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PP RUEHCN RUEHGH
DE RUEHBJ #7509/01 2350243
ZNR UUUUU ZZH
P 230243Z AUG 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 4729
RUEHC/DEPT OF LABOR WASHDC
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHSH/AMCONSUL SHENYANG 6734
RUEHGH/AMCONSUL SHANGHAI 5620
RUEHCN/AMCONSUL CHENGDU 6988
RUEHGZ/AMCONSUL GUANGZHOU 1282
RUEHIN/AIT TAIPEI 5895
RUEHHK/AMCONSUL HONG KONG 8021
RUEHGV/USMISSION GENEVA 1282

UNCLAS SECTION 01 OF 05 BEIJING 017509 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/CM AND DRL/ILCSR 
DEPT PASS USTR FOR KARESH, A. ROSENBERG, MCCARTIN 
LABOR FOR ILAB - CARTER, OWENS, HELM, ZHAO, 
SCHOEPFLE 
TREAS FOR OASIA/ISA-CUSHMAN 
USDOC FOR 4420/ITA/MAC/MCQUEEN 
GENEVA FOR CHAMBERLIN 
 
E.O. 12958: N/A 
TAGS: ELAB EINV ECON PGOV CH
SUBJECT: CHINA EXPERIMENTS WITH 'WAGE GUARANTEE 
FUNDS' TO TACKLE WAGE ARREARS 
 
 
(U) SENSITIVE BUT UNCLASSIFIED: NOT FOR INTERNET 
DISTRIBUTION 
 
¶1.  (U) Summary:  Wage Guarantee Funds (WGFs - 
definition in para 5) are one of the tools Chinese 
local governments are using to tackle the problem of 
wage arrears, which is especially pervasive among 
migrant workers in the construction industry. 
Embassy visits to several locations in China in July 
2006 confirmed that the role of WGFs varies 
considerably from region to region, as do Chinese 
views about their effectiveness.  Chinese experts 
are skeptical; at best, they reason, WGFs are a 
useful part of a package of transitional measures to 
improve enforcement until China changes its labor 
laws to make non-payment of wages a crime.  At 
worst, WGFs will make little or no difference 
because local governments lack the political will to 
put the workers' interests above those of project 
developers, construction companies and labor 
contracting agents.  End Summary. 
 
THE PROBLEM OF WAGE ARREARS 
--------------------------- 
 
¶2. (U) Late or non-payment of wages to employees is 
widespread in China in both state-owned and private 
enterprises.  A report issued by the National 
People's Congress on Labor Law implementation in 
December 2005 indicated that, according to a 
government survey, 7.8 percent of all formal sector 
employees had experienced wage arrears in the past 
year, and that the average duration of arrears was 
3.2 months.  According to the same survey, over 16 
percent of workers in some provinces had experienced 
arrears.  The problem is especially acute in the 
construction, labor-intensive manufacturing and food 
and beverage sectors.  Migrant workers are 
especially vulnerable to late or non-payment of 
wages. 
 
¶3. (U)  Two aspects of Chinese law contribute to the 
problem.  First, non-payment of wages is not a 
crime.  Although Chinese law and numerous 
implementing regulations require employers to pay 
wages in full at least monthly, there is no penalty 
fo non-payment in China's criminal code.  Wage 
arrearage cases can therefore only be handled as 
administrative cases or contract violations, and 
even if successfully prosecuted, penalties are 
insufficient deterrents.  A typical penalty is that 
the employer must pay an additional 25 percent of 
the wage bill to the worker in compensation.  The 
second problem is the lack of legal liability for 
wages of workers employed through labor contractors, 
including legally registered Labor Dispatch Agencies 
(LDAs) and unregulated labor contractors.  The 
former are legally-registered entities that provide 
manpower to enterprises in exchange for a fee, so 
the legal employer-employee relationship is between 
the worker and the LDA.  An LDA is legally 
responsible for complying with all wage and benefit 
regulations.  Unregulated labor contractors include 
individual facilitators or informal operations 
accountable to no one.  The construction industry 
relies particularly heavily on LDAs and unregulated 
labor contractors, which makes it easy for 
construction companies and labor contractors to 
deflect responsibility for non-payment of wages on 
each other, leaving the workers unpaid. 
 
¶4. (U) In recognition of this widespread abuse of 
workers, and its implications for social stability, 
 
BEIJING 00017509  002 OF 005 
 
 
the Central Government's State Council and Ministry 
of Labor and Social Security (MOLSS) issued three 
circulars between September 2003 and September 2004, 
directing local governments to monitor the 
construction industry more closely and to take 
measures to eliminate late- or non-payment of wages 
to migrant workers.  The Central Government vowed in 
late 2003 to eliminate wage arrears to migrants by 
the end of 2006. 
 
¶5. (U) Since 2003, 24 Chinese 
provinces/municipalities issued regulations 
establishing Wage Guarantee Funds (WGFs).  WGFs are 
bonds, generally set as a percentage of project 
value, which employers must deposit in bank accounts 
controlled by local governments to be used against 
wages claims.  In principle, project developers 
and/or construction companies cannot withdraw these 
funds until their wage liabilities are cleared. 
 
