Human Resource Management in China

Shuming Zhao
Nanjing University

Human resource management and labour-management relations in China

are different from those in other countries because of different political and
economic systems and social and cultural backgrounds. Lots of changes have
taken place in human resource management since the 1978 economic
reforms. This paper discusses the general background of human resource man-
agement and labour-management relations in China. It describes the cultural
values, political and economic systems shaping Chinese human resource man-
agement and explores labour-management relations in Chinese enterprises.
The author concludes that as the economic reforms deepen and a market
economy is established, changes will take place in the nature of labour-
management relations and human resource management in Chinese
enterprises.

POPULA,TION AND EDUCATION

The analysis of human resource management in the People’s Republic of China begins
with consideration of China’s large population and relatively low skill levels. China
has a population of over 1.17 billion people, of whom about 64 percent live in rural
areas. Of the more than 300 million who are in urban areas, about 30 million are in
the five largest cities, namely Shanghai, Beijing, Tianjin, Shenyang and Wuhan. Shang-
hai is the largest city in China, with a population of about 13.3 million. However, the
quality of the workforce in Shanghai is not high. According to recent studies, only
about 7.3 percent of those over 25 years old in Shanghai have received higher education
(cf. Canada, 37.4 percent of the same age group; the United States, 31.9 percent; the
Philippines, 15.2 percent; Japan, 14.3 percent; Korea, 8.9 percent). The coastal cities
and provinces are densely populated and the plans for economic development favour
these areas because so much of the needed infrastructure is in place.
The literacy rate serves as a rough index of the quality of the workforce in China.
According to recent census statistics (1992), over 15 percent of the total population
in China (more than 155 million people over the age of 15) is illiterate. The number
has dropped from 200 million illiterate, about 22.81 percent of total population, in
1982. By 1990, some 16.2 million people had received higher education (which is
about 1.4% of the total population); 91 million had received senior high school edu-
cation (about 8%); 260 million had received junior high school education (23.3%);
420.6 million had received elementary school education (37%). The percentage of
high school graduates accepted into colleges each year has risen from 4.7 percent in
1977 to almost 32 percent in 1992. There are 1075 colleges and universities in China

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which had an enrolment of 754 000 first-year students in 1992. In addition, about
592 000 students were admitted to adult education. In 1993, colleges and universities
enrolled a total of 786 000 new undergraduates and secondary technical schools
enrolled 910 000 new students. At present the total enrolment of undergraduates is
2 184 000 and graduate students number over 100 000. Since the economic reforms
of 1978, China has established more vocational and technical schools. In 1992, the
enrolment at those schools reached 6 854 000. In the coastal areas, especially in the
major cities, more people receive higher education than in any other place in China.
Now Chinese governments at different levels are paying much greater attention to the
education problem and plan to increase investment in it.
Generally speaking, basic education in China is relatively strong. However,
foreign management in China may be surprised to learn that the typical graduate of
a college-level institution is trained very narrowly. China adopted the Soviet method

of higher education in 1952, and began the national movement of readjusting the
priorities of colleges and departments. The aims of the movement were to give
prominence to the training of personnel with specialist know-how most needed in
industrial enterprises, to develop specialized institutes, and, accordingly, to readjust
the comprehensive universities. Many students go to colleges or institutes which are
designed with narrow majors to serve particular government ministries. However,
some students go to the major universities, like Beijing, Nanjing, and so on, where

they can major in any field in an array of alternatives which are similar to western
’

universities.
The narrow approach to higher education, combined with an apparent emphasis
on rote learning in many courses in the lower grades, suggests an educational system
which does not stimulate the imagination or promote innovation. Thus, the Chinese
graduate of a technical institute might have been well trained in how things have
been done in the past, but has not been stimulated to think about how things might
be done differently in the future. In recent years, since Chinese movement towards
the market economic system, Chinese higher education has accelerated reform by
establishing more interdisciplinary majors. Business majors, especially, are wel-
comed by students.

