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### Viewing cable 06BEIJING18534, CHINA LABOR ISSUES OVERVIEW

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06BEIJING18534 | 2006-09-01 08:57 | 2011-08-23 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Beijing

`

    VZCZCXRO2482
    PP RUEHCN RUEHGH
    DE RUEHBJ #8534/01 2440857
    ZNR UUUUU ZZH
    P 010857Z SEP 06
    FM AMEMBASSY BEIJING
    TO RUEHC/SECSTATE WASHDC PRIORITY 5827
    RUEHC/DEPT OF LABOR WASHDC PRIORITY
    INFO RUEATRS/DEPT OF TREASURY WASHDC
    RUCPDOC/USDOC WASHDC
    RUEHSH/AMCONSUL SHENYANG 6795
    RUEHGH/AMCONSUL SHANGHAI 5695
    RUEHCN/AMCONSUL CHENGDU 7038
    RUEHGZ/AMCONSUL GUANGZHOU 1346
    RUEHIN/AIT TAIPEI 5911
    RUEHHK/AMCONSUL HONG KONG 8068
    RUEHGV/USMISSION GENEVA 1305

` `

    UNCLAS SECTION 01 OF 12 BEIJING 018534

    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 PGOV PREL CH
    SUBJECT: CHINA LABOR ISSUES OVERVIEW

    (U) SENSITIVE BUT UNCLASSIFIED: NOT FOR INTERNET
    DISTRIBUTION.

    ¶1.  (U)  This message provides background to assist
    with the planning of Labor Secretary Chao's September
    13 meetings with Chinese Minister of Labor and Social
    Security Tian Chengping.  The cable includes a section
    on current political and economic context (paras 4-
    19), a review of developments in China's labor
    situation since Secretary Chao's 2004 visit (paras 20-
    44), and a brief biography of Minister Tian (paras.
    45-47).  Post is happy to provide one-page briefing
    summaries for easy reference.

    ¶2.  (U)  Tian's visit will offer an opportunity to
    discuss our productive bilateral cooperation on labor
    issues under three active USDOL programs in Labor Rule
    of Law, Coal Mine Safety, and HIV/AIDS Workplace
    Education.  The U.S. is also providing assistance for
    the development of Corporate Social Responsibility
    programs as well as Labor Law education, through
    programs funded by the State Department's Bureau of
    Democracy, Rights and Labor.  The State Department's
    Bureau of International Law Enforcement Affairs has
    also funded ILO work to assist China in preparing to
    ratify ILO Conventions 29 (Forced Labor) and 105
    (Abolition of Forced Labor).  In 2004, DOL and the
    Ministry of Labor and Social Security (MOLSS) signed
    four letters of understanding on cooperation on Wage
    and Working Hour Law Administration, Pension Programs,
    Workplace Safety and Health, and Mine Safety and
    Health, but no programs have been initiated yet.  Tian
    may wish to discuss the possibility of increasing
    bilateral cooperation.

    ¶3.  (SBU)  The meeting with Tian will also provide an
    opportunity to encourage the Chinese Government to
    improve governance in the labor area.  Although China
    is making progress in legislation and regulation,
    implementation is far from international standards.
    Numerous labor disputes that should be resolved
    through existing mechanisms end up festering because
    these mechanisms are ineffective, time-consuming and
    expensive, or because local labor bureaus do not
    enforce the rules.  In many cases, workers who attempt
    to resove disputes through proper channels come to
    believe that extra-legal means (e.g., strikes,
    demonstrations) are the only way to get satisfaction.
    It is important to remind Tian that U.S. interest in
    labor cooperation includes human rights concerns, but
    extends beyond them; Congress and the general public
    take an active interest in our open market policies
    and look to us to demonstrate that our bilateral
    engagement is effective in enhancing workers rights.
    A more rational labor market with effective dispute
    resolution mechanisms in China will also help attract
    and keep high-quality U.S. investment.

    THE POLITICAL AND ECONOMIC CONTEXT
    ----------------------------------

    View from Beijing
    -----------------

    ¶4. (SBU)  The Chinese leadership views the outside
    world through the prism of China's own domestic
    challenges and developments and the leadership's
    determination to increase China's global influence.
    The leaders of a one-Party state faced with profound
    development and security challenges are focused on
    stability and on preventing any perceived challenges
    to the power and primacy of the Communist Party.  The
    regime's success, and hence its legitimacy, depends in
    good part on its continuing to deliver breathtaking
    economic growth (approximately 9 percent per year for

    BEIJING 00018534  002 OF 012

    the past 27 years) and commensurate increases in
    living standards for over 1.3 billion Chinese people.
    Job creation is a paramount concern.  To achieve the
    goal of continued rapid economic growth, the
    leadership believes it requires domestic stability and
    stable relations with the U.S. and neighboring
    countries.  China's increasingly active diplomacy
    stems largely from these imperatives, from the
    conviction of Chinese leaders that a stable, peaceful
    international situation benefits China, and to a
    growing extent from China's global quest to secure
    resources.  The Chinese realize that the relationship
    with the U.S. is of paramount importance to their
    continued economic growth, to global stability and
    security, and to China's ability to continue what some
    Chinese call its "peaceful rise."

