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Impact of Globalisation and FDI on Chinese Labour Law

Impact of Globalisation and FDI on Chinese Labour Law

The Impact of Globalisation and Foreign Direct Investment on Chinese Labour Law and Policy



There I was, situated in Shanghai as part of a new student program with the University of Sydney. I drew back the curtains of my hotel suite on the thirtieth floor and beheld the Shanghai skyline. I had been told that not a single building was more than ten years old and I believed it. Before me stood a futuristic New York with sturdy glass skyscrapers towering above the masses as they went about their day on rudimentary cycles. I felt Caucasian and large in a world of physically short men and women whose world was running away from all that they had been and understood. I almost felt as though I were more at home in this strange, capital leviathan of structures, fitting precariously at the doorstep of wealth and clutching like a lost child to the parent sleeve of communism.

Over the next four weeks I would study the impact of globalisation on China’s economical, political and social traditions. I was to tear away at the old fabric of a people’s country and in my own way seemingly justify intellectual property, uneven distributions of wealth and a drive for profits in this world that was steadily before my eyes, turning from red to green. Those students who had come before me had ignored the sheer impact of such factors on this socialist world. They focused merely on the steps that would need to be taken to eradicate bad habits that were hostile to Foreign Direct Investment. Yet the irony was that each and every one of us would venture into the markets and pick up accurate knock-offs of Prada and Hugo Boss for a fraction of their genuine retail value. I did however choose to focus on the people that remained behind the curtain of global market triumph. These were men and women whose lives were left uncertain in a country now becoming more and more devoid of lifetime guaranteed jobs. I wondered at their predicament, I focused on thinking of the changes to their lives and hoped that they would understand that it was all for the best.

Nicola L Tysoe


The clear combination of Foreign Direct Investment (FDI) welcoming policies and a relatively low cost economy spells a formula which, with the addition of cheap labour will become an area that foreign investors are only too happy to target by means of outsourcing the bulk of their services to the People’s Republic of China (PRC). China is rapidly growing in strength into a super power of the future and it becomes necessary to take a good look at the anatomy of this prosperous period of growth.

This paper will begin in Chapter one by focusing on the substantive legal reforms that have been brought on by China’s bid for a more FDI welcoming environment. This will begin by giving an historical account of the social factors that encouraged reform Chapter two will then provide substantive analysis of the Chinese Labour Law of 1994, the Trade Union Law of 2001, Occupational Health and Safety and social security.

In theory, and in a perfect world, the rapid race to FDI impacts on the economy of the target State in much the same manner as the Marshall plan that brightened the horizon for West Germany after the Second World War. Analysts would be forgiven for assuming that it is only a matter of time before the standard of living and sophistication of infrastructure of China begins to reach levels that are on a par with Western markets. This does after all go hand in hand with development in many infrastructures such as pensions and insurance, banking, intellectual property enforcement, taxation and corporate governance. It is also assumed that the process of acceleration will become exponential due to China’s recent accession to the WTO.

In March of 2003, three major institutions came together to convene the International Conference on the Labour Reform: Employment, Workers’ Rights and Labour Law in China. These were; the International Institute’s Advanced Study Centre (ASC), the Institute of Labour and Industrial Relations and the Centre for Chinese Studies. In addition delegates from the World Bank, Amnesty International and University of Michigan faculty members and event co-sponsors[1].

The central point of discussion for this two-day conference was to discuss changes to the labour market of China as a result of over twenty years of rapid economic reform. Interestingly, this conference went beyond the mere analysis of new laws and looked more closely into the socially impacting factors of implementation in order to illustrate the true reality for workers in post economic reform China.

This conference illustrated the clear need for a social analysis of labour in addition to the more procedural concepts of law reform and economic policy changes. Chapter three will therefore provide the contrasting reality for workers and give an account of China’s weak implementation policies as well as the emergence of inequality of worker treatment due to geography, gender and, surprisingly, the corporate entity of the employer.

Finally, no social, financial and economic analysis of labour in post economic reform China would be complete without also analysing the issue of China as a global influence that may be set to create an international benchmark for attracting FDI. Chapter three will explore this point with reference to the existing impact of China on the global investment scene. The question asked will be whether the international community has cause for concern given China’s poor implementation strategy against promising legal harmonisation such as recent accession to the WTO. This will raise the worrying issue of risking a trend within workers rights that will witness a ‘race to the bottom’.

