Background

Along with double-digit growth in 2006, the PRC's trade surplus and foreign reserves both hit new highs in 2007. In the first half of 2007 the main concern was the rapid growth in asset prices; in the second half it was the rise in the consumer price index and the producer price index. PRC policy makers took quick action to control the overheating economy. Lending rates and deposit rates were increased six times in 2007 and the reserve requirement ten times, reaching their highest levels in more than two decades. The primary policy agenda that emerged from the Central Economic Work Conference in December 2007 involved preventing the economy from overheating and structural inflation from becoming a broad-based one. These contractionary macroeconomic policies had an important role in slowing down economic growth in 2008.

The new Labor Contract Law was passed at around the same time. It was formally approved at the 28th National People's Congress in June 2007 and took effect on 1 January 2008. The law requires employers to sign permanent (open-term) contracts with all workers who have had two fixed-term contracts under the same conditions or have been with the same employer for at least 10 years. In addition, employees and unions must be informed of any layoff and retrenchment plan at least 1 month before it is implemented and the plan has to be approved by the local labor bureau. Employers must pay their laid-off workers 1 month's salary for every year of employment, up to 12 months' salary.

The significance of this law was, to some extent, reflected in its polarized drafting and the highly contentious debates that attended its adoption (Cooney et al. 2007). On the one hand, the rising labor disputes and other social problems undermined social stability and called for a national labor law. Moreover, the government had embarked on a development strategy that emphasized industrial upgrading and promoted social harmony. Proponents of the law argued for a set of regulations aligned with the PRC's development agenda that would further workers' interests, particularly through greater employment security and income protection. Enterprises that could not afford the higher labor costs would disappear. On the other hand, the law instantly raised labor costs, limiting the flexibility of corporations to structure their employment arrangements and possibly “over regulates employment relationship” (Zhao and Lim 2008).

Employers reacted sharply long before the law was passed. While it was still being drafted, some factories were already geared to evade responsibility and the potential additional costs under the new law. Employers used two coping strategies (Wang et al. 2009). One was “creative compliance” (evasion). Employers would coerce employees to resign—and thereby forfeit important seniority claims—and then rehire them as new employees. Huawei Technologies Co. Ltd, the PRC's biggest maker of telecommunication network equipment, reportedly encouraged more than 7,000 employees to take up the “voluntary resignation” scheme at the end of 2007 to avoid permanent contracts with employees of more than 10 years (People's Daily 2007). The other coping strategy used by employers was to reduce employment, with stronger and more immediate implications for migrant workers. Many labor-intensive manufacturers began to shutter their factories and shift production to even-lower-wage regions of the PRC or Southeast Asia. Wang et al. (2009) state that, by one account, 1,000 footwear and accessory producers had reduced output or closed up shop in Guangdong by early 2008. Some moved to the PRC hinterland, others to Viet Nam and Burma, where labor was cheaper and legally defenseless. Similarly, after the law took effect, already feeling the pinch of weakening export demand, business owners hurried to shed workers and rearrange work contracts to circumvent the regulations (Asia Times Online 2008).

By early to mid-2008, while the government still feared the overheating of the economy, coastal exporters and textile manufacturers were having to contend with rising costs and weak global demand. Meanwhile, property markets in some cities were softening. The employment impact of the external shock had taken shape. Rising costs and the slowdown in exports was reported to have contributed to the closing of at least 67,000 factories across the PRC in the first half of 2008, forcing laborers to scramble for other jobs or to return home to the countryside (Wong 2008; China Digital Times 2008).

It became increasingly clear that overheating was no longer the main challenge. The PRC quickly realized it had to refocus on sustaining economic growth amid a global slowdown. Accordingly, the policy agenda shifted from preventing overheating and broad-based inflation to ensuring stable economic growth and controlling inflation. Policymakers halted the yuan's appreciation and boosted tax rebates to help exporters. The People's Bank of China cut interest rates in mid-September 2008, for the first time in 6 years. In addition, many provinces introduced measures delaying or reducing social welfare payments by enterprises in difficulties, or even exempting the enterprises altogether from such payments for up to 1 year (Shi, 2009).

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