    President Hu consolidates power; Politicking; Taiwan;
    Military Build-up
    --------------------------------------------- --------

    ¶5.  (SBU)  President Hu has consolidated his authority
    within China's cumbersome collective leadership
    structure, although maneuvering in the run-up to the
    fall 2007 Communist Party Congress is intensifying.
    Changes in personnel at lower levels of the Party and
    Government are preparing the way for leadership
    changes to be ushered in at the Congress and will
    likely preoccupy China's leadership over the coming
    year.  Some Vice Premiers are nearing retirement age
    or facing grave illness and a number of Ministers and
    Provincial Governors may be moved up and/or to the
    center.  Although President Hu has reiterated the need
    for China to continue reforms following heated debates
    on the issue, he has shown caution in areas that touch
    on domestic stability and has supported retrenchment
    in the areas of free speech and media.  Internal
    discussions about China's place in the world show
    increasing signs of economic nationalism, with concern
    by some that Chinese companies face unfair
    competition.  Hu appears to favor an incremental
    approach to "reform" that would improve governance,
    reduce corruption, increase democracy within the Party
    and enhance Party legitimacy but not alter the Party's
    basic monopoly on power.  Taiwan remains a top concern
    for Chinese officials.  China appreciates U.S.
    statements on our one-China policy and our efforts to
    preserve the cross-Strait status quo.  The U.S. and
    others are concerned over the unclear purpose of
    China's large increases in defense spending and the
    military buildup and modernization.  We continue to
    seek to understand how China's buildup is consistent
    with its oft-stated assertions of a defensive military
    doctrine.  The U.S. and China coordinate efforts on
    many issues, such as counterterrorism, the Six-Party
    Talks, unanimous UNSC resolutions on Iran and North
    Korea, and combating infectious diseases.  We
    continue, however, to look to China to contribute more
    to resolving these issues.

    Rapid Economic Growth and its Challenges
    ----------------------------------------

    ¶6.  (SBU)  China's economy continues to grow at a
    brisk pace.  The Chinese official figure for the first
    half of 2006 was 10.9 percent, although some believe
    the true figure may have been even higher.  The latest
    GDP figures indicate that China has now overtaken the
    UK and France to become the world's fourth largest
    economy (based on size of GDP).  However, in per
    capita terms, China ranked one hundred tenth in the
    world in 2005 (IMF data).  At the end of 2005, China
    revised its GDP upward by 16.8 percent.  According to
    the revised statistics, the contribution from services
    now amounts to between 30 and 40 percent of China's

    BEIJING 00018534  003 OF 012

    overall GDP.  Many Chinese economic policy officials
    are increasingly concerned about both the pace and
    composition of China's growth. The Central Government
    seeks to rein in what it perceives to be irrationally
    high growth in some provinces, yet local officials are
    often promoted for their ability to increase
    investment, GDP and jobs.  Despite the Government's
    stated goal of promoting consumption-led growth, the
    economy of late has been increasingly driven by
    investment and net exports.  Chinese officials feel
    the need to maintain high growth to create non-
    agricultural jobs for the large, globally
    uncompetitive and still poor rural sector.  Slowing
    economic growth, or worse yet, a sudden contraction,
    could pose social stability challenges for the Chinese
    Government.

    ¶7.  (SBU)  China faces enormous long-term development
    challenges, including the need to invest more in
    public health, environmental protection and education,
    and securing adequate, reliable access to resources
    and energy.  China's large current account surplus is
    due to an extraordinarily high savings rate of 51.8
    percent (2005 gross national savings rate; EIU data),
    which exceeds an extraordinarily high investment rate
    of 44.5 percent (2005 grows investment as a share of
    GDP, EIU data).  High household precautionary savings
    are necessary because Chinese lack both private and
    public insurance and social safety nets to manage
    rising health costs, finance education and provide for
    a secure retirement.  Corporate savings have risen
    with profits, further pushing up the savings rate.
    Due to weak corporate governance, neither public nor
    private companies pay significant dividends.
    Developing the financial sector, social safety nets
    and corporate governance will all have a far bigger
    impact on China's trade surplus than exchange rate
    changes or reductions in trade barriers, but such
    structural changes will take time.