Chapter One: Analysis – Social-Economic reform in China

AHistorical Changes to Labour

The political reason for economic reform in China was derived from unrest between 1966 and 1976[2] in which there had been a loss of confidence in the communist regime. By instigating reforms towards the creation of an open market, the Government hoped to establish popularity in an ever more dissatisfied population[3].

In addition to politics, China instigated reforms as a result of practical necessity and clearly prioritised economic welfare over purely communist ideals. This revolutionary compromise saved the regime and is exclusively responsible for China’s preservation of communism to this day[4].

China initially instigated its experiment with private ownership in 1978 but prior to this time annual growth rates in industrial production were measured at an average of 9.59 percent between 1952 and 1978[5]. In addition, industrial capital assets increased by an average of 11.08 percent and this contrasted with employment growth of a mere 5.98 percent per annum[6] and a wage rate increase of a mere 0.1 percent!

The increased labour was resourced from rural regions as prospects in these areas diminished and young people undertook economic migration in search of better wage rates in China’s urban centres. This displacement of the population placed pressure on the maintenance of food supplies into the cities and called upon increased spending on housing and public services. The resulting reduction in rural labour resources also resulted in a decrease in agricultural output thereby increasing food costs across the country.

The response from the Chinese government was to prioritise on the development of industries that yielded the highest revenue and these were centred in the urban districts[7]. Unfortunately this resulted in a destabilization of equilibrium of employment availability between the urban and rural regions thereby resulting in increased unemployment in the latter by the late 1970s. The result was an increased migration of rural populations seeking work and numbered a staggering, albeit modest estimate of 5 to 6 million Chinese between the years of 1978 and 1980[8].

The Government was effectively faced with a crisis as the traditional communist solution to simply create jobs within state owned sectors proved to be wholly unrealistic given the scale of the problem.

Clearly relaxation of FDI restrictions, coupled with the attractive incentive of low cost labour would open the door to investment from the West. It was also conceded by the Chinese Government that this economic reform would create widespread modernisation of existing infrastructures and provide a breeding ground for technological advancement, as well as facilitate greater responses to consumer demands[9].

The Chinese Government regarded the allowance for economic growth within a private sector to tackle the problem of unemployment and treated the venture as an experiment. However these areas of private growth had originally formed part of the old communist infrastructure and this alleviated the brunt of political connotation for creation of a thriving private sector within a socialist regime.

As is typical for developing States, China utilised the system of allocating Special Economic Zones (SEZs) for the purpose of concentrating FDI into specific geographic locations. Allocation of the location of these zones began in the early 1980s and there are now five SEZs in the provinces of Guangdong, Fujian, Hainan Hunchun and Pudong (Shanghai).

To this day these zones provide huge tax incentives in the early days of development and can typically entail tax exemption during the first years of business until profits are declared[10]. Thereafter a ‘Tax Clock’ is counted whereby corporations tax would fall payable after the second year of profitable business[11]. Tax is then chargeable at a discount until the end of year five[12].

This method does however create vast inequalities of economic wealth between SEZ and non SEZ regions. This will be discussed further in chapter insert.

B.Direct Implications for Labour

1986 saw China make the bold step of awarding further preferential treatment to businesses within the SEZs that had been established with overseas capital. Under new regulations these firms were permitted to independently determine the size of their own workforce and were given carte blanche discretion on setting wages.

In addition, the Government acknowledged the need for entrepreneurs and hence, increased freedoms for domestic companies. Earlier in 1978 China had therefore given leave for small, privately run businesses to be given permission to exist and grow. In 1981 the State Council set up regulations governing the business ventures of entrepreneurs. By 1988 large domestic companies had been awarded the same workforce level control and profit distribution freedoms as FDI funded companies[13].

Chapter Two: Understanding Labour Law in Post Reform China

AUnderstanding Chinese Labour Market Structure

In order to fully appreciate the effects labour reforms that were brought on by FDI and globalisation it is essential to fully understand the current labour market structure. There are now four types of in addition to privately owned companies and urban collectives. Firstly there are State owned enterprises which, while resembling a capitalist entity by being profit-driven, remains under the control of the People’s Republic of China (PRC)[14]. These enterprises form the historic legacy of the pre-reform days of centralised State planning. This type of entity is used for the implementation of public policy ventures. However, since these reforms have taken hold, there has been a need for wages to be competitively set in accordance with market trends thereby facilitating external, capitalist behaviour when dealing with human resources.