The Influence of Joint Ventures on HRM

Those involved in joint ventures may not encounter literacy problems because they
have been exposed only to the more qualified strata in the workforce. In recent
years, more and more people have wanted to work in foreign joint ventures which
attract the more qualified members of the workforce because, in many ways, they
are preferred employers. Because the Chinese partners want the joint ventures to

succeed, those perceived as the better workers are assigned to them. Since more
market features were introduced into the Chinese economic system, more and more
people have joined the stream of job transfers, in the hope of better remuneration
and opportunities to demonstrate their abilities. This has begun to sway established
employment practices and force those work units suffering from loss of capable
staff to accelerate reform of their labour, personnel, and wage systems. In China,
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every province or city has Personnel Exchange and Service Centres, which are gov-
ernment-sponsored institutions. These organizations sponsor personnel exchange
negotiations, career development programs and provide information on job oppor-
tunities. Statistics indicate that more than 90 percent of total job transfers include
movement to positions in joint ventures, rural and township (small) enterprises, as
well as private firms because these businesses provide better payment, welfare and
opportunities. State-owned enterprises and institutions, on the other hand, still lag
well behind, losing their attractiveness. In Shanghai, more than 1000 foreign-funded
enterprises in operation have a total payroll of 2.1 million employees. More than
50 percent were hired through public personnel exchange activities. Foreign-funded
firms find it easy to solicit staff for any position they need to fill.

THE CHINESE SYSTEM OF CULTURAL VALUES

Understanding different aspects of the system of values found among the Chinese
is of great significance to foreigners doing business in China. The most important
values are associated with Confucianism. The general thrust of Confucianism is con-
cemed with the importance of proper human relationships. A sense of order, of
obligation to the group, and especially a preference for harmony in interpersonal
relationships might all be cited as features of the value system encountered among
’

the Chinese (Zhao, 1991).

Four Key Confucian Principles

Confucian ideas have affected human resource management and labour relations in
China for centuries. Confucius was an itinerant teacher of the fifth century BC (551-
479 BC). Among Confucian ideas that have particular importance for the later history
of China are: -

. Confucianism treats the family as the key unit in human society, and filial piety-
loyalty and reverence towards one’s parents-as the most important aspect of
family relationships. A man’s loyalty to his parents is supposed to take precedence
over everything else, including loyalty to his children, his wife, or his ruler.

. Confucianism takes a basically hierarchical view of society. One should note that
of the five key human relationships in the Confucian doctrine, four are relation-
ships linking a superior to a subordinate: father to son, ruler to subject, husband
to wife, and elder brother to younger brother. Only the relationship of friend to
friend is between equals. Nowadays, Chinese are talking of adding another rela-
tion, which is group to group. They consider that loyalty to organizations, as
demonstrated in Japanese culture, is very important to corporations.
.
Confucianism argues not only that a ruler has an obligation to behave in a good
and humane fashion, and to provide decent living conditions for his subjects, but
also that these obligations are profitable for the ruler: the subjects will respond
with loyalty and obedience. It is imperative that a ruler keep the confidence of
his people. If they are poor and miserable, the ruler will lose the ’mandate of
heaven’; he deserves to be overthrown and he probably will be.
6

power should be exercised by people who have been educated in the proper
way of exercising it. Confucius himself never attained the position of power for
which he yearned, but he felt that he was training his students to be officials, and
eventually (many centuries later), a Confucian education became, in fact, the main
pathway to power in the Chinese government (China Reconstructs, 1989).

Implications of Confucian Values

The critical role of harmony in the system of values in modem China is seen in the
well-known phenomenon of ’face’. The manager who criticizes a subordinate,
whether in private or in the presence of others, causes that subordinate to ’lose
face’. But the manager in this situation also loses face because he or she caused the
subordinate to lose face. This means that criticism of performance on the job must
be handled in a very delicate way, with criticism disguised as suggestions for
improvement. Foreign managers who are accustomed to dealing with workers in a
straightforward way, open and blunt, must be aware of the Chinese concern for
’face’ if they are to be effective.
Connections, the term ’guanxi’ is used in Chinese, are very important in ’getting
on’ in Chinese society, even if technocratic qualifications have become more nec-
essary. ’Who you know’ is still very useful in one’s working life and career. ’Net-
working’ is also clearly important to get business done and to get a good position,
whether for administrators, managers or entrepreneurs (Warner, 1993).
Govemment policy is the principal force at work, no doubt, but the Confucian
preference for an orderly and stable hierarchy also plays a role in that policy. The
enterprise or work unit is more than an employer in the sense in which that term
is used in western market-oriented economies. The Chinese worker is typically
attached to his or her work unit for life. The so-called ’iron rice bowl’ assures a
worker of a job and an income throughout his or her working career. Housing,
medical care, and other benefits are provided by the work unit as well. The Con-
fucian sense of harmony and order assures that the worker appreciates his or her
position in the organizational structure of that unit.
One can understand that a worker with this view of the organization is not likely
to take the initiative in devising new products or new ways of doing things. Inno-
vations in manufacturing processes or in product offerings are likely to be disruptive
of organizational harmony. Hence Chinese workers have typically taken a very
passive attitude toward their work, ready to respond to the boss, but unprepared to
act as a change agent. The Chinese employee is trained to take orders, but not to
initiate change. However, since 1978, Chinese political and economic reform poli-
cies have encouraged Chinese workers to become more active in participating in
decision-making and in taking initiatives in their work.
Challenges to Confucianism since the 1949 Revolution _

