Human Resources

[Emily]

2004 White Paper - Human Resources



While there remains a vast array of labor regulations that continue to have disparate application at the local level, China's central authorities appear determined to continue their efforts to streamline the complexities and make regulations more transparent and uniform across all locations. In part, this is evidenced by the ongoing dismantling of regulations that imposed inconsistent treatment of foreign- invested enterprises relative to local and stateowned enterprises. The following issues continue to dominate human resources perspectives.

Labor Law Reforms

Adopting flexible employment policies is one of the key mechanisms utilized by central authorities to manage the labor market. However, striking variations in labor policies by region continue, as well as inconsistent application of labor administration and employment protection between the national and local levels. Nevertheless, there has been noticeable progress under the unified Ministry of Labor and Social Security, such as the new Minimum Wage Regulations that came into effect on March 1, 2004. Under the earlier minimum wage regulations it was unclear whether part-time workers were entitled to be paid a minimum wage. The 2004 regulations removed that uncertainty. The regulations also ensure that part-time workers are paid sufficient remuneration to enable them to make their social security contributions to fund pensions.

However, significant labor law hurdles still face foreign firms. One of the most consistent criticisms from overseas investors in China is the apparent arbitrary enforcement of regulations and the lack of transparency. The fact that there is no single source of nationally applicable employment laws, either in English or Chinese, continues to be an irritant to employers. The situation is further complicated by the fragmented nature of China's labor law system. The labor law is applied variously, depending on the type of organization (representative office, joint venture, etc.) and location involved. Representative offices, for example, require three sets of approval before engaging in recruitment activities, such as advertising or job fairs. However, other forms of foreign-invested enterprise and local firms typically require only basic approval.

The types of benefits required in Beijing differ greatly from those in outlying and even urban areas, such as Shanghai, making it difficult for employers to offer and administer standardized benefits programs at a national level.

In some localities, employers need to comply with labor law at four different levels: national, provincial, district, and local. While labor law at the lower level is not meant to be inconsistent with laws that are higher in the hierarchy, in practice, local officials (including those of the judiciary) are often free to interpret how and when to implement higher levels of law in their locality.

There are also widespread cases where one agency, such as a local labor bureau, will enact new regulations without informing or coordinating with other relevant agencies, such as their counterparts in the local tax bureau or other related organizations. As a result, China's labor administration continues to create additional administrative work, expenses, and challenges.

While it is commendable that China has taken positive steps to implement more comprehensive labor laws, giving practical effect to those laws is often a stumbling block for foreign investors and employers. Difficulties of enforcing non-competition and confidentiality agreements is a case in point. While there is no lack of law or official rules in China that recognise the validity of such agreements, the judicial system is not set up to allow speedy and decisive prohibitive action to be taken against employees or former employees who, in breach of such agreements, wrongfully disclose or otherwise use confidential information. This is just one example of available remedies not keeping pace with the expanding array of labor rights and obligations.

Social Security Programs

Overhauling and reforming China's social security programs -- especially those relating to pensions, medical insurance, and workers' insurance -- continues to be one of the major concerns at the highest levels of government. Many of China's localized social security programs are either drastically under-funded or, in some cases, actually insolvent. As a consequence, the funding of existing retirement benefits and medical benefits has often required central authorities to step in to make up the shortfall.

The future of the various retirement schemes is a major concern for foreign firms. For example, the ratio of retirees as a percentage of the labor force in 1952 was a mere 0.1 percent; in 2000 that ratio had jumped to 24 percent. By 2030 it is projected to be around 55 percent. It is difficult to estimate unfunded pension liabilities, but they may be as high as 50 percent of China's GDP. We are concerned about who will fund retirement payments in the future and the potential ripple effect on the overall economy.

China's new Enterprise Annuity policy does not clearly stipulate such important terms as the tax treatment of the EA contributions and benefits, the investment vehicles involved, and detailed administrative rules. While our member companies recognize the value of such a plan with respect to employee retirement benefits, it is not feasible for companies to implement such a plan without more detail.

