provisions of the law is Article 14.

Under this, workers who have served 10 straight years or two consecutive fixed-term employment contracts with a company would automatically migrate to an “open-ended contract”. An open-ended contract would give employees greater job security since it would provide for employment-until-retirement and dismissal only with ‘just cause’ (such as breach of contract); it would also provide for a higher severance pay in the event of a layoff, even which would be enforced only in more restrictive circumstances.

In effect, according to Dickson, the new law “re-establishes the Iron Rice Bowl” - the extraordinary welfare benefits and employment for life that Chinese businesses extended to their employees until the 1990s.

Since then, however, as part of the reform of state-owned enterprises, workers have lost out on these welfare benefits - and even the cocoon of job security. With few labour laws in force and no social safety net, millions of Chinese workers lost their jobs as the Iron Rice Bowl shattered spectacularly.

The provisions of Article 14 have so unnerved companies operating in China that some of them are resorting to dubious means to sidestep it.

Earlier this month, Chinese telecom equipment supplier Huawei initiated a programme of “voluntary resignation” of 7,000 long-term workers - with plans to rehire them on fixed-term contracts.

But under pressure from key New Left supporters of the law, and China’s only official trade union, the All China Federation of Trade Unions (ACFTU), Huawei was forced to suspend it. 

Other provisions of the law, too, have companies running scared. For instance:

Under Article 10, every worker must be employed based on a written contract, and a handbook that specifies the terms of engagement; employees can claim double the wages for the period they work without a contract.

Employees’ service can be terminated only on “just cause” - such as breach of contract - and after observing the due process.

Downsizing in response to business downturns is permissible, but the procedure is made more complicated by new conditions and limits.

Employees can be put on probation period no more than once, and even then only for specified time-limits proportionate to the tenure of the underlying contract (Article 19).

Competition restriction clauses (or ‘non-compete clause’, as they’re called) can only be enforced on senior executives and other key personnel, but for no more than two years. Significantly, the employer must pay a portion of the employee’s salary for the entire period that the non-compete clause is in effect.

The draft of the legislation was first circulated for public comments over three years ago, and it met with stiff opposition from foreign chambers of commerce.

The US-China Business Council said elements of the draft were “burdensome,” “prohibitively expensive,” and would have
“an adverse impact on the productivity and economic viability of employers.”

The European Union Chamber of Commerce even warned that if the law was passed, its member-companies would “leave China”.

However, under pressure from “fair trade” lobbyists who were pushing for change in China’s “sweatshops”, it subsequently reversed that position.

In effect, as a study by labour think-tank Global Labour Strategies comments, the proposed new contract law starkly
shows up the conflict of interests among the various players in the China story.

China is now looking to establish some of the fundamentals needed to raise living standards - such as a fair wage. But ironically, it is precisely those provisions of the law that would “de-casualise” labour and restore the Iron Rice Bowl that have employers running scared.