Four and a half months ago, the rundown Ferro Alloy Factory shut its doors after a half-century of cranking out metal plates for industry in the grim Chinese city of Liaoyang. When the state-owned enterprise closed, 5,000 people lost their jobs. The workers, accustomed to cradle-to-grave security, were promised pensions and back wages for the previous year. But little or nothing materialized. Meanwhile, say workers, their erstwhile bosses busied themselves selling off factory equipment and pocketing the cash.
The workers were outraged. So, every day for the past few weeks, they have marched through Liaoyang, finishing up on Democracy Road outside the factory, not far from City Hall, where a sign exhorts each passerby to be a "civilized citizen." There, the protesters--often joined by workers from other local factories--noisily demand the money owed them and the arrest of their former bosses. One typical worker--let's call him Li Feng--is owed $240 in back wages, enough to keep him and his family going for four months. For now Li, 55, has a job shoveling coal into a city furnace--but that will end when the weather warms up. None of this sits well with Li's wife, a retired hand at a paper factory. So she has joined the protests. "Life is so hard" for the common people, she says. "But the officials--their salaries keep rising."
Angry workers in the streets: It is the Chinese government's gravest challenge. In recent weeks, a rash of protests have erupted in cities throughout the northeast, including Liaoyang, Fushun, and Daqing. In the latter city, thousands have laid siege to a petroleum installation belonging to China's biggest oil company, PetroChina. But the protests are not confined to the industrial centers. At any moment, countless smaller rallies are going on across China, from southwestern Sichuan province to southern Jiangxi province, where farmers are agitating against oppressive taxes and shrinking incomes. Time and again, the government has managed to quell protests with a combination of force and offers of compensation. This latest round of demonstrations, while garnering international attention for their scale and intensity, may end no differently. And while many foreign investors have contingency plans, most remain optimistic. The unrest, says Michael Dell, CEO of Dell Computer Corp, "hasn't deterred us from moving forward. We [understand] the risk."
Still, time is not on Beijing's side. The government can't afford perpetual welfare payments for the Rust Belt's unemployed and disaffected workers, many of whom are only in their 40s and see no prospect of new employment in their home provinces. And the pattern of factory shutdowns and layoffs will only accelerate now that China is a member of the World Trade Organization and its decrepit industrial sector must go head-to-head with foreign competition. "This is the No. 1 challenge for China's next generation of leaders," says Hu Angang, a scholar at the Chinese Academy of Sciences, an official think tank. "No country in the world has ever cut so many jobs before."
With workers besieging government offices, blocking roads, and clashing with police, China's formidable state security apparatus is doing everything in its power to prevent the scattered protesters from coming together and forming so much as the seed of a national labor movement. So far, Beijing has managed to contain the situation, thanks to plainclothes police who loiter on every other street corner in strife-torn cities like Liaoyang. Whenever workers try to form independent trade unions, they are immediately crushed. And when the protests get too large, the cops lock the organizers up.
Ultimately, such tactics fan the flames by denying workers the right to protest and negotiate for better deals. "The problems are not economic," says Arthur Waldron, director of Asian studies at the University of Pennsylvania. "It's a political problem. They have to let citizens be citizens. Not letting them be citizens--this is a potentially explosive situation."
Besides, in many cases, the authorities chop the head off the protest movement only to see it grow another. "If you suppress everything," says Nicolas Becquelin, a Hong Kong-based researcher at Human Rights in China, a New York group, "then it's a time bomb."
To defuse it, the government of President Jiang Zemin and Premier Zhu Rongji--which is in its last year of power--is trying to move faster on the policy front. Already Beijing is opening such sectors as tourism, telecoms, and heavy industry to foreign investment. The hope is that foreign companies will soak up many of the jobless and teach them new skills. But many of these initiatives are happening in the southern coastal provinces, where people are richer and have fewer grievances. Crucial for the northeast, a region of ramshackle factories and millions of unemployed, is the creation of a social safety net to help workers absorb the pain as the shakeout accelerates.
This challenge to Beijing's grip on power began about five years ago. That was when China started in earnest to reform the industrial enterprises of its once-proud workshop cities, weaning them off massive subsidies, merging and shuttering factories, and laying off millions. The mass firings were a profound shock for workers who had expected jobs for life. "Ironically, the places that have fared the worst are the ones so favored under the planned economy," says Shaomin Li, a marketing professor at City University of Hong Kong. Before long, protests broke out. A turning point came in 1997, when 4,000 workers from a closed silk factory in Sichuan surrounded government offices and demanded unemployment benefits.