¶6. (U) Labor intern visited Zhengzhou (Henan 
Province) on July 7 and joined AmCongen Pol/Econoff 
in meetings in Guangzhou and Dongguan (Guangdong 
Province) on July 21 to study the implementation of 
WGFs and other anti-wage arrearage initiatives. 
 
HENAN OFFICIALS SEE WGF'S AS A TRANSITIONAL MEASURE 
--------------------------------------------- ------ 
 
¶7. (U) Zhengzhou is the capital of Henan, China's 
most populous province with 97 million people and 
some 15 million migrant workers.  The Henan 
(provincial) and Zhengzhou (municipal) governments 
have both established WGFs in response to the 2003 
circulars. 
 
¶8. (SBU) Tang Min, Director, Henan Provincial Labor 
and Social Services (LSS) Bureau, said that Henan 
faced serious wage arrears in recent years, but 
three factors have largely resolved the problem:  1) 
the State Council's guidance (the 2003 circulars; 
2) increased enforcement efforts at the provincial 
level; and  3) the establishment of WGFs for the 
construction industry.  Tang said the Henan 
regulation requires project developers and 
construction companies to deposit WGFs before 
relevant jurisdictions can issue construction 
permits for any project. 
 
¶9. (U) The rules established in Henan Province 
require the project developers and construction 
companies each to pay two percent of the project 
value into a special account supervised by the local 
LSS Bureau.  (Zhengzhou municipal regulations 
require deposits of 1.5 percent each.)  The 
depositors can withdraw these funds with accrued 
interest, after local authorities (the LSS Bureau 
and Construction Committee) determine that the 
project is complete and wages have been paid in 
full. 
 
¶10. (SBU) Tang Min said wage arrears occurred for 
three main reasons:  1) project developers did not 
pay construction companies in full, so cash-strapped 
construction companies would withhold wages; 2) some 
companies initiated construction without sufficient 
funding and encountered cash flow problems; and 3) 
legal and illegal subcontracting for labor resulted 
in a loss of accountability for wages.  Tang also 
said that, prior to the creation of WGFs in Henan, 
wage arrears were common and the government 
enforcement efforts had little effect, something he 
attributed to the lack of clear laws on wage 
 
BEIJING 00017509  003 OF 005 
 
 
liability. 
 
¶11.  (SBU) Henan and Zhengzhou officials said the 
WGF program was effective.  Tang reported that 
Henan's Provincial WGF contained RMB 26 billion (USD 
3.25 billion) and that the fund had paid out RMB 8.8 
million (USD 1.1 million) to migrant workers since 
¶2003.  Dr. Pan Kaiming, Deputy DG of the Zhengzhou 
Construction Committee said Zhengzhou had resolved 
RMB 110 million (USD 13.75 million) in wage arrears, 
which includes RMB 50 million (USD 6.25 million) 
that accumulated since the Government?s pledge to 
clear wage arrears in 2003. 
 
¶12.  (SBU) Despite their praise for WGFs, Tang and 
Pan both said WGFs alone are not enough.  Other 
important measures include establishing local 
offices to resolve wage arrears; routine and random 
LSS work-site inspections; enacting tougher 
standards for registering LSAs; enforcing a "one 
strike you're out" policy for companies that fail to 
pay workers; making companies post employer and wage 
arrear helpline information on visible billboards at 
construction sites; educating migrant workers about 
pay, compensation, and rights at the workplace; and 
blacklisting defaulting companies using media and 
government websites.  In short, enforcement and 
accountability are the keys. 
 
¶13. (SBU)  Tang and Pan believed that WGFs, even 
when combined with other enforcement initiatives, 
were at best a transitional measure.  The most 
important step toward protecting migrant workers 
from wage arrears would be changes to the law making 
non-payment of wages a criminal offense.  Pan noted 
that the 3,000 labor inspectors at all levels of 
government in Henan had multiple responsibilities, 
and were simply inadequate to guarantee wage 
compliance for the province's 15 million migrant 
workers.  Criminal liability would encourage 
employers to modify their own behavior. 
 
GUANGDONG PROVINCE:  THANKS BUT NO THANKS 
----------------------------------------- 
 
¶14.  (U) Guangdong, China's wealthiest province and 
home to about 30 million of China's estimated 200 
million migrant workers, has some of the worst wage 
arrears problems in China.  Not surprisingly, 
Guangdong has not established a WGF program, and we 
encountered a range of ideas on how to address the 
problem of wage arrears there during our July 21 
discussions. 
 
¶15.  (SBU) Zheng Chaoyang, Deputy Director General 
of the Guangdong Provincial LSS Bureau, said 
Guangdong has not established a province-wide WGF 
program because of sensitivities, such as its 
possible effect on business operations.  Since the 
law does not clearly dictate how to address wage 
arrears, Guangdong and surrounding localities have 
opted to address the problem of arrears through 
means other than WGFs, such as blacklisting 
employers who fail to pay wages. 
 