    ¶8.  (SBU)  Big threats loom, including widespread
    continuing drought and water shortages, air and water
    pollution and the new threat of avian influenza.  For
    all its growth, the Chinese economy is also energy-
    inefficient.  China's energy consumption per unit of
    gross domestic product is almost two and one-half
    times greater than the world average and energy
    intensity is still rising, a reflection of ongoing
    high rates of investment in fixed assets.  In the
    early 1990s, China was still a net energy exporter,
    but early this decade, overtook Japan as the world's
    second largest importer of crude oil.  Westinghouse,
    still with much U.S. content though now owned by
    Japan's Toshiba, is a finalist for new Chinese nuclear
    power plant contracts and approved for USG advocacy;
    those nuclear power plants are part of China's plans
    to diversify its energy supplies, which the U.S.
    supports.

    ¶9.  (SBU)  Political support for inefficient state-
    owned industries has led to overcapacity, falling
    prices, and profitability, and burgeoning bad debts
    that by some estimates could exceed half of China's
    annual gross domestic product.  Overcapacity is
    particularly evident in such areas as steel, aluminum,
    cement, real estate and construction.  Economic growth
    and its concomitant urbanization have lead to a
    growing gap in living standards between China's
    urbanites and rural residents.  The transfer of
    population from rural to urban areas that accompany
    industrialization in all societies continues apace in
    China.  Remaining price controls (including on
    energy,) administrative measures that interfere with
    market operations, Communist Party selection of
    banking leaders and government selection of preferred

    BEIJING 00018534  004 OF 012

    industries tend to perpetuate inefficient capital
    allocation in China.

    China's Foreign Trade Performance
    ---------------------------------

    ¶10.  (SBU)  China's foreign trade growth also
    continues to be impressive.  Total trade for 2005
    exceeded USD 1.4 trillion (USD 756 billion through the
    first half of 2006), with export growth for 2005 at
    28.4 percent and import growth at 17.6 percent.  The
    PRC's overall trade surplus was USD 102 billion in
    2005 (USD 61.5 billion through the first half of
    2006), over three times the surplus in 2004.  The U.S.
    is China's largest export market, taking more than
    one-fifth of all Chinese exports.  In 2005, China also
    attracted USD 60 billion in foreign direct investment
    (marginally down to USD 28.4 billion through the first
    half of 2006).  Foreign invested enterprises (FIEs)
    have accounted for about half of China's exports in
    recent years, employ about 11 percent of China's urban
    workforce, and pay roughly 20 percent of total tax
    revenues.  As a result of strong inward capital flows,
    China's foreign exchange reserves now exceed USD 940
    billion, the largest total in the world, and are
    expected to exceed USD one trillion before year's end.

    ¶11.  (SBU)  U.S. exports to China grew for the sixth
    consecutive year, up 18.2 percent in 2005 after a 22
    percent increase in 2004, a continuation of a trend
    that began with China's accession to the World Trade
    Organization in 2001.  In the first quarter of 2006,
    U.S. export growth to China exceeded 29 percent.
    Despite this good nws, PRC exports to the U.S. grew
    even faster.  As a result, China's trade surplus with
    the U.S. rose from USD 162 billion in 2004 to over USD
    201.7 billion in 2005.  Many of the underlying reasons
    for this unprecedented surplus are structural, in the
    form of China's low wages and low overhead and capital
    costs.  Nonetheless, China too often uses industrial
    policy tools to promote and protect favored industries
    and sectors.  Its ineffective enforcement of
    intellectual property rights is a major problem for
    American exporters.

    Currency Issues
    ---------------

    ¶12.  (SBU)  China's currency regime poses increased
    risks to the Chinese and global economies.  While
    China increased the value of the renminbi (RMB) last
    year by 2.1 percent, and has allowed it to rise by
    another 1.7 percent against the U.S. dollar through
    late August, it remains effectively pegged to the U.S.
    dollar.  The peg is contributing to growing
    macroeconomic imbalances in the Chinese economy and is
    constraining the Central Bank's ability to maintain
    financial stability.  To avoid the risk of repeating a
    cycle of credit-fueled boom-busts, China needs to
    tighten its monetary policy.  But its inability to
    raise interest rates is constrained by the peg,
    because absent appreciation of the currency, higher
    interest rates would just induce more speculative
    inflows.  Some Chinese officials are concerned about
    the potential adverse impact of exchange rate
    flexibility on the export sector, particularly about
    the vulnerability of low value added assembly
    operations that are most likely to transfer to Vietnam
    or other low wage countries, and which support
    hundreds of millions of migrant workers whose
    remittances help the rural economy.  Fortunately,
    there appears to be increased understanding among the
    political elite of the linkage between China's peg,
    its large balance of payments surplus, and excessive
    credit and investment growth.  In mid-August, the

    BEIJING 00018534  005 OF 012

    authorities allowed RMB volatility to increase
    notably.  Most analysts expect the RMB's rate of
    appreciation to increase slightly.

