CHINA EXPERIMENTS WITH 'WAGE GUARANTEE

UNCLAS SECTION 01 OF 05 BEIJING 017509

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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,

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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

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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.

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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.

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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