Secondly township and village enterprises (TVEs) consist of groups of firms that are inextricably and contractually linked to the local governments of a township or village[15]. These types of business entity are restricted to the employment of local people and must adhere to stricter budget constraints than their state owned enterprise counterparts. Township and Village Enterprises are clearly also connected to local markets such as fishing and agriculture and are not subject to state planning policies for the implementation of public sector ventures.

Thirdly Joint Ventures (JVs) are largely located in the five SEZs of the PRC where one party to the venture is a foreign investor. Where however domestic enterprises engage in a similar agreement, no such geographic restriction applies and as a result JVs tend to be scattered around the whole of the PRC. JVs enjoy the contractual freedom of being able ensure that they may hire and fire whomsoever they please within their constituent workforces and are therefore awarded far more flexibility than their state owned enterprise counterparts.

Lastly, foreign owned firms are similar in this respect but they of course obtain far more advantageous tax advantages than any of the other three types of entity. This therefore means that of all the types of corporate forms, the foreign owned firm is by far the least restrained[16].

This description of the status of the various separate entities throughout the PRC is, as stated above, essential for a full understanding of the labour law reforms. Part B will now explain reform in relation to the Labour Law of 1994. Part C will do the same for the Trade Union law of 2001 and Parts C and D will explain current Chinese policies on Occupational Health and Safety and social security respectively.

BThe Labour Law of 1994[17]

The Labour law of China was passed by the Standing Committee of the National People’s Congress in 1994 and became effective on 1 January 1995 and was in fact the first substantive legal source for labour relations in the history of the PRC.

The statute consists of a series of principles that are derived from China’s administrative regulations and, as will be seen, represents a clear desire of the PRC Government to create a system of labour and industrial relations that is far more in keeping with the international community’s standards.

Interestingly, there exists a clear attempt to combine the two concepts of traditional command economy with the Western market economy ethos. This balancing act may seem to be a conceptually awkward marriage.

  1. Scope of the Law

Article 4 of the Labour Law firmly states:

The employing units shall establish and perfect rules and regulations in accordance with the law so as to ensure that labourers enjoy the right to work and fulfil labour obligations.”

The Labour Law of 1994 is applicable to all business entities, whether nationally or internationally owned and governs employment across the skills spectrum. The clear aim to remove distinctions in labour rights between the various skills types and corporate entities is a positive effort to create one high standard of rights for workers in China.

A further aspect of the Labour Law is contract employment is given a great deal of attention within Chapter 3 of the Law whereby it has become necessary for all employment to be protected in accordance with a contract. Article 16 states:

A labour contract is the agreement reached between a labourer and an employing unit for the establishment of the labour relationship and the definition of the rights, interests and obligations of each party.

A labour contract shall be concluded where a labour relationship is to be established.

Prior to the economic reforms that were brought on by unrest and global pressure, the PRC Government was solely responsible for the allocation of labour. Instead, the Labour law follows 1986 regulations[18] whereby the standard contract of employment is described.

By 1995, the Ministry of Labour had stated that this contract employment system was already in operation among some 85% of the state workforce[19].

A further internationally respected issue of the Labour law is direct address to anti-discrimination. Article 12 states:

Labourers shall not be discriminated against in employment, regardless of their ethnic community, race, sex, or religious belief.”

This is followed by Article 13 which provides that:

“Females shall enjoy equal rights as males in employment. It shall not be allowed, in the recruitment of staff and workers, to use sex as a pretext for excluding females form employment or to raise recruitment standards for the females, except for the types of work or posts that are not suitable for females as stipulated by the State.”

The issue of gender equality does in reality reflect the PRC’s existing policies of equality that are not unusual for a communist state. In addition to the Labour Law, the PRC also produced the Law on the Protection of Women’s Rights and Interests in 1992[20] and is in keeping with the international campaign of the United Nations Development Fund for Women[21] .

The law also consists of mandatory periods of rest, restrictions to overtime and overtime pay. In relation to factories that are set up within the Special Economic Zones (SEZs) it is surprising to note that these mostly foreign owned companies are the worst culprits for worker exploitation. The reason for this is that the bulk of those employed are from the rural areas and tend to be on a temporary basis, which is associated with the fluctuating demands for labour in privately owned firms. This is by contrast to the state owned businesses that promote longevity of working contract as a legacy of the communist era. The Labour Law stipulates in Article 36 that workers are to be engaged for no more than 8 hours per day and that the working week is no to exceed 44 hours. In addition, Article 38 calls for the right to have at least one day off per week. It is also interesting to learn that only three months after the coming into effect of the Labour Law, one State Council reduced the minimum standards of working hours within the Labour Law to a maximum of 8 hours per day for five days per week.

