By Brian Schwarz

The Lunar New Year for 2009 has come early for millions of migrant workers in south China who makeup the backbone of the country’s export machine. Slowing overseas demand for Chinese products has already shuttered many factories in the Pearl River Delta and thrown millions out of work. While the new year doesn’t officially start until January 26, the annual exodus to hometowns in the interior is already under way in major cities, with many low-skilled laborers facing an uncertain future, state media reports.

The picture is not much better at corporate headquarters. With the Shanghai Composite having lost nearly two-thirds of its value in the past twelve months and leading multinationals like Sony Ericsson and Philips – to name just a few – either laying off staff or implementing hiring freezes, the impact of the global economic crisis has hit the confidence of Chinese workers hard. HR consultancies in Shanghai reportedly show that Chinese office workers are the most stressed in Asia. Gone are the days of soaring salary increases and endless talent shortages; job security is the new talk of the town. 

For years surveys of foreign firms in a country of 1.3 billion showed recruiting talent was their biggest operational problem—more than the number who cited regulatory concerns, a lack of transparency, bureaucracy, or the infringement of intellectual-property rights. Just as the global downturn started to bite, new government rules pushed up the cost of hiring workers and have made the HR’s job a legal nightmare.
 
Even before it went into effect one year ago, China’s new labor contract law was creating controversy. As Dan Harris, partner at the Seattle-based Harris & Moure law firm, wrote on his popular China Law Blog more than a year ago, the law is a “huge deal.” The main complaint of the new law is that it makes hiring and terminating overly burdensome. “We have heard from Chinese lawyers who already have plaintiffs all lined up and ready to sue various foreign companies for when those foreign companies fail to comply. I kid you not,” wrote Harris.
 
The economic downturn seems to have intensified the fight over the new law. Earlier this month, a group of people claiming to be marketing department staff of Sony Ericsson gathered on a cold day outside the company’s headquarters in Beijing, asking for compensation after their labor contracts were terminated, according to local media reports. Not only are famous multinationals and low-wage labor-intensive jobs under threat, but a few Chinese high-tech firms feeling pressure from the public scrutiny.

The significance of the law was summed up by the country’s top telecoms equipment-maker Huawei Technologies decision to “ask” 7,000 of its employees who had been working for the company for eight years or more to resign. Drawing headlines across the country, it was viewed as an attempt to circumvent the new law which states that employees can sign open-ended labor contracts if they have worked for a company for ten years or more. These contracts will make it harder for an employer to fire its workers.

In the end, it seems Huawei’s strategy has backfired badly. Bill Dodson, general manager at Asia Base in the city of Suzhou and author of the This is China Blog, told the story of his friend Paul, who works for one of Huawei’s European rivals. Writes Dodson: “Huawei are bad guys,” Paul said. “They fired so many senior people before the end of last year, to get round the new labor law.”

The new labor law has it that employees must be paid one month’s salary for every year they have been with the company. Firing staff before the new year, then having them re-apply for jobs at lower pay grades is a way for a company in China to save loads of cash.” Dodson concludes: “We hired a lot of those guys,” Paul said proudly.

Today many firms are downsizing or considering closing up shop all together. Citing fast-climbing labor costs and pesky production quality problems, a growing number of German companies are doing an about face and pulling their manufacturing operations out of China. In August the Association of German Engineers (VDI) estimated that one in five of the approximately 1,600 German companies with presences in China were planning to pull out of the market.

Fearing social unrest, government officials have slashed interest rates and announced plans for a large fiscal stimulus to keep the job engine from stalling completely. McKinsey estimates that another 300 million rural residents must come to Chinese cities over the next seven years. Already, this year’s 5 million university graduates are struggling to find white-collar jobs. The Chinese portal Sina captured the problem with a story entitled “1,300 Graduate Students Compete to Sell Pork, Who Should be Ashamed?” In the end, 25 were hired.

Economic difficulties are gaining momentum just the political leadership is celebrating the thirtieth anniversary of Deng Xiaoping’s campaign launching China on the path of market reform. By slowing the pace of appreciation of the yuan and reinstating of a host of export rebates, Beijing trying to support economic growth by boosting exports, a move that could spark waves of global protectionism.

While Goldman Sachs predicts China’s GDP will grow by six percent in 2009, it feels much worse for many Chinese workers who thought the economy would grow at double digits indefinitely. Michael Pettis, professor of finance at Guanghua School of Management at Peking University is quoted in Businessweek as saying, “If China makes the same mistakes the U.S. did, and thinks they can export their way out of this problem and don’t have to massively boost domestic demand, then we have a repeat of the 1930s. So far China is acting like it thinks it can export its way out of this problem.”

“I am very, very worried,” says Pettis, who is predicting that China’s growth will fall below 7% in 2009. With a limited safety net available for the unemployed, the outlook for the Year of the Bull is grim.

Brian Schwarz, China Challenges