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Cablegate: Labor Contract Law Slows Hiring and Investment in China's

VZCZCXRO9997
PP RUEHCN RUEHGH RUEHVC
DE RUEHSH #0169/01 3310508
ZNR UUUUU ZZH
P 260508Z NOV 08
FM AMCONSUL SHENYANG
TO RUEHC/SECSTATE WASHDC PRIORITY 8560
RUEHOO/CHINA POSTS COLLECTIVE

UNCLAS SECTION 01 OF 02 SHENYANG 000169

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EINV EFIN ELAB PGOV PREL HK CH
SUBJECT: Labor Contract Law Slows Hiring and Investment in China's
Northeast

1. (SBU) Summary: China's Labor Contract Law has had an uneven
impact on major foreign and domestic businesses in Northeast China.
While many of the results are seen as beneficial to labor, the law
has had some unintended consequences detrimental to workers
interests. Both companies and their employees complain that the
labor unions collect money but provide no service to either the
workers or the company. Fixed requirements for training and
contract length make it cost-prohibitive to hire temporary workers
for peak seasonal production, reducing the number of jobs available.
Meanwhile, newly implemented rules for worker seniority and
pensions when companies are sold to new owners have investment
bankers who were previously very keen on purchasing State Owned
Enterprises (SOEs) proceeding with great caution. Bankers fear
there will be no way to streamline the companies without excessive
payouts. Bankers also expressed concern about unfunded pension
liabilities. However, most companies see the labor law as having a
minor impact compared to market forces that are driving up costs.
End summary.

2. U) To measure the effect of China's new Labor Contract Law, we
recently polled key U.S.-invested and firms and other contacts in
Dalian and Shenyang. Opinions are generally negative but suggest
the law will have less impact than the current financial crisis,
though that crisis seems to be having fewer negative effects here
than in other parts of the country.

3. (SBU) Cargill Corporation's Fushun plant manager explained that
the new labor law has added some cost but that the impact on the
bottom line would be minimal. The greater impact is the limited
flexibility the company has in hiring temporary workers. The
complex system of rules forces companies to make workers permanent
quickly, and it it is more difficult to get rid of poor performers.
The manager said these problems are much greater than the cost of
paying for the "five insurances and one allowance."(Retirement
insurance, health insurance, unemployment insurance, injury
insurance, maternity insurance, and housing allowance.)

4. (SBU) According to Cargill officials, Fushun is assiduously
trying to ensure that both employers and employees understand the
new law and the implementing regulations. Fushun Municipal Labor
and Social Security Bureau officials conducted training seminars for
employers in the area to clear up any confusion. The Cargill
employees are also gathering to study the new rule to make sure they
receive all the benefits they deserve.

5. (SBU) HR managers at Tyco's plant in Shenyang said that while
the law posed no major problems, the rule requiring equal pay for
equal work was being arbitrarily applied, making it impossible to
reward longevity with increased wages. Local Labor Bureau officials
interpret the rule to mean absolute equality, so a brand new mold
operator must make the same as one with ten years of longevity.
Tyco officials say this will hurt the workers more than the company,
as the company will simply stop using longevity increases. The HR
managers expect other companies throughout Liaoning Province will do
the same.

6. (SBU) Both employers and employees complained that the two
percent of payroll sent annually to the labor union was simply a
waste of money. They explained that payments are made to the
Shenyang Local Taxation Bureau which then transfers forty percent of
the funds to the appropriate city district labor union. The
remaining sixty percent of the labor union fees are kept by the
Taxation Bureau to cover its collection costs. According to plant
workers, they receive no benefit. Workers explained that the union
has no organized activities, no worker welfare programs, and does
not participate in contract negotiations.

7. (SBU) Goodyear, like Cargill, complained of great problems in
hiring temporary workers. HR managers said that the new law would
be fine in a mature labor environment where workers come to a
company already trained in the basics of a job, either through high
school, vocational training or college. But in China the labor
supply is generally untrained, lacking in even the fundamental
aspects of the job. If Goodyear invests in substantial training for
workers, it risks not only the training funds, but also substantial
severance benefits in the event of termination. Goodyear managers
said that the new rules were unlikely to impact profitability but
could limit expansion and will definitely limit new job
opportunities.

8. (SBU) Epoch Corporation, a small American firm which
manufactures security devices in Dalian, believes the new labor law
is a relatively minor factor in rising costs. According to Epoch,
increased competition for skilled workers is a much greater factor.
Other costs, such as taxes and regulatory fees, Epoch explained,
were also escalating rapidly. Epoch is considering the possibility
of relocating because of the general cost increases in China, and
not due to the labor law.

9. (SBU) SOEs also feel the impact of the new labor law. Since
their labor pools have been with the companies much longer,

SHENYANG 00000169 002 OF 002


Liaoning's steel producers, for example, face huge unfunded pension
liabilities. SOEs seeking buyers to privatize their operations
confront an even greater problem. Prior to the new law, all of the
workers were fired when a company was sold. The new owner then
hired them back, free from the previous owner's liabilities.
However, under the new law, the workers are hired back at the same
seniority and benefit level they had with the previous owner. While
salaries and general insurance are not major issues, virtually all
SOEs in the region have large unfunded pension insurance
obligations. This has prompted investment bankers to rethink their
positions. One firm, which invested USD 500 million in Liaoning
SOEs in 2007, has yet to spend a penny in 2008. According to the
company chairman, the SOEs are much too great a risk under the new
law. The contract provisions make it much too difficult to cut
staff in companies that, according to her, are among the most
bloated in the world. When the unfunded pension factor is added in,
she said, investing in large SOEs is just not a smart move. She
reported that her principals, who have invested primarily in heavy
industries in China and had planned to continue to do so, are now
focusing their search on plants in Eastern Europe.

10. (SBU) While several companies and investors highlight the
adverse effects from the new labor law, virtually all except the
investment bankers believe the impact of the law on their bottom
lines will be minimal. General Electric and ITT Flygt said that
initial compliance and documentation issues would consume some
resources initially but, in the long run, the costs would not differ
greatly from the current level. Both companies indicated that in
most areas they already provide benefits and protections to their
employees that meet or exceed the requirements of the new law. Both
companies said the only long term cost involved is the payment to
the labor union, and both said the amount, as long as it remained at
current levels, was manageable.

11. (SBU) There has been no major wave of factory closings in the
Northeast following adoption of the new labor law, although several
small South Korean garment plants in coastal Liaoning Province
closed without notice, leaving workers unpaid and unemployed.
According to sources in the Korean Consulate, the local government
provided compensation to the workers and requested assistance from
the Korean Consulate to hold the factory accountable. Korean
sources told Econoff that the twenty-percent slide in the value of
the Korean Won compared to the Chinese Yuan is really driving the
retreat of small scale Korean manufacturers; the labor law just
happened to be put into effect at the same time.

WICKMAN

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