China Law Blog

Nicely balanced article out in today's Guardian on China's new labor law, set to come into effect on January 1, 2008. The article is entitled, "New Chinese labour law give employers the jitters," but it essentially concludes that while it will raise employee costs, it will have only a marginal impact on foreign direct investment (FDI) into China.

The article starts out by saying the new law "will increase labour costs markedly and reduce the flexibility that has made China the world's factory" and will cause "many firms to shift to inland provinces like Jiangxi and Hunan or countries such as Vietnam." It goes on to quote a a Taiwanese businessperson on how "hundreds of small-sized Taiwan-invested firms in Dongguan and Shenzhen will be dead next year due to the new law." A Deloitte & Touche tax advisor out of Taipei states that "The labour contract law totally favours labour, which will significantly increase operating costs."

Others are more positive about its impact and Jun Ma, chief Deutsche Bank economist for China in Hong Kong, thinks that "over time, the law would reduce labour disputes and make workers more loyal to good employers" though in the short term it will make "many firms in sectors such as supermarkets, restaurants, construction and low-end manufacturing ... vulnerable due to reduced flexibility to abuse cheap labour and evade social security payments." Yuan Yiming, an economics professor at Shenzhen University, sees this as simply "an inevitable trend for any economy, and China is not an exception."

The article then hits the nail right on the head regarding Beijing's policy reasons behind it:

Many economists see increased labour costs as part of a deliberate strategy to get manufacturers to raise their game. Beijing has also let the yuan rise more quickly and has scrapped some export tax rebates. "Basically, the central government would like to see a little bit more consolidation in many industries, and so increasing cost pressure on businesses would enhance that," Arthur Kroeber with the Beijing consultancy Dragonomics said. The law gave workers basic protection that would not be thought out of place in a rather more developed economy, he said. "There's been an awful lot of squawking by employers," Kroeber said. "But I think at the end of the day it's not going to make a whole lot of difference as far as the case for investing in China is concerned." Chang Kai, a professor at China Renmin University in Beijing and a drafter of the law, agreed. "It may increase business costs, but the rise will be absolutely acceptable."

Yes, some firms will leave China because of the new law:

Yet firms are already having to pay more for everything from land to treating pollution, and the rise in labour costs may be the final straw. Peter Kurz, an analyst at Citi in Taipei, said a number of Taiwan makers of finished personal computers had suggested the law marked the peak of their investment in China.

But no doubt others will continue streaming in. As China's wages rise, the purchasing power of its citizens will no doubt rise as well and companies seeking to sell into China will benefit. China is serious about its desire to move from manufacturing rubber duckies to a more sophisticated economy. This new labor law is simply a part of that inexorable transformation and companies that use well drafted written contracts with their employees and put an employee manual into place should have little to fear.

CLB's Steve Dickinson will be speaking on China's labor contract law at the Beijing Rotary Club on January 8, 2008. For more on China's new labor law, check out the following:

"China's New Labor Law: Enforcement Is The Key" (This post centered on an interview of me by the Christian Science Monitor before the extent of private enforcement had become clear)

"China's New Labor Law -- It's A Huge Deal. Huge I Tell You."

"China's New Labor Contract Law," linking over to a well received interview with Steve Dickinson on the China Business Network.

"Power to the People." A column by Steve Dickinson for the China International Business magazine that remains the most popular article in the magazine months after its publication.