The Labour Law also provides for criteria for the calculation of a minimum wage within Article 48, which specifies that:

The determination and readjustment of the standards on minimum wages shall be made with reference to the following factors in a comprehensive manner:

  1. the lowest living expenses of labourers themselves and the average family members they support;
  2. (2) the average wage level of the society as a whole;

(3) labour productivity;

  1. the situation of employment; and
  2. the different levels of economic development between regions.”

As stipulated above, Article 48 also provides for the reporting of wages to the State Council which means that the Central Government has the power to supervise wages across the nation. This is only a slightly more invasive policy than that of Western Civilisations that specify a minimum wage but is arguably superior given that the wording of Article 48 provides for relative considerations such as geographic cost of living and worker commitments in order to determine wage levels. This therefore means that deemed income that is sufficient for comfortable living is more realistically achievable for Chinese workers than many low income earners in the West. This also provides for the availability of a large amount of data concerning minimum wage levels across the PRC and there is a sizeable difference between the South Coast SEZ provinces by comparison to the Northern regions. This will be discussed further in Chapter 2.

  1. A new kind of relationship between the worker and the state

The Labour Law has cleverly converted administrative sanctions into liability for breach of contract, thereby maintaining a sense of obligation for workers without the stigmatising concept of the over-lord State. An example of this can be seen in Article 25 which stipulates situations that would permit the revocation of the contract of employment:

The employing unit may revoke the labour contract with a labourer in any of the following circumstances:

  1. to be proved not up to the requirements for recruitment during the probation period;
  2. to seriously violate labour disciplines or the rules and regulations of the employing units;
  3. to cause great losses to the employing unit due to serious dereliction of duty or engagement in malpractice for selfish ends; and
  4. to be investigated for criminal responsibilities in accordance with the law.

Another example is the right to sue workers for damages in the event that they walk away from the job[22].

As regards the obligations and duties of the employer to the employees, the Labour Law deals with Legal Responsibility[23] of the employer exclusively in such areas as excessive overtime and breaches of occupational safety but these will be dealt with further in part D.

This incentive of shifting the premise for disciplinary violation as a contractual breach is also in keeping with the PRC’s efforts to award legal personality to businesses, regardless of whether they are state or privately owned. Indeed, as far as state enterprises are concerned, there will be a marked change in its relationship towards its workers and the contractual format of establishing such a relationship will be the basis for this change.

In addition it is clear that the Chinese Labour Law was written to combat the inevitable onslaught of problems of abuse of uneven bargain positions that are common in the West. Indeed, with the introduction of a market dependent labour force it is clear that Western style abuses would arise and that therefore, workers would require to be entitled to the internationally recognised right to privately instigate litigation.

This does however contrast with continued State control over the process of employment termination and this reflects the ongoing strength of pre-reform ethics concerning security of employment. This therefore means that lay-offs are statutorily regulated, as is illustrated in Article 27 which stipulates a requirement to consult trade unions:

During the period of statutory consolidation when the employing unit comes to the brink of bankruptcy or runs deep into difficulties in production and management, and if reduction of its personnel becomes really necessary, the unit may make such reduction after it has explained the situation to the trade union or all of its staff and workers 30 days in advance, solicited opinions from them and reported to the labour administrative department.”

The result of this law is that termination for employment as a means of increasing productivity is prohibited. The main reason for this is that communist manufacturing infrastructures create more than a mere job for labourers but also provide workers with an array of fringe benefits that overshadow those of Western counterparts. These benefits traditionally include housing and free medical care with the result that a loss of work often means a loss of home and health!

Layoffs therefore carry serious implications for political upheaval and are to be avoided at all costs and an employment culture of relocation, retraining and early retirement is unlikely to arise in the foreseeable future[24]. This does contrast with pressures from both the World Bank and the World Trade Organisation of which China has now been a member since 11 December 2002[25] but in general it would be prudent for these global organisations to be sensitive to the impact of economic restructuring on a workforce that is dependent on the full-life-package derived through their employers.

It does seem that the influence of FDI into China has led to reforms that result in the workforce becoming a mere producer of manufactured goods as opposed to a fully rounded human being with social needs.

C.The revised Trade Union Laws of 2001[26]

Following the economic reforms that have caused China to become globally open to FDI, the resulting reforms of labour laws and trends in labour activity have resulted in a new role for trade unions as safeguards of worker’s interests during the difficult period of reform that would give rise to dissatisfaction from the workforce. This is stipulated in the November 2001 report of the International Confederation of Trade Unions[27].

