China (II) - Investment in China

Paul Sweeney18/07/2010

Paul Sweeney: Many thanks to all those who commented on the first post. A few responses are made by me on that post for those who are interested. This is the second of four posts on China.

In the first post I examined the huge growth of Chinese investment in the rest of the world. In this post I will briefly look at the other side of the investment coin – foreign direct investment in China and unionisation in MNC plants and offices. The growth in FDI into China quickly grew to over $108bn in 2008, the last figures from UNCTAD. This is equivalent to 6% of total investment in China. Outward investment from China was $52bn in 2008 and is undoubtedly higher today.

Western firms have been pouring investment into China. On 8th July, Peugeot announced a €1bn joint venture with a Chinese car company in new plants in China.

Yet some MNCs are baulking. Google’s decision to exit its Chinese business because of censorship was unusual as it is a major company which was willing to make a strong statement – eventually! However, a compromise was reached recently with the Chinese government in early July and Google will stay. In its licence-renewal application, Google pledged to “abide by Chinese law”. The level of censorship to be imposed and accepted by Google is as yet unknown. Other foreign firms put up with intimidation and often have to indulge in bribery to Communist Party officials.

The recent harsh prison sentences imposed on four Rio Tinto employees in Shanghai for bribe-taking of between seven and 14 years for bribery and theft of commercial secrets (only one of them admitted the second charge) has scared many western firms. The employees were three Chinese and one an Australian of Chinese descent. The American Chamber of Commerce in China found that many American firms feel shut out of Chinese markets because of “discriminatory government policies and inconsistent treatment by the legal system.”

One advantage for western multinationals in this “workers’ state” is the absence of free trade unions. There are only yellow unions in China. They are similar to the yellow unions in Ryanair or Quinn Insurance – not free trade unions but in-house “representatives.” The All-China Federation of Trade Unions, (ACFTU), the country’s union organisation, is closely linked with the Communist Party. Union representatives in companies have to be approved by the union federation. They are thus linked, perhaps indirectly, to the Chinese government. So unionisation can link in the state into management.

Yet Chinese workers in many plants have been ignoring the state controlled unions and confronting management. The ACFTU has been forced to increase its efforts to recruit members after industrial unrest, which stopped the China operations of two Japanese carmakers.

At the Honda plant, worker representative, Ms Li issued an open letter on behalf of the 16 employees chosen by workers to negotiate on their behalf, during the strike which closed Honda’s China operations for a week. “We must maintain a high degree of unity and not let the representatives of Capital divide us,” the letter urged. “This factory’s profits are the fruits of our bitter toil ... This struggle is not just about the interests of our 1,800 workers. We also care about the rights and interests of all Chinese workers.” The strike was quickly followed by two other strikes in two other Honda plants in China. Yet at rallies, most Honda strikers were fearful of the state and hid their faces with surgical masks and few would give their full names to the media.

The result: the workers won a 25% increase in pay to €230 a month! Most commentators do not think even 30% pay rises will lead to noticeable price increases in the West, but are more worried that strikes will disrupt supply chains. If this happens, the authoritarian state may step in.

Most foreign companies do not accept unions to date. But many commentators are saying that if they want to operate in China, they may have no choice from now on. It has been seen that the Apple IPod is made under very stressful conditions for its non-unionised workers, many of whom were so stressed that they have committed suicide. Great, progressive steps to prevent more suicides have been taken by Apple’s supplier. For example: Nets to prevent jumping off factories have been put up, “counseling” and pay rises have been “imposed” by Foxconn, the kind sub-contractor, to reduce stress! It is largely controlled by one staggeringly rich man.

Foxconn is the world’s largest contract electronics manufacturer, whose clients include Apple, Dell and HP. Some assert that it is one of the better employers with a fine campus with a large swimming pool and many other facilities at its “factory town” in Shenzhen, near Hong Kong. Yet it has been shaken by the high-profile series of suicides. And rightly so, for a fine pool is no good when you are treated like a serf in the factory working very long hours, doing repetitive and really tedious work under quasi-military guard. And other employers are even more nervous too. Whether free trade unions will be allowed to operate remains to be seen, but it is unlikely in the short run.

Up till recently, big companies have been welcomed in China for providing foreign capital and skills, and they were not asked by the state to allow the workers to organize (nor have workers been given this right in law), or rather, to be told by government what union to accept. Unions are mild in China but there is now a 2% charge on payroll in the companies where unions do exist. It may be used for workers' health care and other “benefits”. The FT reported that “They are actually telling us [to establish union chapters], not asking us,” said one foreign executive in Suzhou. “The feeling from everyone was – we just got a 2 per cent tax.” “In Europe or America, having a union is like having a [rival] manager in the company,” said a government official. “Here a union is to help the company be more productive.” Well those are two views of the comrades and the MNCs!

This increased worker militancy may impact on consumers as costs will rise at key stages in the thousands of supply chains that bring them electronics, clothes and toys. Workers are more skilled an,d with greater investment in capital and in skills, productivity is rising. The workers’ share was not at all equitable and they are now becoming more militant. Thus wages and then prices will rise. This is not bad as it would help reduce Chinas huge foreign surpluses in time, though for many Chinese products, like electronics, labour costs are but a fraction of total costs. Increased wages and salaries will re-orientate consumption to China’s growing middle class too, shifting more consumption to the domestic market.

Unionization had been mainly been confined to those industrial hubs which have a history of union activity, such as Guangdong and Tianjin, east of Beijing. Wal-Mart rejected unionisation in China and then pulled out, and Microsoft is currently resisting a unionisation drive. The FT recently reported that the “union officials in Beijing’s financial district summoned representatives of multinational investment banks to a meeting last month at which they were encouraged to establish union chapters.” The banks included Goldman Sachs, JPMorgan, Morgan Stanley and UBS.

Posted in: EconomicsInvestmentLabour market

Tagged with: trade unionschinainvestment

Paul Sweeney     @paulsweeneyman


Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.



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