Foreign firms often conclude that the retirement benefits the Chinese government provides to retired employees will be insufficient compared to their former salaries. As a consequence, many American firms provide supplementary pension plans in order to ensure that their employees' retirement funds are adequate to meet their needs. However, the regulations that apply to such supplementary plans are distorted by uncertainty and confusion. In spite of the efforts that have been made by the central authorities, the social security system throughout China remains fragmented and in need of urgent regulatory attention.

Of all the issues that will influence, if not dominate, human resources in China over the coming decade is the manner in which its social security system is regulated and funded

The Household Registration System: Labor Mobility

As both the Chinese authorities and foreign businesses well understand, the employment gap between the rural parts of China and its coastal and industrial belts continues to grow. Urban employees are currently estimated to earn, on average, more than three times the income of their rural counterparts. As a consequence, there has been accelerated growth in the number of rural migrant workers (currently estimated to be somewhere between 100-150 million) moving to those parts of the country where employment can be more readily found.

Although the State Council issued a directive in January of 2003 effectively paving the way for the dismantling of the hukou (residence permit) regulations that prohibited workers from working in any other location other than where they are registered, it is anticipated that it will be some time before local authorities give full effect to that directive.

The central authorities increasingly recognize the migrant workforce as a positive resource that contributes to China's overall economic development. We note that the economic costs of affording such workers employment benefits and protections comparable to urban workers is being met with a high degree of resistance from Chinese authorities at the local levels. We believe that as a matter of equity, as well as to ensure labor market flexibility, this problem must be solved.

We also encounter similar difficulties when employees from one urban area attempt to work in another urban area. For example, if an employee based in Guangzhou obtains permission to work in Beijing, there is no nationwide system in place that permits such an employee to transfer social security contributions held in that employee's own name from Guangzhou to Beijing. We encourage broader and more flexible approaches to allow greater mobility of labor and to ensure that staff who take employment in a particular location are treated no less favorably than other employees in the same location. Many of our member companies have encountered situations where local employees who have transferred from Beijing to Shanghai have had to maintain their hukou registration in Beijing in order to preserve their insurance benefits. As a result, they must return to Beijing when seeking medical care.

Government-Industry Cooperation

New laws are often introduced without seeking prior discussion or comment from those whom the regulations most strongly impact. We have found that the practice found in other countries, whereby there is a defined "comment period" prior to the enactment of a law, has a strong impact on acceptance of and adherence to that law. This often means fewer problems for the government once a law or regulation goes into effect. At present, many laws and regulations are promulgated without the opportunity by business or industry associations to comment prior to its taking effect. As a result, changes in the labor law continue to take many companies by surprise. The impact of surprise is even more keenly felt where labor laws have immediate or, in some instances, retrospective financial effect.

We encourage the government to take advantage of the many Chinese and foreign human-resource organizations and forums that are available and poised to provide useful commentary on the shaping of such human resource regulations.

[Adenan]

This is really a good article on human resources. However, I was just thinking if this is the right place to submit it? I think that in such forums small one or two para should be used for specific purposes.

Adenan

[Emily]

Hi all,

I would like everyone knows more about China's market. It would be great if we can do something in this big potential market and get more profits there.

First of all, post whole articles might give you some general information of different industries in China, just for your reference. Then,someone will might be interested in business in China. I would lilke to help people in UK to do business in China like: sourcing products, setting up operations, knowing more regulations or we can talk together to see if we can set up a small consulting company in China. Lots of things we need to do. It's really a big opptunity here.

If someone is interested in my business, please feel free to contact me. Let's see what we can do in this big country-China. If not, it does not matter, just start getting to know China and it might be useful for your business in the future.

Adenan, thank your for your suggestions.

Have a nice day!

Best,
Emily

[Adenan]

I have stayed in U.A.E. for over 25 years and had trading relationships with several Chinese manufacturers as well as I was in contact with Chinese residents in Abu Dhabi as well as in Dubai. I have hands on experience of working with them.

Can I be of any assistance to anyone? Emily, if you would like to be in touch with me?

Adenan