As China's Losses Mount, Confidence Turns to Fear
Officials Use Bailouts to Forestall Unrest

By Ariana Eunjung Cha
Washington Post Foreign Service
Tuesday, November 4, 2008

SHENZHEN, China -- When Chong Yik Toy Co. went bankrupt, the bosses fled without meeting their payroll and angry workers took to the streets in protest. Less than 72 hours later, the local government came to the rescue.

Armed with bags full of cash totaling half a million dollars, accountants began distributing the money so the 900 former employees would have something to get by on. The Chinese officials who made the emergency payments on Oct. 21 called it an "advance," part of a "back-pay insurance fund."

But the reality was obvious to everyone: It was a government bailout.

In the initial weeks of the global financial crisis, Chinese officials resolutely declared that they were not significantly affected. But now, as factory closings, dire corporate earnings reports and stock market losses continue to mount, the Communist Party's confidence has changed to another feeling entirely: fear.

For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble. And for the Communist Party, the crisis is not just an economic one, but a political one. The government's response offers a glimpse into its still ambiguous relationship with capitalism -- relatively hands-off in good times, but quick to intervene directly at the first signs of a downturn in order to prevent popular unrest.

In recent weeks, local governments have set up special loans for ailing companies and initiated severance payments for workers who have already lost their jobs. Officials are candid in acknowledging the efforts are needed to head off what they call "mass incidents" -- the Communist Party euphemism for protests.

The economic devastation has been worst in the industrial centers of southern China, areas that had thrived in recent decades by producing the electronics, clothing, toys and furniture that fill retail stores in the United States.

With export orders falling because of the global slowdown and rising raw material and labor costs, more than 68,000 small companies nationwide collapsed in the first half of 2008 and about 2.5 million jobs in the Pearl River Delta region may be lost by the end of the year, according to government and industry estimates.

As the economy has soured, dissatisfaction has grown: Since mid-October, there have been dozens of labor protests involving thousands of workers at major exporters, including several publicly listed companies.

Meanwhile, government figures released last month show that the gross domestic product grew by 9 percent in the third quarter -- robust by almost any standard, but not in China. Here, the figure represented the slowest growth in five years, and was dangerously close to 8 percent. That's the level at which economists say China needs to grow in order to keep generating enough factory jobs to maintain stability in the labor market, as millions of peasants continue to pour into Chinese cities in search of work.

At the same time, some of China's most revered companies, whose growth once seemed limitless, have reported surprising losses in the past few days. Air China, the nation's biggest international carrier, posted its first loss in seven quarters because of declining passenger numbers and wrong-way bets on fuel prices. Bank of China, the nation's largest foreign-exchange lender, said that as credit-market losses went up, its profit growth went down to its slowest in two years.

China's leaders have made a variety of moves to try to stabilize the economy -- three interest rate cuts in six weeks, new export tax rebates, reduced costs for home buyers, and billions spent on infrastructure. But any hope that a strong Chinese economy -- the single largest contributor to global growth -- would offset the slowdown elsewhere is gone.

The government's efforts to prop up individual companies are a radical move for a country that in recent years has tried to move away from its "iron rice bowl" philosophy, in which jobs and wages are guaranteed for life, and transition to a more sink-or-swim-style capitalism.

In the coastal province of Zhejiang, the local government is setting up a special $9.5 million loan fund to help companies such as the deeply indebted Feiyue Group, which exports sewing machines and suitcases. In Jiangsu province, the government extended unemployment benefits to migrant workers laid off from ailing factories; these workers had previously been shut out of public services because they don't have residency cards.

The Guangdong provincial government in the south is scrambling to set up a special fund to compensate laid-off workers in order to "protect against some of the financial and social problems caused by such closures."

Eddie Leung, chairman of the Dailywin Group, which makes Movado and Anne Klein watches, said Guangdong officials also seem to be backing down from efforts to transform the area from a manufacturing hub into a high-tech and services center. In recent years, the government had been content to see polluting factories and sweatshops go out of business to make room for companies higher in the value chain. Now the government seems inclined to help them survive.

Chong Yik Toy is but one of a number of bankrupt companies whose employees have received payoffs from the government.

In the eastern city of Wujiang, nearly 1,000 workers from bankrupt Chunyu Textile Co. received four months' salary on Oct. 27 after they swarmed the area's four main roads to draw attention to their cause. After more than 1,000 workers for home appliance maker BEP International Holdings gathered outside the factory to protest, district officials gave them $44 each late last month. The employees were also allowed to continue living in the defunct factory's dormitories for free. The same week, the government offered three months' back pay to the 900 workers at Gangsheng, an electronics supplier, after they staged a protest at a shop near their factory.

In the neighboring city of Dongguan, the local government handed out about $3.5 million on Oct. 21 to the employees of Smart Union -- which sold its toys to Mattel, Disney and Hasbro -- after the 7,000 workers staged a strike.

Hu Weicai, 38, who worked with the plastic molds used to make electronic toys, said employees became nervous when the owners slipped three months behind on salary payments. The workers occupied the factory and the surrounding streets until government officials promised them they would be paid.

"The government was very afraid when they saw what was happening. What the government fears most is workers making trouble. They paid us to stabilize our moods," Hu said.

But employees said a one-time payment will provide only a temporary reprieve from the unrest if the workers are unable to find new jobs.

Jia Yingge's husband, a guard, received a little less than his monthly salary of $300. With no employment prospects in sight, she worries about how the couple will support their newborn son.

"If you mention this company's name, no one wants to hire you because they know about the blockade and now we have a bad reputation," Jia said.

When Liu Fangping, 38, was paid, the government took his fingerprints with red ink -- presumably to make sure the right person was receiving the payment. But Liu noted that the prints could also be used to pinpoint troublemakers who continue to protest despite the handouts.

"I don't think the government is doing its best to protect the rights of workers," Liu said, adding that officials seemed more interested in controlling unrest than helping individual workers.

Indeed, signs posted at the gates of closed factories did not direct former workers to places where they could get help, but instead displayed a warning. In large black characters, they reminded workers that they could be detained for stirring up unrest, for disobeying security officials or even for "unlawful gathering."

Researchers Crissie Ding and Liu Liu contributed to this report.

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