May 9, 1996

Staff Agency Or 'extortion': FESCO's Nice Little Earner

Eric Ellis, Beijing

Despite new market zeal, one State way of raising hard currency is thriving in the new China. Eric Ellis reports from Beijing

MENTION the name FESCO to old China hands and there is a good chance they will recoil in horror.

"Legalised extortion", is how one Australian company representative described FESCO to The Australian Financial Review. The Foreign Enterprise Service Corporation has long been the only source of workers for foreign investors in China.

It's no surprise that FESCO occupies one of the smartest buildings in Beijing. For the 17 years since Deng's open door policy was enacted, FESCO has been a major source of foreign exchange. In recent years it has doubled both turnover and profit year-on-year.

The way it works is simple, if you are the Chinese Government.

You sign your deal, usually with a State-owned company, which FESCO is effectively a party to.

You indicate what staff you require and FESCO provides them. You do not hire them directly, FESCO does. The employment contract is with them, not you.

This way you pay FESCO the employees' wages, in hard currency ($US, deutschemark or yen) and often at rates that would have staff in Sydney, London, New York or Tokyo green with envy. FESCO pays the employee his or her wages ... in renminbi at Chinese rates. Instant profit for FESCO.

This, of course, often defeats the purpose of being in China, to take advantage of its low wage costs, ironically something China likes to promote to foreign investors.

But foreign firms grin and bear it if they get good, trained staff. But some say that rarely happens.

"I am sure they just have a list of workers and they just pull people down from it and send them over," says an Australian in charge of a representative office in Beijing.

"There's too many horror stories that suggest there's not a lot of matching going on."

Perhaps it is no coincidence that FESCO's deputy manager of the all-important personnel department says that disputes between employers and FESCO's employees can be a headache.

"They take up quite a big part of our time," says Mr Wang Xiaoping. "Nearly every day we have to deal with it. We are like a courtroom."

Another drawback is the suspected influence other Chinese ministries have in FESCO.

Rightly or wrongly, FESCO suffers an image problem in being suspected of placing "spies" in some operations, particularly in sensitive businesses or operations based in countries that have a rocky diplomatic relationship with Beijing, such as the US.

"It makes you very careful about how much company information you share with your senior staff," says the Australian.

China has strict rules against some companies conducting business. Many firms have "representative" or liaison offices to work the mao tai circuit and generate contracts for head office.

But often there is a fine line between representing and conducting business and "China can have a tendency to interpret things to suit them", says the Australian. His implication is that the snitch can often be a FESCO person.

FESCO denies any such activity and says it is simply a sophisticated employment agency.

But times are changing in China and FESCO is changing with them. Deng's market-Leninism has also led to reforms in the labour market and it is now possible for foreign firms to hire their own staff.

Representative offices still have to go through FESCO but joint ventures can advertise, hire and fire, broadly as in the West.

Mr Wang says in time, with further reform, all firms will likely be able to hire independently.

In an efficient market economy, a State middleman like FESCO wouldn't exist.

FESCO seems to recognise this and has begun to transform itself into a "large-scale specialised international service trading corporation". It has invested its large pool of greenbacks in real estate, a public relations and advertising agency, hotels, a trading company, a foreign investment house, a law firm, a travel agency, textiles, auto assembly and maintenance.