As China's market reforms took hold, unemployment went through the roof. While official figures put the urban jobless rate at 3.6%, economists believe it is closer to 15%. In Rust Belt cities the number is more like 25%--a situation that is expected to worsen. According to scholar Hu, over the next few years 10 million workers will be furloughed annually, while an extra 7 million will join the workforce. "It's very difficult to find work for China's people," he says. "Premier Zhu doesn't have an easy job."
Protests are forcing Beijing to slow industrial restructuring. Take the effort to merge Liaoning province's four biggest steel-makers. The plan could make a third of the four companies' 200,000 workers redundant. Now consolidation is impossible. "It is so hard to cut employees," says Liu Zhijiang, an official with the Fushun Iron & Steel Group. "As a state enterprise, we have a responsibility to keep social stability."
With tensions rising, Beijing is resorting to heavy-handed tactics. Police have rounded up four protest leaders in Liaoyang. One, Yao Fuxin, was arrested following a Mar. 17 meeting with city officials to discuss the protesters' grievances. A second man, Xiao Yunliang, was taken into custody two days later; his daughter has heard that he has started a hunger strike to protest his imprisonment. "We don't know what is going to happen to him," she says. "We don't even know where he is." With the organizers sidelined, the government is now trying to buy off the rest of the protesters. Local press reports say workers at Ferro Alloy have received half their back wages and will soon get unemployment benefits or pensions. But workers say this is a fraction of what is owed--and they aren't counting on more.
It wasn't supposed to be this way. In 1986, Beijing announced it would start subsidizing pension payments to state-enterprise employees, and later to all urban workers. Provincial and city governments were also to contribute. The result: a mishmash of programs that mostly didn't work. Beijing tried again last year, selecting the Rust Belt province of Liaoning for a three-year pilot program. Liaoning seemed like a good bet because its governor, Bo Xilai, is widely regarded as a masterful administrator. So it was a surprise when Bo showed up at March's National People's Congress to announce that the new program wasn't working either.
It turns out there was insufficient funding from the central government, and what did arrive was probably siphoned off by local officials or managers. A solution is desperately needed. With layoffs accelerating, says Wang Dongdong, an official with the Liaoning welfare office, "time is running out."
And then there's the corruption issue. Last year, according to the National Audit Bureau, billions of dollars went missing in state enterprises as factory managers sold assets on the cheap and pocketed loans and pension proceeds. Given the allegations swirling around the closure of the Ferro Alloy factory, Beijing knows it can't stand idly by. The Liaoyang Daily has reported that at least 13 factory managers are being probed for corrupt activities involving more than $600,000. "If the government is clever," says Hong Kong-based labor activist Han Dongfang, "they will sacrifice some local officials."
Another solution is to use grassroots reforms to foster accountability. It's already happening in the rich coastal cities, where residents are encouraged to report graft, city officials must pass proficiency tests, and public hearings are held on everything from power price hikes to phone surcharges. So far no such democratization has been allowed in Liaoyang and other Rust Belt cities, where the enormity of the problems make such measures seem a luxury. Besides, northeastern officialdom has little patience for workers' grievances. As a result, they take them to the streets. Says labor activist Han: "The system doesn't allow the workers to have negotiations around the table. That is the sickness of the system."
Unless they spread and involve more people, the protests are unlikely to prompt real change in labor policy any time soon. And while Liaoyang workers from various factories and industries have shown unusual solidarity, there is no sign that a regional labor movement is forming--let alone a national one. For the time being, China's only sanctioned labor entity is the All-China Federation of Trade Unions, a toothless group established in 1925. "It has been extremely difficult to link up social protest in different areas," says rights activist Becquelin. "There is no independent union, because as soon as one tries to set up one, they retaliate."
That means that pressure will continue to build in China's inefficient state economy, particularly in heavy industry and agriculture. Already, a destabilizing income gap between haves and have-nots is looming. Consider that in 2000, according to the Asian Development Bank, per capita income of the top 20% of China's urban population jumped 9.6%, to $1,360. By contrast, the income of the bottom 20%--about 80 million people--grew only 2.7%, to $377 per year. "That's very worrisome," says Tang Min, the ADB's chief economist in China. Indeed it is. Until China's leaders figure out how to give their workers a peaceful way to raise their complaints, the demos will continue--and that could force real political change upon Beijing. By Dexter Roberts in Liaoyang, with Bruce Einhorn and Frederik Balfour in Hong Kong