    Health and the Environment
    --------------------------

    ¶13.  (SBU)  China's rapid economic growth is
    stretching its natural resources and increasing
    concerns about pollution and environmental damage.
    Water issues are a major concern for urban areas and
    on the farm, especially in northern China.  Water
    shortages have been chronic in some parts of China due
    to long-term price controls that discourage
    conservation.  Poor water quality exacerbates
    shortages and has become a hot political issue,
    especially since the major toxic spill in the Songhua
    River in northeastern China last winter.  The Chinese
    Government values its partnerships with EPA, the
    Department of Energy and other U.S. agencies in
    addressing these issues.  U.S. NGOs are assisting
    China in everything from working to protect
    biodiversity to developing better environmental laws
    and ensuring community participation.

    ¶14.  (SBU)  Public health is of increasing national
    concern, especially since the 2003 SARS epidemic.
    Beijing has taken more serious measures to control
    HIV/AIDS and is working harder to stem the spread of
    avian influenza.  The U.S. and China are collaborating
    on a robust Emerging Infections program to combat
    disease, with both the National Institute of Health
    and the Centers for Disease Control active in China.
    The U.S. Department of Agriculture and USAID are also
    supporting bilateral animal health programs.  However,
    China's reporting of animal outbreaks of avian
    influenza is not as strong as the reporting on the
    human health side, and we continue to urge greater
    openness with both information and samples.

    Intellectual Property Rights (IPR)
    ----------------------------------

    ¶15.  (SBU) China's poor record on protecting
    intellectual property rights has been one of the most
    pressing difficulties facing our relationship.  From
    pirated CDs and DVDs to theft of entire product lines
    from unknowing American manufacturers, IPR problems in
    China harm U.S. companies around the world, and
    threaten China's ability to be seen as a responsible
    participant in the international trading system.
    While China has made significant and valuable progress
    in some areas related to IPR, the scope of the problem
    is increasing faster than Chinese enforcement efforts.

    "National Economic Security" and Shifting Bureaucratic
    Strongholds
    --------------------------------------------- ---------

    ¶16.  (SBU)  Pursuant to the Eleventh Five-Year Plan
    (2006-2010), the Central Government announced a focus
    on rural development, addressing rising income
    inequality and moving China up the value chain.  We
    are observing a shift in China's trade policy center
    of gravity from the Ministry of Commerce (MOFCOM) and
    WTO implementation issues towards the National
    Development and Reform Commission (NDRC) and
    implementation of more ambitious industrial policies.
    As NDRC fleshes out its policy mandate, we expect to
    see increased experimentation with policy measures
    that will test, and perhaps breach, WTO norms.
    Examples include the mandatory application of domestic
    standards (WAPI), rules designed to increase the
    percentage and technological sophistication of local
    content (autos), and support for development of

    BEIJING 00018534  006 OF 012

    advanced manufacturing and high technology programs.

    ¶17. (SBU)  China's policy for these emerging
    industries appears to be to nurture them by carving
    out of market share via government procurement policy
    (software), restricted expansion of FIE market share
    growth in undefined "sensitive" sectors and may have
    particularly problematic results in services
    (insurance, banking, telecommunications and direct
    sales.)  China erects technical and sanitary standards
    to delay the entrance of competing products
    (pharmaceuticals, medical devices and agricultural
    products).

    Beijing Summer Olympics
    -----------------------

    ¶18.  (SBU)  The Summer Olympics will take place in
    Beijing August 8-24, 2008.  The city will also host
    the Paralympic Games that September.  The Games will
    attract some 10,500 athletes, 180,000 accredited
    staff, 22,000 media and 230 VIPs, and perhaps up to 60
    heads of state.  Organizers indicate these will be the
    biggest, most expensive and most watched Olympic Games
    in history.  Beijing will be the primary site with 285
    of 302 total events; Qingdao in Shandong Province will
    host sailing events, and Hong Kong will host
    equestrian events.  Preliminary Olympic Games soccer
    matches will be played in a number of other mainland
    cities.  The Chinese Government will reportedly spend
    between USD 30 and 40 billion on the Games.  The
    Beijing Organizing Committee for the Olympic Games
    (BOCOG) is the public coordinator for the Olympics,
    although the Communist Party remains the final
    Arbiter, as it is for all major policy questions.

