Chinese firms struggle as state support flags

Soaring costs are squeezing Chinese companies, but pleas from executives for government relief are falling mostly on deaf ears.

As Beijing tempers the push for export-driven growth with concern for long-neglected worker rights and environmental protection, even powerful businesses have not been getting their own way at the annual gathering of China's parliament.

Much of the corporate grumbling at the two-week-long National People's Congress, which ends on Tuesday, has been about a labour contract law that went into effect on Jan. 1.

Critics say the law makes it harder to fire workers, hurts competitiveness and could lead to more bankruptcies.

Zong Qinghou, chairman of Hangzhou Wahaha Group, China's top beverage firm, used his pulpit as a Congress delegate to complain that the law was a step backward to the days of the "iron rice bowl" when state-owned firms provided cradle-to-grave welfare for the world's largest workforce.

"It isn't reasonable," Zong said. "We must protect workers, but uncompetitive businesses would hurt workers even more."

That sentiment was widespread, but still seemed to carry little weight with officials.

"The issue now is not revision, but full enforcement," Sun Baoshu, vice-minister of labour and social security, told reporters.

HARD TO SURVIVE

As workers gradually assert their rights, the number of labour disputes is rising by one-fifth every year, the government said last week.

In southern China, 1,500 workers at one factory alone went on strike over a contract dispute and clashed with police.

The law is a symbol of President Hu Jintao's determination to make a "harmonious society" out of a country marked by a yawning wealth gap, which is being aggravated by rising food prices. Inflation has hit 8.7 percent, the highest in nearly 12 years.

The Communist Party fears income inequalities, if left unchecked, could spark social unrest and undermine its authority.

Against this background, Ben Simpfendorfer, China strategist at Royal Bank of Scotland in Hong Kong, said he saw little scope to roll back the law.

"They are trying to protect labour rights for a reason," Simpfendorfer said. "The corporate sector has to take some pain."

"The corporate sector has benefitted the most over the past twenty years, and now it has to be the household sector," he said.

Most of that pain will be felt in the profit margins of smaller enterprises that are also struggling with a stronger yuan and fast-rising raw material costs.

Zhang Yansheng, an economist at the Beijing External Economy Research Institute, reckons large companies will adapt fairly well, but says less efficient firms face two years of tough restructuring.

"For small and medium-sized enterprises the situation will be very difficult," he said. "It will be hard to survive."

In a sign of the cost pressure companies are under, Nike Inc , the world's biggest sportswear maker, said on its Web site this month that it had found underage workers and unpaid wages at some of its Chinese suppliers.

ENVIRONMENTAL DAMAGE

Cleaning up the environment is another growing political priority, so executives from natural resource companies are also now finding it harder to win favours.

Zhou Zhongshu, the president of Minmetals, the country's largest base metals trader, cited the power disruptions caused by fierce snowstorms in January to lobby for a respite from a crackdown on inefficient coal mines.

"After the electricity failures from the recent winter storms, I understand the government is looking at that possibility," said Zhou, who doubles as a deputy to a parliamentary consultative group. "But no decision has been made."

And none will be, if officials can be taken at their word.

With record high prices in the world's second-largest energy market, miners are busy exploiting China's vast coal supplies, but along with huge profits the industry has also produced the world's worst safety record and life-choking pollution.

In a token of the importance the Party attaches to cleaner air and water, the environmental protection agency was elevated last week to the status of ministry.

Minmetals is far from alone in trying to make sure that the bottom line trumps the Party line.

Even companies such as Lenovo Group Ltd <0992.hk>, the world's No.4 computer maker and Beijing's ideal of a modern Chinese firm, was looking for government help.

"We hope authorities will look into tax incentives as a way to encourage companies to invest more in research and development and technology innovation," said Lenovo Chairman Yang Yuanqing.

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