Interestingly this report regards the revised Trade Union laws of 2001 as representing only a minimal departure from the 1992 version. This earlier version had been heavily criticised by the International Labour Organisation’s Committee on Freedom of Association which condemned the 1992 law as a:

“serious constraint on the rights of unions to establish their own constitutions, organize their activities and formulate programs.[28]

However, the following substantive analysis will reveal that Trade Unions have been awarded substantial powers in their role as organisations that are established to represent the welfare of the labour force but also maintain a central system of regulating these Trade Unions.

As stated above, the original 1992 Trade Union Law was revised in 2001 in order to create a more comprehensive response to the continuing market foundation of the Chinese economy[29]. The role of the Trade Union is defined in the basic functions under Articles 2 and 6 of the Trade Union Law of 2002.

Article 2 states that:

Trade unions are mass organizations of the working class formed by the workers and staff members on a voluntary basis.

The All-China Federation of Trade Unions and all the trade union organizations under it represent the interests of the workers and staff members and safeguard the legitimate rights and interests of the workers and staff members according to law.”

In addition, Article 6 states that the basic function of the Trade Union is the safeguarding of the rights and interests of workers. Further to this, Trade Unions are to coordinate labour relations and arrange for members to partake of democratic decision making and remain in close relation with workers as their representatives to employers.

Before China’s economic reforms, Trade Unions were chiefly involved in the fringe benefits of workers such as education and welfare. This was based on the premise that worker unrest and industrial action were unique to capitalist regimes although the truth of this matter is debatable.

It is however true that the profound change to relationships between the worker and the employer are significantly different to justify an alteration of the role of the Trade Union. One of the main differences is the realisation that workers can no longer be automatically enrolled into Trade Union Membership. According to Union Chairman and Politburo member Wie Jianxing[30] only 5% of workers in the private sector were actually Union members. This was by comparison to a mere 3.4% in township enterprises.

Incentives to increase Union membership are therefore present in the 2001 Union Laws. Article 10 encourages increases in Union branches and recruitment drives by the more superior branches also form part of the Union policy of increased membership under Article 11. In addition, Article 43 and Chapter VI have been introduced to protect the interests of maintaining Union property and income. Clearly this issue could not have arisen under the pre-economic reform era of Chinese communism.

This initial analysis of laws that are geared towards the protection of the Union does motivate us to question whether this has become a priority that exceeds the interests of workers. Clearly the path of the Chinese Government is to ensure that Trade Unions should work hard to remain at the forefront in order to continue to provide support to workers. This is especially important during a time in which Chinese workers are arguably more vulnerable in a commercial environment where traditional guarantees of life-time work and fringe benefits are becoming ever more unstable.

In addition to the above changes, Article 20 stipulates increased power for Trade Unions in collective bargaining and in Article 21 a right has been created whereby the Union may interfere in disciplinary proceedings and unfair dismissals. In the case of workers taking their employer to court, the Trade Union is obliged to assist.

Equally significant is the power for Unions to assist in strikes and work to rule action. Clearly the role here is for the Trade Union to act as the voice of the labour force and a theme of the collective, communist labour force versus the potentially corrupt, capitalist employer screams out through the provisions of the 2001 Law.

Occupational Health and Safety are dealt with in relation to Trade Unions in Articles 23 to 26. Here Trade Unions have heightened powers in relation this matter which will be dealt with in greater detail under part C below. As regards the relationship between Occupational Health and Safety and Trade Unions, the latter are obliged to conduct investigations into accidents where there have been infringements of health and safety. Trade Unions also have the power under Articles 33 and 34 of the 2001 law to assist in the process of creating new labour laws, further health and safety regulations and policies relating to social security. Consultation rights are also enjoyed by Trade Unions under Articles 37 to 39 of the new 2001 law in relation to these self same issues of pay, health and safety, social security and the democratic election of ‘worker directors.’

By comparison to the old law relating to the power of Trade Unions it is clear that their increase in power is in response to exposure of China to the international community. It is therefore more of a protective mechanism in the face of a more mobile, market influenced labour force as opposed to any international Trade Union movement. In addition, the reforms ought not to be mistaken for a step in the direction of democracy. This is blatantly illustrated in Article 4 which announces a clear adherence to the Communist state:

Trade unions shall observe and safeguard the Constitution, take it as the fundamental criterion for their activities, take economic development as the central task, uphold the socialist

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