Chinese female factory workers make Nike shoes at the factory of Yue Yuen Industrial (Holdings) Limited in Dongguan, Guangdong province in this 2005 file photo. [Photo/icpress]

A massive worker strike over unpaid social benefits in Guangdong province has exposed loopholes in the country's social security system and illustrates the growing pressure on manufacturers to stay ahead of rising labor costs.

The strike at Yue Yuen Industrial (Holdings), a Dongguan-based producer for major brands including Nike, Adidas and Timberland, entered its third day.

About 600 workers first stormed onto the streets on April 5, blocking roads and demanding that social insurance and housing funds be fully paid.

After failed negotiations with management, thousands of employees stopped work and joined the strike on Monday and Tuesday, many holding banners demanding benefits. Hundreds of policemen were sent to the scene to ensure order.

The workers claim that the factory's management had been tricking them by paying inadequate amounts into the social insurance system each month. Additionally, a majority had received no housing funds, which were also supposed to have been paid by the company.

After the local government intervened, the number of strikers subsided and the crowd dispersed on Wednesday morning.

Nie Xin, of the city's publicity department, said the shoe manufacturer had agreed to increase social benefits starting in May, but the problem of paying for the benefits in arrears remains.

"Now the key problem lies in the strikers asking the shoe manufacturer to catch up on the social benefits it didn't pay workers during all the time they were employed by the company," Nie said.

"Paying back all welfare benefits over several decades for thousands of workers could bankrupt the company."

The incident sets off alarms for many other manufacturers in the economically booming Pearl River Delta region.

A human resources executive who requested anonymity confirmed that the social benefit payments had been shorted. Only about 1,000 workers of the plant's 45,000 have been paid housing funds, he said.

Although all workers are covered by the social insurance program, the amount paid by the company has been lower than required by the law, he said. Workers' social insurance was paid based on the local average salary instead of their actual monthly income, which is much higher. That means the factory workers would receive less from the social insurance program after they retire.

Experts said loopholes in the social insurance system have long been a hidden problem, and the practice of making less than full payments is common among manufacturers.

Xiao Shengfang, a lawyer with Sino-Win Law Firm, said the strike highlights the rising cost of labor for companies.

Some manufacturers are considering relocating their businesses elsewhere, such as Cambodia, Thailand and Vietnam, where they can save up to 20 percent on costs, according to a survey by Standard Chartered Bank

Xiao said the strike at Yue Yuen also revealed that many manufacturers lack innovation. "They have to resort to cutting labor costs to gain," Xiao said.

Zheng Caixiong in Guangzhou contributed to the story.