Since 1949, the Chinese have experienced almost four decades in which the virtues
ofegalitarianism have come to be accepted as the desirable norm, at least by most

people and at least until recently. In other words, egalitarianism might have been a
 7

matter of public policy for so long that it has become a part of the value system,
even though there is nothing in Confucianism which would lead to egalitarianism.
Recent capitalist reforms in China, of course, have been premised on the view that
’it is glorious to be rich’. This might suggest an attack on revolutionary egalitarianism.
But given the popular outcry against the ’new rich’ in China, it is apparent that
egalitarianism has become an ideal for many people. Egalitarianism is reflected in
the relatively flat wage structure.
Another aspect of the value system under some challenge is the intense strength
of respect for the aged person. China’s political leaders are considerably older than
their counterparts in other countries. In everyday life, one sees evidence of the
family’s respect for aging parents and grandparents. This, too, reflects elements of
Confucianism. Foreign managers in China should be aware that, whereas in the
United States, the youngish individual who has shown good performance might be
advanced rapidly over older colleagues, this is not generally the case in China. In
China, merit is given consideration, but the most important thing to be considered
is the age of the person. This feature of the value system is one of the factors behind
the complaints of young people, especially those who have returned to China after
completing studies abroad, that they were not being used satisfactorily, and that
they deserved more advanced positions than they were given when they returned.

IMPACTS OF POLITICAL AND ECONOMIC STRUCTURES ON HRM

To understand human resource management in China, expatriates from foreign com-
panies should learn the political and economic structures in China before going
there. The vast majority of enterprises in China can be classified as either state-
owned, collectives, private enterprises or joint ventures.
Business Structures
The state-owned enterprises are the key to the whole system. There are about
13 000 large and medium-sized state-owned enterprises in China with over 44
million employees. These large and medium-sized enterprises constitute 2.6 percent
of all firms in the industrial sector, produce about 46 percent of total gross value of
industrial output, and pay to the state about 67 percent of profits and taxes. Before
economic reform was introduced, all their profits went to the state. Now they typ-
ically contract with the state to pay a certain tax, and any earnings in excess of the
tax can be used for reinvestment, bonuses, or welfare (especially housing). Such

large and medium-sized enterprises have the full stereotypical apparatus of Chinese
labour-management relations with a consistent set of personnel practices. They have
almost complete unionization, workers’ congresses, as well as branch union com-
mittees and Party influence over their activities (Warner, 1993).
Collective enterprises under local government are, in effect, owned by the workers
in that enterprise. Even before economic reform, they paid a tax of 55 percent of
earnings, and the remaining profit was used for new equipment, worker bonuses
or welfare. Since economic reform in 1978, Chinese urban and rural township enter-

prises (small businesses) have been blooming. They employ about 112 million
8

people, producing about 35 percent of the total gross value of industrial output and
have grown rapidly in recent years. They are allowed to recruit employees according
to their production needs and reward workers and managers more flexibly. State-
owned enterprises are most common in the basic and strategic industries of iron
and steel, petroleum, chemicals and other essential lines of manufacturing, whereas
collectives are more common in light industry such as bicycles, watches and sewing
machines.
Privately owned enterprises are now significant in terms of numbers, but they are
still largely in the service sector. They employ about 25 million workers and make
around 5 percent of the nation’s gross value of industrial output. They also have
greater leeway in their employment practices and reward systems and in effect
operate in more flexible ways than state-owned and collectively owned enterprises.
Joint ventures have become increasingly common in recent years. With the expan-
sion of investment scope and the ’open areas’, the number of Sino-foreign joint
ventures, co-operative and exclusively foreign-owned enterprises has increased
remarkably, with those registered in China amounting to 130 000 joint ventures by
November 1993. About 6 million workers work for joint venture enterprises. They
pay much better than the other three categories of enterprise mentioned above. The
total output value of these joint ventures is currently about 5 percent of gross
national product (Beijing Review, 1993). They are also able to recruit their own
workers. Some of these joint ventures may have trade unions, but not necessarily
workers’ congresses.

