VZCZCXRO5632
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0863/01 2110815
ZNR UUUUU ZZH
R 300815Z JUL 07
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6330
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC

UNCLAS SECTION 01 OF 02 GUANGZHOU 000863 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: WTRO ECON PGOV CH
SUBJECT: HR Issues in South China -- The New Labor Contract Law and 
Beyond 
 
REF: Beijing 4467 
 
(U) THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  IT SHOULD NOT BE 
DISSEMINATED OUTSIDE U.S. GOVERNMENT CHANNELS OR IN ANY PUBLIC FORUM 
WITHOUT THE WRITTEN CONCURRENCE OF THE ORIGINATOR.  IT SHOULD NOT BE 
POSTED ON THE INTERNET. 
 
¶1. (SBU) SUMMARY AND COMMENT: Employers clearly emerged as "victors" 
in the labor contract law open comment vetting process, with the 
relaxation of several obligations that had been in the original 
draft, especially the requirement that they "seek approval from" 
their employees.  Low-end manufacturers, in contrast, appear to have 
gained the least from the process, especially as it will require 
certain modifications in their organizational structure.  The law 
should help clarify the rights of employees, and perhaps even curb 
somewhat the recent rise in labor disputes in South China.  However, 
the region's greatest challenge remains the shortage of 
professionals in leadership positions. END SUMMARY AND COMMENT. 
 
To the Employers Go the Spoils 
-------------------------------------- 
 
¶2. (SBU) Set to take effect in January 2008, the Labor Contract Law 
(LCL), published just a month ago, is the legislative product of 
almost three years of public engagement.  The second major China law 
to have been forged out of a legitimate public comment process (the 
anti-money-laundering law is the other, though as yet not passed), 
the new LCL has been crafted with the support of comments from over 
190,000 organizations and individuals, both from within China and 
abroad.  While the final legislation makes numerous gestures toward 
improving workers' rights, employers have emerged as the clear 
beneficiaries from the public comment process according to Nancy Wu, 
Hewitt's Regional Consultant. 
 
¶3. (SBU) Ms. Wu points to the relaxation of employer obligations 
between the initial and final drafts.  For instance, the final LCL 
says employers should negotiate with -- instead of "seek approval 
from" -- the trade union or employees' representatives when making 
decisions that would directly affect the rights and interests of 
employees.  Furthermore, while both drafts arguably limit the 
ability of employers to institute rule changes without first 
consulting the labor unions, the final draft significantly narrows 
the acceptable definition of "labor union."  It therefore further 
limits the potential scenarios in which employers must actually 
consult with their labor counterparts. 
 
Low-End Manufacturers Lose Out 
----------------------------------------- 
 
¶4. (SBU) Low-end manufacturers are among those who benefited least 
from the LCL's comment process.  Zach Wortham, Legal Consultant for 
Wang Jing Law Firm in Guangzhou, attributes this to the overwhelming 
influence of Western foreign-invested enterprises on the final draft 
legislation.  According to Wortham, since the LCL is in many ways a 
reflection of the worker protection provided to employees in Western 
nations, Western FIEs will generally be able to borrow their home 
system as a comprehensive model, thus ensuring compliance under 
China's new LCL without the added costs of implementing an entirely 
new operational structure. 
 
¶5. (SBU) Low-end manufacturers in industries such as textiles and 
apparel, on the other hand, will need to completely restructure 
their organizations in order to maintain compliance with the new 
LCL.  The brunt of this is expected to fall on FIEs from neighboring 
South-East Asian countries, which typically control operations in 
these sectors. 
 
It All Comes Down to Enforcement 
------------------------------------------- 
 
¶6. (SBU) Because of China's previous problems with enforcement, FIEs 
have raised concerns that the LCL may do little to change the ways 
of local companies, which often ignore inconvenient regulations, 
while simultaneously imposing an increased burden on 
already-compliant FIEs.  (reftel) 
 
¶7. (SBU) However, a surprising number of legal and business 
professionals in China's southern manufacturing region believe there 
are reasons for optimism.  For one, many assert that since the 
current LCL is much clearer than any of China's previous labor laws, 
there will be less room for local interpretations.  As such, local 
authorities will have less latitude in granting favorable exemptions 
to local companies.  Some also believe that the comment process 
itself will lead to improvements in uniform enforcement.  According 
to Dan Harris, Managing Partner for Harris & Moure PLLC, since the 
law was reached by consensus, local regulatory bodies should be 
expected to defer to its provisions, as opposed to previous laws 
which may have been more easily disregarded. 
 
 
GUANGZHOU 00000863  002 OF 002 
 
 
Labor Disputes Increasing in South China 
--------------------------------------------- ----- 
 
¶8. (SBU) Employees in all industry sectors in the region appear to 
be stepping up their efforts for increased pay and benefits, whether 
against foreign-brand firms like KFC and McDonald's or Chinese 
companies; in addition, the number of labor tribunals has increased 
in every part of Guangzhou city. (NOTE: Due to their high caseload, 
these tribunals often operate in excess of fourteen hours per day. 
END NOTE.)  Speaking anonymously, a representative of a major 
consulting firm in Guangzhou recently described a story in which 
their client, a multinational auto company, announced that it would 
be closing down its facility.  The situation quickly escalated to a 
hostage takeover scenario between disgruntled employees and 
management.  This is not uncommon in South China, particularly 
amidst the massive layoffs which sometimes follow large mergers and 
acquisitions.  With the help of local government intervention, this 
particular situation was eventually resolved without bloodshed.  The 
lesson, according to the consulting representative, is for FIEs to 
engage the government early in the negotiating process.  This is 
especially evident in South China, where local government is often 
relatively accommodating to large multinational enterprises. 
 
Qualified Professionals:  The Drought in the South 
--------------------------------------------- ----- 
 
¶9. (SBU) According to Nancy Wu of Hewitt, at over 20 percent, 
China's professional personnel turnover rate currently leads all 
Asian countries.  The problem has been further compounded by a local 
market of employers which so far has been either unwilling or unable 
to train talented personnel at an early stage of development. 
However, there are signs that companies in South China are beginning 
to take notice of the problem.  More and more organizations appear 
to be engaging in benchmarking -- a process by which companies use 
multiple information sources to determine appropriate compensation. 
Ms Wu told us that some companies have even begun sharing pay data 
in order to manage costs and retain talent.  In addition, an 
increasing number of local companies are beginning to realize the 
need to develop and promote talented individuals from within.  If 
this trend continues, the region could remedy its current shortage 
of experienced talent within five years. 
 
 
GOLDBERG