Chinese companies in trouble withhold wages and illuminate economic challenge

After a long year of toil, 25-year-old construction worker Qiu Kai faces the harsh indignity of returning to his home in western Sichuan province over Chinese New Year without a dollar to show for it.

Qiu and more than 100 of his fellow workers on a luxury residential development – named "Romantic" – on the holiday island of Hainan have not been paid, despite repeated assurances from their sub-contractor that their cashflow issues would be resolved before the holidays. He is owed more than 30,000 yuan ($6590) in backpay.

The Chinese sharemarket has been extremely volatile.
The Chinese sharemarket has been extremely volatile. Photo: AP

"The company promised us they would solve the problem by the 15th [of January], but they haven't. They made such promises many times in the past," Qiu told Fairfax Media via telephone.

As the disgruntled workers unfurled banners and called for management to face them, the company's sales department locked its gates and called in security. Rumours started to spread among workers that their boss had pocketed their money and ran.

Construction worker Qiu Kai says he is owed wages.
Construction worker Qiu Kai says he is owed wages. Photo: Supplied

"I feel terrible," Qiu says. "My grandfather is in poor health, and I was hoping to get my money as soon as possible so I can go home and be with him."

Withholding wages is a common tactic employed by Chinese companies in trouble, in a country where labour protections still leave much to be desired.

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But labour rights groups say the number of strikes and worker protests in mainland China escalated dramatically towards the end of last year as the economy continued to falter, with a particular surge in pay disputes in the struggling manufacturing and construction industries.

The Hong Kong-based China Labour Bulletin recorded 2774 separate strikes and protests for the year, double the number of incidents in 2014, with more than two-thirds of all disputes recorded related to the non-payment of wages. A growing spate of labour activist arrests in recent months also point to Beijing's growing anxiety over increasing unrest.

"Wage arrears have been endemic in the construction industry for decades but are now increasingly evident in manufacturing, mining and services as employers simply refuse to pay workers or close their businesses down and disappear," it said.

This is the pointy end of the slowing Chinese economy.

On Tuesday, the Chinese government will announce its gross domestic product figures for the December quarter (and therefore the year).

The official numbers will likely show China's rate of economic growth for 2015 was just shy of 7 per cent – smack bang on the target growth rate set by Communist Party leaders in March.

As The Economist put it in the cover story of its latest issue: "That figure may be an overestimate, but it is not entirely divorced from reality."

China's economy is not veering off a cliff; ironically, the long-term watchers of China's economic slowdown say that because it has been growing slower than official figures have suggested for years, the likelihood of a hard landing is smaller than two or three years ago.

But far from being the purring engine that has driven global growth for the past decade, China's slowing economy has become the central source of anxiety as overseas investors awaken to the fundamental challenges the world's second-largest economy faces.

Chinese leaders now openly admit its struggles in its difficult transition from the old credit-fuelled and investment-led industrial economy – which has resulted in chronic overcapacity and unsold real estate – to a more innovative and consumption-driven services economy. It says the positives in the new economy will offset the decline of the old, and that economic growth will be maintained around 6.5 per cent.

But persistent stockmarket turmoil and the central bank meddling with its currency has fuelled concerns Communist Party leaders are mismanaging the difficult transition.

Economists point to a growing credit bubble as a ticking time-bomb as a result of delayed reforms, and the bloated state-owned sector remains too inefficient. And there is the issue of what role unskilled and uneducated workers left behind in the old economy can play.

Steel and coal producing towns across China are in the doldrums, while reports of factory closures in the southern manufacturing hubs of Guangdong and Zhejiang proliferate. Despite the upbeat tone China's state-controlled media mandates, the fear is that the gloomy sentiment offshore permeates and blunts consumer confidence, one of the few remaining bright spots.

President Xi Jinping was reportedly so annoyed at being depicted on July's Economist cover with both arms extended, propping up a free-falling sharemarket graph that he rounded on his economic advisers. With China's economic and sharemarket woes again in the spotlight, he is featured on the latest issue riding a nosediving dragon replete with flaring nostrils.

Having spent the past three years consolidating power through an anti-corruption campaign and military reshuffle, the fate of global markets could well rest with his ability to finally implement the painful reforms needed to right the course of China's economy.

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