Planning systems
Products in China are subject to various types of treatment in the planning process.
In the case of mandatory planning, the enterprise is subject to production quotas
and sales to assigned customers in the same manner as before economic reform
was instituted in 1978. Mandatory planning is applied primarily to the essential

industries, such as coal, iron and steel, petrochemicals and the like. In the case of
guidance planning, an output target range is applied rather than a specific output
quota. Firms not subject to mandatory planning or guidance planning are essentially
free-market firms. A firm might have some of its output subject to mandatory plan-
ning and be free to sell over-quota production on the free market. Consequently,
the system includes the full spectrum of planning options, from mandatory planning
to the free market.
In early 1980, the ’economic responsibility’ system was extended from agriculture
to manufacturing. Under the economic responsibility system, the enterprise signs a
contract with the state under the terms of.which it agrees to generate a certain level
of profits, a portion of which is turned over to the state as taxes. Thus the state-
owned enterprise is able to retain part of its profits whereas formerly all profit had
been turned over to the state. The profits are then used by the enterprise for
bonuses, investment in new equipment and for welfare (housing seems to be the
principal expenditure in this category). Joint ventures are subject to a straightforward
profits tax without having to enter into economic responsibility contracts.
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Impacts of Planning on HRM .

The planning system in China, even though now modified in order to let market
forces play a larger role, is still one in which most enterprises, especially state-owned
ones, are greatly constrained by government regulations. These constraints are so

great that the Chinese enterprise might best be considered not as an independent
decision-making unit but rather as a semi-autonomous branch of the government
(Holten, 1988). Decision-making is diffused upward throughout the bureaucracy to
which the enterprise reports. Consequently, foreign managers in China often dis-
cover that human resource management decisions, like many others, are subject to

very specific constraints from outside the enterprise. The Labour Services Bureau is
sometimes involved in decisions about wages and fringe benefits, and so on.
’

Danwei: The Individual Work Unit

The dominant feature of decision-making in China from the viewpoint of human
resource management is the role played by the individual’s work unit, the Danwei.

The unit is much more than an employer. It is the key element in the country’s
social welfare system. Although the system is changing, at least around the edges,
in the past a person, once assigned to a unit, would typically stay with that unit
throughout his or her working career. Employment was thus assured; the worker
had an ’iron rice bowl’. The larger units would also provide housing for the workers
(in the case of smaller units, the workers would find housing through the municipal
housing bureau). In China, because of the vast population, work units are usually
overstaffed. Since the recent reforms, the Chinese government has been trying to
create an environment which welcomes foreign investments and the establishment
of foreign enterprises, joint ventures and co-operative enterprises in China in order
to speed up the modernization program and to create more employment

opportunities.
The Work Unit and Labour Mobility
In part because of the social welfare function of the work unit, the mobility of labour
in China is limited. Although lower level workers might move from unit to unit, at
least occasionally, managers, engineers and technicians are more difficult to transfer.
One’s pension plan is with the unit and often one’s housing as well. More signifi-
cantly, a worker cannot move from one unit to another unless both bosses agree to
the transfer. This policy is clearly shortsighted in terms of maximizing worker moti-
vation to perform. It is possible for an individual to find a better position in another
unit, but the better he or she performs at the present job, the lower the probability
that the present boss will agree to let the individual go. Because of these reasons,
Chinese are used to living in one place for generations, unlike westemers.
Since the economic reforms of the 1980s, more flexibility in the labour market
has gradually been permitted. Increasingly, employers enjoy some choice, selecting
people from among several candidates for a particular opening. As mentioned
earlier, China has established Personnel Exchange Centers in every province and
every city. Now China is trying to establish a free labour market.
10

In the past, it has been rare for a unit to dismiss a worker. In an attempt to
introduce more discipline into the labour market, the Chinese government in 1986
initiated the idea of short-term employment contracts in the state-owned enterprises,
something which had been used earlier in collectives and private firms. Perversely,
the employment contracting system might actually have the effect of lowering mobil-
ity. Among lower level workers, who were more likely to gain permission to move
than were skilled managers and technicians, the idea of moving from the present
position to a new unit is not attractive if it means giving up an ’iron rice bowl’ for
a short-term contract. On 13 February 1992 the Ministry of Labour, the State Council