    ¶19.  (U) The venue centerpieces in Beijing will be the
    91,000-seat Olympic Stadium, nicknamed the Bird's
    Nest, and the nearby Aquatic Center.  The estimated
    cost of the complex is about USD 400 million.  Beijing
    is in the process of major upgrades to its public
    transportation and highway systems.  In addition, the
    U.S. Environmental Protection Agency and Department of
    Energy are cooperating with Chinese counterparts to
    improve the environment and energy efficiency in
    Beijing in connection with the Games.

    CHINA LABOR DEVELOPMENTS SINCE 2004
    -----------------------------------

    Role of Ministry
    ----------------

    ¶20.  (U)  The Ministry of Labor and Social Security
    (MOLSS) is responsible for crafting policies to
    improve and implement China's labor laws and
    regulations, and various social welfare insurance
    programs, including pension, unemployment, workplace
    injury and maternity benefit insurance programs.
    Enforcement of the laws and regulations is the
    responsibility of provincial or sub-provincial labor
    bureaus.  MOLSS has no formal authority over
    provincial bureaus, but the bureaus look to the
    Ministry for policy direction.  MOLSS is not
    responsible for workplace safety and health issues.
    These fall under the jurisdiction of the cabinet-level
    State Administration for Work Safety (SAWS) and the
    State Administration for Coal Mine Safety (SACMS).
    Health insurance is under the jurisdiction of the
    Ministry of Health.

    The Labor Market
    ----------------

    ¶21.  (U) China's official figures show a labor force

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    of approximately 750 million, including 200-250
    million urban workers, 100-150 million migrant
    workers, and roughly 400 million farmers (many of whom
    engage in other occupations as well).  While Chinese
    official statistics report unemployment of about 4.2
    percent, this refers only to urban residents who have
    registered as unemployed.  MOLSS surveys estimate a
    real unemployment rate closer to 7 or 8 percent, and
    anecdotal estimates in some areas are much higher.
    Rapid economic growth in and around China's cities
    continues to create jobs and attract labor from rural
    areas; unemployment, underemployment and rising
    expectations in rural areas is also driving labor
    migration.  Urban workers who are registered urban
    residents earn an average of RMB 73.3 (USD 9) per day,
    and enjoy some social welfare benefits.  Migrant
    workers earn about half as much, with no social
    welfare benefits, but this is still more than they
    would earn back in their villages.

    ¶22.  (U)  Official statistics indicate that on
    average, wages rose 14.9 percent in 2005.  Some
    heavily industrialized areas of China, e.g., the Pearl
    River Delta, are beginning to experience shortages of
    unskilled labor and wage increases for both skilled
    and unskilled labor.  These shortages may be partially
    the result of rural tax cuts and other Central
    Government policies meant to increase living standards
    in rural areas, which have reduced the push to
    migrate.

    ¶23.  (U)  Unemployment is currently significant for
    recent university graduates.  China?s rapid increase
    in post-secondary students since 1999 has produced a
    large pool of educated persons with high expectations.
    The public sector cannot absorb all of these
    graduates, and private sector employers complain that
    the quality of graduates is too low.  A recent survey
    suggests that only 10 percent of post-secondary
    graduates have the skills necessary to assume
    professional or management positions in the private
    sector.

    The Social Safety Net
    ---------------------

    ¶24.  (U)  The 1995 Labor Law shifted responsibility
    for pensions, health insurance, unemployment
    insurance, workplace injury insurance and maternity
    benefits from the old "work units" of the command
    economy to various levels of government.  In the past
    two years, the Central Government has devoted much
    attention to reforming and improving the social
    welfare insurance, experimenting, in different
    locations, with a variety of models.  So far, however,
    no comprehensive pension, health care, unemployment or
    workplace injury insurance system is in place.  A
    December 2005 report by an investigative committee of
    the National People's Congress (the NPC is China's
    national legislature) observed that "coverage of the
    social welfare insurance system is too narrow, the
    levels of government responsible for maintaining
    insurance funds are too low, and there is a serious
    problem of arrears to insurance funds."

    ¶25.  (U)  PENSIONS: China modified its pension rules
    in January 2006.  Current rules mandate a three-tiered
    system to be administered by local governments.  The
    three tiers include a pay-as-you go "social pool"
    funded by employer contributions (20 percent of
    wages), personal accounts funded by mandated employee
    contributions deducted from wages (8 percent), and
    voluntary, employer-funded supplementary accounts.
    There are some provincial pilot programs which vary
    from the national standards.  Pension accounts are

    BEIJING 00018534  008 OF 012

    managed by local governments.  Participation (in the
    first two tiers) is mandatory, but non-compliance is
    widespread.  The NPC noted that the bulk of
    participants in current pension programs were
    employees of China's remaining state-owned and
    cooperative enterprises.  Private sector urban workers
    and migrant workers are largely uncovered.  MOLSS
    reports that the pension system covered 178.8 million
    workers as of June 2006.

