Publications

Introduction

China’s economy continued to boom over 2007. Its real GDP has doubled since 1998, and shows no signs of slowing down: it grew by a minimum 10% annually since 2003, and by 11.5% in 2007 (according to International Monetary Fund predictions). Foreign-invested enterprises (FIEs) are closely involved in this growth, with $83 billion in foreign direct investment entering China in 2007 alone.

Although China is a huge country, and millions of new college graduates come on the job market every year, very few of these graduates are suited for work at FIEs. As a result, candidates with prior experience at FIEs or with good English skills are in high demand and short supply. For example, in 2002, an accounting associate from a top Chinese university who had ten years’ FIE experience in China and spoke good English might have made around $15,000 per year. Today, an equivalent candidate would require at least $40,000.

HR managers dealing with China must keep current with a string of new laws and regulations, as the Chinese government tries to enhance workers’ rights. This article discusses new legal and business developments over the course of 2007 that are relevant for HR professionals.

New laws and regulations

The most ground-altering HR law to be released in 2007 was the Labor Contract Law, which became effective on January 1, 2008. This is a mostly pro-worker law, although it will probably affect blue-collar employees more than white-collar. One of its goals is to extend employment contracts to all Chinese employees. This requirement has not been widely enforced in the past. Also, the new law makes it somewhat more difficult to terminate an employment contract, and decrees that a short-term employee may only be renewed twice before being given a permanent contract.

Many labor laws on the books in China are left unenforced. However, the national government has recently put more emphasis on narrowing the rich-poor divide. As part of this, it seems to be seriously trying to enhance the position of employees, especially in the countryside where wages are significantly lower than in major cities. The Labor Contract Law’s true effects will not be clear until businesses have had some experience with its implementation. PBI’s upcoming March webcast, China Labor Contract Law Update, will discuss its provisions and implications in greater detail.

The Labor Disputes Arbitration Law will go into effect on May 1st, 2008. This makes a number of edits to the existing labor arbitration system, mostly in employees’ favor. In particular, it gives employees the right to bring their dispute to court if arbitration gave an “unjust” result, or if its decision was not carried out. Previously, they could move the case to court only if arbitration failed.

The China Employment Promotion Law, which went into effect on January 1st, 2008, is chiefly concerned with prohibiting discrimination in hiring and employment. It specifies ethnicity, race, gender, disability, religion, and migrant worker status as illegal reasons to discriminate. Most of these prohibitions already existed in a 1994 law which has not been enforced. The new law is notable for giving victims the right to file suit for discrimination, which had not existed before.

Also related to protecting minorities, the Rules on Employment of People with Disabilities came into effect on August 1st, 2007. Unlike the Americans with Disabilities Act (ADA), which protects the disabled against employment discrimination, this law actually requires employers to hire at least 1.5% disabled persons onto their staff. However, there is an alternative of contributing to a government fund for the disabled. Even if the law is enforced, which it may not be, most companies will probably choose to make the fund contributions.

Finally, the government has instituted a set of incentives for Chinese who have spent time working or studying abroad to return to China. This includes the privilege of living anywhere in the country, preference for their family members in some schools and jobs (in state-owned enterprises), and streamlining a number of administrative procedures related to taxation, financing, and employment. Many of these incentives have already been implemented by local governments, which are eager for returnees due to their suitability as FIE talent, or as an upgrade to state-owned enterprises’ workforces.

Government actions

Many foreign companies entering China have found it freewheeling in terms of regulations. Local governments did not widely enforce various laws, since the foreign companies were helping their economies. Some companies did not even bother with corporate registration. This has changed: labor laws on the books should be carefully followed to avoid government enforcement.

In Beijing, there has been a crackdown on expatriates working without proper documentation, such as staying in the country on tourist visas. Apartments as well as workplaces have been visited by police to check employees’ legal status. This is also related to the upcoming 2008 Olympics, but may spread to other cities. Employers of expatriates should verify their immigration status and keep detailed records on file.

Finally, the government has also been enforcing collection of pension and unemployment insurance premiums more rigorously. A great deal of emphasis is being put on pension plans, since China will have to deal with a large elderly population within as little as twenty years. Monthly pension premiums are 8% of each employee’s salary contributed by the employee, and at least 10% (varying by city) contributed by the employer. Monthly unemployment insurance premiums are 1% of salary from the employee and 2% from the employer.

Union activity

In mid-2006, the All-China Federation of Trade Unions (ACFTU) announced it planned to unionize a large number of FIE workplaces. The world realized it was serious in August 2006, when Wal-Mart allowed its first-ever union to be formed in some of its Chinese locations. The ACFTU continued this drive over 2007, and now expects to have 65% of FIEs unionized by autumn of 2008. A voluntary-membership union must be formed by law if 25 workers sign a request for it.

It should be noted that unionization under the ACFTU does not imply a dissatisfied or activist workforce. The ACFTU is an arm of the government, and its officials emphasize labor harmony. On the other hand, the ACFTU has begun to flex its muscles in small ways. In late 2007, the official Wal-Mart union in Shenyang, Liaoning province, negotiated one day off per week (for those working seven days per week) as well as an end to probationary contracts.

Strikes and other labor actions are increasing in China, but virtually never under the leadership of ACFTU affiliated unions. They usually arise independently, as low-paid factory workers protest late pay, lack of raises, safety problems, etc. It is difficult to estimate their number, but one labor activist has said that at least one strike involving at least 1,000 workers happens per week in the Pearl River Delta region (around Shenzhen and Guangzhou). However, this is more common among Chinese-owned factories than among Western-owned ones, which generally have better pay and labor standards.

Compensation practices

In retaining key employees, stock options have become much more common over the last year. The Shanghai Stock Exchange more than quadrupled in value over 2006 and 2007, and this general rise made Chinese much more interested in the stock market. In addition, regulations on employee stock options were significantly loosened at the end of 2006. As a result, equity incentive plans are being introduced in many private and even state-owned companies. In the future, they may become a standard part of compensation packages, especially for retention purposes.

Business education and training

As mentioned earlier, Chinese colleges do not usually train their students to the standards needed by Western employees. This is partly because of a heavy focus on memorization and rote learning over creative thinking in its education system. Many Chinese institutions have recently started Western-style business schools to try to overcome this gap.

However, these schools’ performance has not been impressive so far. According to a survey by MeritTrac, under 20% of Chinese MBAs are qualified to work for top domestic companies, and even fewer for FIEs. An exception is the small number of programs which have set up joint ventures with foreign business schools. For example, the Tsinghua International MBA program was created in partnership with MIT Sloan. However, graduates of these programs tend to be in high demand, similar to regular graduates from Tsinghua and Peking University. The day when international-grade business education is broadly available to local Chinese is still far off.

Conclusion

Finding and keeping top talent in China is a constant struggle, where there are no perfect answers. Western companies entering China or expanding their operations in China should not assume that in the booming economy, they are bound to succeed. Poor staffing or management can easily lead to reduced earnings or unsuccessful ventures in China. HR managers need to keep current with employees’ compensation and benefit expectations, government regulations and enforcement, and appropriate sources for candidates, as the China landscape changes rapidly.

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