Production Office, the State System Reform Commission, the Ministry of Personnel
and the All-China Federation of Trade Unions put forward a twelve-point proposal
for deepening reform of the enterprise systems of labour and personnel, wage dis-
tribution and social insurance (People’s Daily, 1992). In order to further the reform,
the third plenary session of the 14th Party Congress passed a 50-point set of deci-
sions on ten issues to do with establishing a ’socialist market economic system’,
including establishing a reasonable individual income distribution and social insur-
ance system (Qui Shi journal, 1993).
The Communist Party and the Work Unit
One particular feature in China is the role of the Communist Party in the work unit.
In the typical state-owned enterprise, the administrative structure of the unit includes
not only the managing director, deputy managing directors and the rest of a man-

agement hierarchy, but a parallel structure of Party committees at the various levels
in the unit. Even at the level of the individual workshop, there is a Party branch or
Party committee. In January 1987, the Party tried to extricate itself from supervision
of business management by moving to a system in which the managing director of
the enterprise is fully responsible for production and management. Nevertheless,
the regulations state that managing directors should ’regularly report on their work
to Party organisations and should accept their supervision of these groups’. Party
committees are to ’ensure and supervise the implementation of Party and govern-
ment policies and carry out political and ideological work’ (China Daily, 1987). The
problem may be less severe than this suggests. According to some studies, joint-
venture managers have had no problems with the Party organizations within the

joint ventures.
Trade unions in China have traditionally been organized on vertical lines, carrying
out the Party’s policies and taking care of workers’ welfare. Trade unions in enter-

prises do not bargain freely, or fix wage levels as in western countries, but in con-
tracted or leased enterprises they help determine the allocation of funds and the
arrangement of working schedules. Normally, trade unions are supposed to help
implement the resolutions passed by the workers’ congress in these areas. In the
everyday work of enterprises, union officials are also expected to defuse conflict
between the workforce and management. In recent years, Chinese trade unions have
played an increasing role in labour-management relations, especially in the joint
ventures.
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KEY IMPLICATIONS FOR EXPATRIATE MANAGERS

Since the Chinese government is determined to continue economic reforms in the
direction of a market economic system, great changes will take place in the nature
of labour-management relations and human resource management in Chinese enter-
prises as the state ownership pattern is transformed into shareholding systems. China
has favourable investment policies and a stable investment environment. Market
mechanisms play a growing role in China’s economic system. China has been trying
to create a better investment environment for foreign firms and works hard to ensure
that managers of joint ventures face a minimum of obstacles as they move to
develop their corporations in China.
Managing Chinese human resources well and paying attention to human relations
and ’harmony’ is an important key to success. For foreign joint-venture managers,
any disciplinary measures must be handled with sensitivity given the Chinese
emphasis on harmony and ’saving face’. Foreign expatriates need to recognize that
workers, to a considerable extent, have an almost feudal. view of the role of the
employer. Fringe benefits are large and important because almost all enterprises
provide housing, medical care, and so on for all their employees. Given the sub-
stantial fringe benefits, every effort must be made to maximize labour productivity
if production costs are to be held to a reasonable level.
Expatriates working in China require time to become familiar with China’s unique
environment. Language skills certainly allow them to adapt more quickly than those
not fluent in Chinese, and ethnic ties and cultural background may also help to
shorten the learning curve. In co-operating with Chinese managers, foreign expa-
triates must be prepared to give considerable attention to helping Chinese managers
to accept responsibility, to exercise imagination and initiative, and to communicate
readily across functional lines. Chinese managers have not typically been faced with
pressure to economize and to operate efficiently. Foreign managers may encounter
shortages of experienced managers and other professional people. Training pro-
grams may need to be much more extensive than elsewhere.
Clearly, China is different from the rest of the world. Politics plays a very impor-
tant role in management and influences labour-management relations. Through
fifteen years of various reforms, a deep and firm foundation for future development
has been laid. Trade unions in enterprises will play an active role in Chinese labour-
management relations. Chinese enterprises will soon be competing against each
other in employing highly qualified workers and motivating and retaining them with
better salaries, fringe benefits and greater opportunities for career development.

Shuming Zhao (BA, MA, PhD) is a professor in human resource management and international
business management and associate dean of the School of International Business at Nanjing Univer-
sity, People’s Republic of China. He has worked as a visiting professor at several North American
universities, including Florida Atlantic University, University of Hawaii-Manoa, the University of
Toronto, York University, the University of Southern Maine-Portland, Oklahoma City University and
Whitworth College. He has lectured at more than twenty universities in the United States, Japan,
Canada, Europe and Australia. His most recent publications include International Human Resource
Management (1992), International Business Management (1993) and International Business: Cross-
cultural Management (1994).
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