A Blue Christmas at China's North Pole

At about 6 o'clock on Thursday evening, near what used to be quitting time for the day shift at the He Jun toy factory in Dongguan, China, 40-year-old Wei Dong Li made his way to the factory's front entrance, his 3-year-old son Qian Jie tugging at his sleeve. The factory is now closed; a few security guards stand inside the locked gate. Posted each evening at the front entrance is a sheaf of documents, the latest rulings from a local court on compensation claims filed by many of He Jun's 4,000 workers, Wei included. "They process a few of them a day, so I come back every other day to check and see if my case is on the list," Wei says. He has no luck again. "I'll just wait some more," he says. "I have nothing else to do at this point."

Dongguan, along with a handful of similar nearby towns, is the real Santa's factory at the North Pole. A sprawling, charmless city of 7.5 million that sits 50 miles (80 km) southeast of Guangzhou, the provincial capital of Guangdong in southern China, Dongguan produces a vast amount of the toys that will end up under Christmas trees around the world. Toys were one of the critical, low-wage, low-tech industries on which China built its economic ascent over the past 30 years. But as workers such as Wei know better than anyone, 2008 is the year that that part of China's miracle has come to an end.

It's been six weeks since He Jun, a Hong Kong–listed company, shuttered two of its biggest factories in China — suddenly and without any warning, former workers say. They were among the latest and largest factory closures in China's battered low-end industries: toy manufacturers, textile companies and shoemakers most prominent among them. China's steadily appreciating renminbi (RMB) currency — which makes Chinese goods more expensive in key export markets like the U.S. — as well as higher costs embedded in a new labor law enacted last year were already wreaking havoc with companies that survived even in the best of times on the thinnest of profit margins. Now, with a global recession gathering pace, the best of times are gone, and the pain in what had been booming areas in southern China is spreading quickly. Fully half of China's toy exporters, which sent nearly $8 billion worth of Barbies and Thomas the Tank Engines to export markets in 2007, were driven out of business in the first seven months of this year, Beijing's General Administration of Customs said in a recent report. In the city of Shenzhen, the other major manufacturing center in Guangdong province, 50,000 people have already lost their jobs this year. And in Beijing last week, Zhang Ping, chairman of the National Development and Reform Commission (NDRC), the nation's key economic policymaking body, bluntly warned that "excessive production cuts and business closures will cause massive unemployment, and that will lead to instability."

In Dongguan, it already has. On the evening of Nov. 25, another large toy factory here, Kai Da Manufacturing, laid off more than 600 of its workers because of slowing production. According to participants and eyewitnesses to what followed, a large group of the workers gathered in the front courtyard of the factory demanding to know what compensation they would receive. At first, a company manager told them that anyone with a good work record and less than five years' service would receive less than 10,000 RMB — less than $1,500 at today's exchange rates. Anyone with a good record and more than seven years on the line would get 12,300 RMB, or about $1,800.

Those gathered were furious at what one worker, who gave his name as Mr. Shao (he declined to provide his full name), described as "the pittance they are offering us." They refused to leave the plant, and according to eyewitnesses, security guards started to get aggressive, pushing and shoving them to leave. At that point, Shao says, "things got out of control." Workers fought back against the security guards, who quickly called the local police for assistance. Then more workers joined in. Some moved into the factory's office and began breaking windows and computers. When the police showed up, they were immediately on the defensive. Two squad cars were overturned and trashed, as were five police motorcycles. The police called in reinforcements, and five workers ended up getting beaten badly, an eyewitness said. (Dongguan police declined comment on the riot.) The violence lasted for more than an hour before police restored order.

And order, above all, is what the Chinese government is concerned about. Episodes like the one at Kai Da have become jarringly frequent in southern China in recent months, and the NDRC's Zhang, in a press conference yesterday in Beijing, made the government's nervousness plain. The central government is pressuring provincial authorities to make sure that employers pay severance according to the law, and in cases when they don't, to step in and pay the workers themselves. (Several provincial governments, according to Chinese press reports, have in turn complained that they don't have the funds to make extensive severance payments as the number of unemployed workers mounts.)

That's the reason Wei Dong Li of He Jun shows up at the closed factory gate each evening, awaiting the court's ruling on how much he and others should be paid. "The [local] government has told us that this issue will be resolved by the end of this month, so I should find something out soon from the court [about the severance]." But he acknowledges that he doesn't have much faith that the authorities will come through with any assistance, and in the meantime, his money is running out. "I've posted my résumé online for a month now, but it's very hard to find a job around here these days. I've had no responses," he says.

Soon, he acknowledged, he may have to join the exodus out of Guangdong province of migrant workers, now jobless, who are headed back to their hometowns in less-prosperous parts of the country. This exodus — the reversal of more than two decades of migration from poor rural areas to faster-growing, coastal cities — is most visible at the Guangzhou train station, where hundreds of migrants, all bearing suitcases and shopping bags crammed with their worldly belongings, sit outside for hours waiting to board trains home. On Nov. 26, Zhang De Jun, 35, was one of them. For 10 years, he said, he worked in a sweater factory not far from Dongguan. His wife, seated next to him, worked at a toy factory. Both had lost their jobs. Like millions of other migrants, Zhang said each month he had sent part of his salary of 2,000 RMB home to his extended family, who live outside Chongqing in Sichuan province. Asked what he will do when he gets back, Zhang took a drag on his cigarette and muttered, "I'll do what I used to do. I'll work in the fields."

Since reforms started 30 years ago, China hasn't been able to keep peasants down on the farm anymore — and that was a resounding sign of success. Now, as Christmas approaches, China's North Pole is shutting down, and millions may have to stream back to the farms. For the leaders in Beijing and in the provinces, that's not success. That's trouble.