    ¶26.  (U)  Because the first tier of the pension system
    is a defined benefits program, mandated contributions
    are high (20 percent of wages), and the system is
    still deeply in deficit.  The People's Bank of China
    estimated that the system was RMB 6 trillion (USD 760
    billion) as of the end of 2004.  In many cases, local
    governments raid personal accounts of contributing
    workers to fund their current liabilities to retirees.
    The Deputy Minister of MOLSS reportedly said that the
    total amount owned to "empty" individual accounts at
    the end of 2004 was RMB 740 billion (USD 94 billion)
    and growing by RMB 100 billion (USD 13 billion) per
    year.

    ¶27.  (U)  In addition, China has yet to establish a
    nationwide pension system for rural residents.
    Although pilot pension programs for rural residents
    and migrant workers exist, they are neither common nor
    popular.  The NPC report attributed this to the fact
    that most pension benefits are not easily transferable
    from one jurisdiction to another.

    ¶28.  (U)  UNEMPLOYMENT INSURANCE:  Local labor bureaus
    maintain a system of social pools funded jointly by
    employer (2 percent of wages) and employees (1 percent
    of wages).  Benefits are based an employee's seniority
    and set at a percentage of the local monthly minimum
    wage.  As with pensions, participation is mandatory,
    but non-compliance is widespread.  MOLSS reports that
    the unemployment insurance system covered 145.3
    million workers as of June 2006.

    ¶29.  (U)  WORKPLACE INJURY/DISABILITY INSURANCE:
    Employers pay injury/disability insurance based on the
    risk level attributed to their industry by the local
    labor bureau.  Disabled workers receive 100 percent
    reimbursement of medical expenses from the insurance
    fund, and 100 percent of total wages for up to 18
    months.  MOLSS reports that the workplace
    injury/disability insurance system covered 89.54
    million workers as of June 2006.

    ¶30.  (U)  MATERNITY BENEFITS:  Benefits cover full
    salaries for the required period of maternity leave,
    paid for through a social pool funded by employees
    alone.  Many localities in China have not yet set up
    maternity benefit systems.  MOLSS reports that the
    maternity benefit system covered 59.6 million workers
    as of June 2006.

    ¶31.  (SBU)  The inadequate social safety net
    profoundly affects the personal welfare of the average
    Chinese citizen.  Rural residents have virtually no
    publicly-funded safety net, and only a portion of the
    urban population is covered.  Private sector insurance
    is highly underdeveloped.  The lack of safety nets
    compels many Chinese to save to manage rising health
    costs, finance education and provide for their own
    retirement.  China's savings rate in 2005 was an
    extraordinary 51.8 percent of GDP.  This high level of
    savings contributes to China's current account
    surplus, and thus to China's trade surplus.  A
    meaningful reform of the social safety net could
    reduce precautionary savings, and reduce macroeconomic
    imbalances that exacerbate China's trade surplus with

    BEIJING 00018534  009 OF 012

    the United States.

    Workers Rights and Working Conditions
    -------------------------------------

    ¶32.  (SBU)  China's economy appears to be creating
    jobs for most of the roughly 7 million new workers who
    enter the labor force and 10 million rural workers who
    migrate to the cities each year.  Wages appear to be
    rising in some parts of the country.  Nevertheless,
    incidents of worker discontent are frequent, whether
    measured by the roughly 300,000 labor disputes
    reported by the All China Federation of Trade Unions
    in 2005, or by the large (but unknown) number of
    (often unreported) strikes and protests.  Workers lack
    legitimate channels through which to seek timely
    resolution of grievances.  In the vast majority of
    labor disputes workers seek nothing more than what
    they are minimally entitled to under the law or their
    labor contracts.  As indicated by the NPC report, the
    Chinese Government is well aware of the problems.  It
    has been slow to address them, however, because doing
    so requires tackling governance/rule-of-law issues
    fundamental to China's decentralized, single-Party
    system.

    ¶33.  (SBU)  FREEDOM OF ASSOCIATION: China does not
    recognize freedom of association, despite having
    ratified the 1998 ILO Convention on Fundamental Rights
    at Work.  The ACFTU, a "mass movement" arm of the
    Communist Party is the only union recognized in China.
    Workers who attempt to form independent unions or
    associations, or who simply demonstrate against
    legitimate grievances risk imprisonment.  The ACFTU
    has significant power under the Labor Law, but is seen
    by most observers as, at best, a social organization,
    and, at worst, an advocate for employer interests.
    In a handful of exceptional cases, ACFTU unions have
    freely elected their own leaders in individual
    enterprises.  Chinese academics are working with the
    ACFTU to explore ways the union can modestly increase
    its role in protecting workers' rights, e.g., by
    representing workers in court.