¶16. (U) Zheng explained that in May 2005, Guangdong 
Provincial authorities issued a regulation that 
enforces minimum wage standards and a system to deal 
with construction companies who fail to pay migrant 
workers.  Moreover, Guangdong created a hotline 
number for workers to call regarding labor rights 
violations, and posted this information to a 
website. 
 
BEIJING 00017509  004 OF 005 
 
 
 
¶17. (SBU) DDG Zheng added that Guangdong has taken 
further steps to minimize wage arrearages, such as 
creating a labor arbitration office, providing 
training to companies with bad track records on wage 
arrears, and electronically classifying all 
construction companies doing business in Guangdong. 
This system, Zheng explained, classifies companies 
based upon reports from inspectors or complaints 
filed by workers, then places them into a color 
coded filing system, which is updated monthly, so 
that the government is aware of violators.  So far 
in 2006, Guangdong has blacklisted 30 companies and 
made their names and information available to the 
public, he said.  DDG Zheng believed the All China 
Federation of Trade Unions, Construction Bureau, 
Public Security Bureau, and courts could improve 
coordination to crackdown on wage arrearages. 
 
¶18. (SBU)  Zheng Zizhen, Director of the Guangdong 
Academy of Social Sciences. told us that that a WGF 
program would probably not work in practice because 
construction companies would find a way to avoid 
depositing the required bonds.  Zheng Zhizhen said 
Guangdong is preparing to implement a worker safety 
card pilot program, which will help workers and the 
LSS Bureau track wages and benefits.  Director Zheng 
also believed that workers themselves could be 
"inspectors" by raising complaints, but only if 
higher level government officials are willing to act 
on their complaints. 
 
¶19. (SBU) Huang Zhian, Director of the Construction 
Bureau in Dongguan (50 kilometers southeast of 
Guangzhou and home to some 8 million migrant 
workers) said Dongguan's WGF is different than WGF 
programs elsewhere.  The Dongguan program focuses on 
ensuring that construction work is adequately 
financed by requiring project developers to place 20 
percent of the project value in accounts controlled 
by the Construction Bureau.  Dongguan also subjects 
developers to regular inspections to ensure that 
developers maintain adequate finances, that workers 
get paid on time, that projects finish on time, and 
that defaulting companies are held responsible. 
Huang said Dongguan's 200-plus part- and full-time 
inspectors in the LSS, Construction Bureau, and 
Municipality respond to complaints from the labor 
violations hotline, and work closely with over 600 
labor mediators and 34 legal aid offices in the 
city. 
 
¶20. (SBU) Liu Kaiming, Director of the Institute of 
Contemporary Observation, a labor NGO in Guangdong's 
Shenzhen Special Economic Zone, was skeptical about 
the prospects for WGFs in Shenzhen (now being 
implemented on a pilot basis).  He estimated that 
half of the wage arrears reported in 2003 related to 
the government's failure to payits bills for 
government-funded projects.  He felt that WGFs would 
tempt government officials into corruption, rather 
than reduce wage arrears.  He was also skeptical of 
blacklisting, pointing out that a company 
blacklisted in one locality can easily find work in 
another. 
 
THE REAL PROBLEM LIES WITH ENFORCEMENT 
-------------------------------------- 
 
¶21. (SBU) On August 4, Laboff met with Shi Fu Mao, 
executive director of the Migrant Workers Legal Aid 
Station in Beijing.  Shi said that wage arrears are 
the subject of most complaints his office receives. 
 
BEIJING 00017509  005 OF 005 
 
 
Shi said Beijing has regulations on WGFs on the 
books, but that participation in WGFs is not 
mandatory in practice, and WGFs have not reduced the 
wage arrears problem.  When asked whether wage 
arrears exist because of gaps in the law, Shi noted 
that failure to pay wages is not a criminal offense, 
and that administrative penalties are weak, but said 
he believed the main problem was the LSS Bureaus' 
unwillingness to enforce the law, and their 
inability to coordinate with courts.  Shi said that 
despite gaps in the law, there are ample regulations 
requiring on-time payment of wages, and that the LSS 
Bureau does have the authority to call employers and 
instruct them to pay.  The problem, he said, is that 
the LSS bureau rarely makes the call. 
 
COMMENT 
------- 
 
¶22. (SBU)  Ministry of Construction statistics 
quoted in the Chinese press state that construction 
companies have paid out 95.2 percent of the RMB 177 
billion (USD 22 billion) in wage arrears to migrants 
that they reported to the government before the end 
of 2003.  Whether or not these figures are accurate, 
new arrears have continued to accumulate.  Although 
the Central Government maintains its position that 
it will eliminate wage arrears by the end of this 
year, it is not clear whether they are looking at 
arrears reported by construction companies or by 
workers.  In any case, barring a major push from the 
Central Government, Embassy does not expect a major 
improvement in the wage arrears situation. 
 
¶23. (U) This message was coordinated with Consulate 
Guangzhou. 
 
SEDNEY