DONGGUAN - A massive worker strike over social benefits in south China's Guangdong Province has exposed loopholes in the country's social security scheme and the growing pressure on manufacturers to keep up with rising labor costs.

The strike at Yue Yuen Industrial (Holdings) Ltd., a footwear maker in Dongguan City, entered its third day on Wednesday, with thousands of workers shelving their tools and gathering at the factory compound.

About 600 workers from the plant 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, more workers joined what became a massive strike on Monday and Tuesday.

As talks between workers and management went on and the local government intervened, the number of people on strike subsided and the crowd dispersed on Wednesday morning after talks with management representatives.

A senior company executive surnamed He told reporters that the company had initiated a cash award to encourage workers to return to their posts.

Yet the disputes over social benefits remain unsolved, ringing alarms for many other manufacturers in the economically booming southern Pearl River Delta region.

Disputes over social benefits

The workers claimed that the factory management had been tricking them by paying inadequate sums of money into the social insurance scheme each month. Additionally, a majority had received no housing funds, though they were supposed to be paid by the company.

A human resources executive who requested anonymity confirmed the matter, saying only about 1,000 workers of the plant's 45,000 staff have been paid housing funds.

Although all workers are covered by the social insurance program, the sum paid by the company is lower than required in accordance with the law, the executive said.

He explained that the workers' social insurance was paid based on the local average salary standard instead of their actual monthly income, which is much higher. That means workers will receive less from the social insurance program after they retire.

Experts say loopholes in the social insurance scheme have long been a hidden problem, and this practice is common among other manufacturers.

He Gaochao, a public affairs professor at Sun Yat-sen University, said it is a common phenomenon for many manufacturers, at least in the Pearl River Delta region, to pay as little in social security funds for their workers as possible.

However, with new awareness on the part of workers to safeguard their rights, manufacturers' practices are now causing tensions, He said.

Rising labor cost crunch

Xiao Shengfang, a lawyer with Guangdong-based Sino-Win Law Firm, said the strike also exposed the crunch faced by manufacturers as they battle the rising cost of labor.

As of April 1, at least seven provinces and municipalities, including Beijing, Shanghai and Tianjin, have lifted the minimum wage standard.

A survey conducted by Standard Chartered Bank among 375 manufacturers in the Pearl River Delta region in February and March showed that worker wages are expected to rise 9.2 percent this year, compared with an 8.4-percent rise registered in 2013.

Some manufacturers are considering relocating their businesses elsewhere, according to the survey. Thirteen percent of the surveyed manufacturers said they intended to move out of China to countries such as Cambodia, Thailand and Vietnam, where they can save up to 10 or 20 percent on costs.

Xiao said the strike at Yue Yuen also revealed that many manufacturers lack innovation in a market with intense competition and low profit margins. "They have to resort to cutting labor costs to gain," Xiao said.

The strike in Dongguan sent shockwaves to exhibitors at the ongoing Canton Fair in Guangzhou.

Zeng Zhanhui, president of Guangdong Xinbao Electrical Appliances Holdings Ltd., said his company had felt the pain over labor expenses as worker wages increased at an average of 10 percent annually over the past three years.

"With rising wages, the company has to pay the workers' social security funds, which we have no way to ignore," Zeng said at the fair.

Zeng said his company, one of the country's leading home appliance exporters, has been resorting to technical innovation and development of its own brands to expand profits and defuse the labor cost pressure.

"As we are also in a labor-intensive manufacturing industry, the key for our company is to launch innovative products to sustain our future development," said Luo Wei, marketing manager of the company's Espresso Coffee Machine Division.