    ¶34.  (SBU)  COLLECTIVE BARGAINING: True collective
    bargaining does not take place in China.  Although not
    prohibited by the Labor Law, there is, in practice, no
    mechanism for workers to negotiate with employers as a
    unit, except through the ACFTU.  Collective bargaining
    in China generally consists of an employer and a pro-
    employer ACFTU union signing an off-the-shelf model
    collective contract.  Such contracts rarely cover more
    than wage provisions.  Although the Government has
    called for increased use of collective contracts,
    there is no indication that either the Chinese
    Government or the ACFTU seeks to move toward setting
    wages and other terms of employment through actual
    negotiation.  The subject of whether wages in China
    are freely set via collective bargaining has been
    discussed in the U.S.-China Joint Committee on
    Commerce and Trade (JCCT) in connection with China's
    request to be treated under USG trade regulations as a
    market economy.

    ¶35.  (SBU) FORCED LABOR: Chinese law prohibits forced
    labor, and authorities have arrested employers for
    trapping workers at labor sites.  However, forced
    labor is part of the Chinese administrative detention
    system. The Public Security Bureau (police) can
    sentence certain offenders to periods of "reeducation
    through labor" without judicial review.  The ILO, with
    USG funding, is working with China on legislative
    changes necessary to ratify the forced labor ILO
    Conventions 29 and 105.  Since late 2004, the ILO's
    Special Action Program to Combat Forced Labor has also

    BEIJING 00018534  010 OF 012

    been working with MOLSS to address detection and
    prosecution of human trafficking cases.  In2005,
    China cooperated with the U.S. Prison Labor Task Force
    to resolve several allegations of prison labor
    products being exported to the United States.  In each
    case, visits to Chinese prisons uncovered no evidence
    that the goods in question were produced there.

    ¶36.  (U)  CHILD LABOR:  Despite reports from some
    outside observers that child labor is on the rise in
    China, there is no publicly available data on which to
    judge.  The Labor Law prohibits employment of workers
    under 16, and provides special protections for workers
    between 16 and 18.  The ILO reports that the
    percentage of working children is low in China, but
    that reports of child labor are relatively prevalent
    in the garment, footwear, toy, firecracker and food
    processing industries, as well in catering and
    "entertainment" services.  Isolated labor shortages in
    industrialized regions potentially increase demand for
    child labor.  The Chinese Government has intensified
    efforts to combat child labor.

    ¶37.  (U)  One problem which has received much
    publicity in the past two years is the recruitment of
    underage students to work in factories on "work-study"
    programs.  A recent case involved an alleged
    arrangement between a teacher, a labor contractor, and
    a factory manager to supply 10-14 year old students to
    peel grapes in a cannery in Ningbo, Zhejiang Province,
    during summer vacation.  The teacher and labor
    contractor allegedly kept a portion of the children's
    wages, and are currently under investigation.

    ¶38.  (U)  A May 2006 report on Child Labor issued by
    "China Labor Bulletin" (a Hong Kong NGO) noted that
    Chinese Government efforts to combat child labor focus
    on the demand side (by prosecuting employers), but do
    not adequately address the supply side.  Many poor
    families willfully encourage their teenage children to
    leave school to work at age 14 or 15 because they do
    not have the money to pay for continued schooling, or
    because they see no benefit in completing a high
    school curriculum which is geared toward preparation
    for college entrance exams.

    ¶39.  (SBU)  DISCRIMINATION IN EMPLOYMENT:  The most
    severe form of discrimination in employment continues
    to be the household registration (hukou) system, which
    effectively brands Chinese citizens at birth as rural
    or urban residents, based on their mother's status.
    Although most regulations restricting internal
    migration have been abolished, Chinese citizens cannot
    change their hukou place of residence without (rarely
    granted) government approval.  As a result, hundreds
    of millions of Chinese rural residents working in
    urban areas face obstacles gaining access to social
    welfare insurance, care in public clinics and
    hospitals, or public education for their children.
    The ILO estimates that there are some 22 million
    children of migrant workers left behind in rural
    areas.  Local regulations in some jurisdictions
    restrict also employers to hiring only people with
    local hukous.

    ¶40.  (SBU)  The hukou system creates significant
    hardship for employees and employers alike,
    effectively breaking China into numerous separate
    labor markets, while at the same time making migrant
    workers of all skill levels and easily exploited
    second class of citizens in the towns and cities where
    they work.  Under instructions from the Central
    Government, provincial and sub-provincial governments
    are experimenting with various means to de-link hukou
    status from access to benefits, but the Central

    BEIJING 00018534  011 OF 012

    Government remains committed to maintaining the
    system, as it prevents uncontrolled rural-urban
    migration.  Chinese labor experts believe serious
    reform of the hukou system will not take place until
    after the Government has established a unified social
    welfare insurance system that covers both urban and
    rural residents, and an anti-discrimination law that
    addresses discrimination against rural people.

    ¶41.  (U)  Chinese laws prohibit discrimination in
    employment and occupation against women and ethnic
    minorities.  Some complaints of discrimination,
    including institutionalized discrimination, are well-
    founded, such as local governments' preference for
    using Han Chinese contractors for construction
    projects in ethnic minority areas.  Numerous studies
    by Chinese academics also highlight various forms of
    discrimination that are not illegal.  These include
    widespread use of height or physical appearance
    criteria in hiring.

    ¶42.  (SBU)  China ratified ILO convention 111 on
    Discrimination in Employment and Occupation on January
    12, 2006.  MOLSS officials said the Ministry hopes to
    use the ratification to force legislative and
    regulatory action to better combat discrimination in
    employment.  Establishing a definition of
    "discrimination" will be the first step.  This
    presents an opportunity for Chinese academics and
    public interest groups to press for further relaxation
    of the hukou system.

    ¶43.  (SBU)  ACCEPTABLE CONDITIONS OF WORK:  Although
    wages appear to be rising in China, there has been
    little improvement in working conditions in the past
    two years.  The AFL-CIO, the ICFTU, the Congressional-
    Executive Committee and China and other observers have
    commented on this lack of progress in great detail
    (and with varying degrees of spin).  Perhaps the most
    credible testament to the lack of progress, however,
    is the NPC's well-researched "Report on Implementation
    of the PRC Labor Law."   The report included the
    following findings (Embassy can provide a more
    detailed unofficial translation of the report):

    -- The ratio of workers with signed labor contracts is
    low, duration of labor contracts is short, and the
    contents of labor contracts do not conform to
    standards.

    -- The minimum wage guarantee system is not fully
    implemented, wage arrears continue to occur, and there
    is no regular mechanism for increasing wages.

    -- Excessive overtime is common and working conditions
    are substandard.

    -- Most workers in private enterprises and sole-
    proprietorships do not participate (in social welfare
    insurance programs) and the vast majority of migrant
    workers have trouble participating in the systems in
    their present form.

    -- Labor inspection agencies do not have adequate
    resources, their methods are weak and their
    investigations of, and sanctions for illegal behavior
    lack force.

    Legislative developments
    ------------------------

    ¶44.  (U)  There has been no new labor legislation
    since 2004, but MOLSS it would place priority on four
    pieces of draft legislation in 2006.  The NPC
    published a draft Labor Contract Law in March 2006 for

    BEIJING 00018534  012 OF 012

    public comment.  There was a large response, including
    from the American business community.  Discussion of
    controversial issues continues, including the role of
    labor in business decisions and tightened restrictions
    on labor contracting.  A draft Employment Law will
    debut for public discussion in late August.  A draft
    Labor Dispute Law and Social Insurance Law have not
    yet been published.   A Bankruptcy Law passed on
    August 27, 2006, that makes wage and social insurance
    contribution arrears senior to other debts of bankrupt
    enterprises.  This provision is considered a victory
    for the ACFTU, whose influence overcame resistance
    from the People's Bank of China, which noted that the
    bankruptcy laws of other countries emphasize debts to
    banks and other creditors.

    BIOGRAPHY OF TIAN CHENGPING
    ---------------------------

    ¶45.  (SBU) Tian Chengping was appointed Minister of
    Labor and Social Security on July 1, 2005. He has
    actively promoted labor market and social insurance
    reforms, and welcomes international dialogue.  Tian
    was a university classmate of Chinese President Hu
    Jintao.  He is a member of the Chinese Communist Party
    (CCP) Central Committee.
    ¶46.  (U)  Tian's previous positions were:  Chairman of
    the Shanxi Provincial Legislature Standing Committee
    (2003-2006), Secretary of the Shanxi Province CCP
    Provincial Committee (1999-2003), Chairman of the
    Qinghai Province Provincial Legislature Standing
    Committee (1997-1999), Acting Governor, then Governor
    of Qinghai Province (1992-1997), Secretary of the
    Beijing Xicheng District CCP Committee (1984-1992),
    Deputy Party Secretary at the Qianjin Chemical
    Workings, Beijing, (1974-1983), and Secretary of the
    Communist Youth League of the Beijing General
    Petrochemical Works (1973-1974).
    ¶47.  (U)  Tian is a native of Daming, Hebei Province,
    and was born in 1945.  He joined the Communist Party
    of China (CPC) in 1964 and graduated from the
    Department of Civil Architecture of Qinghua University
    in 1968.

    SEDNEY

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