New Chinese labor law gives employers the jitters

By Zhou Xin and Jason Subler - Analysis

BEIJING (Reuters) - A new labor contract law will push up business costs in China next year and could force firms that are already struggling with rising expenses to shift production inland or out of China altogether.

The law will increase labor costs markedly and reduce the flexibility that has made China the world's factory, businessmen and analysts say.

"To be frank, in the processing trade here, the biggest advantage was cheap labor. But now that's going to change," said Hsieh Ching-yuan, vice-president of the Taiwan Businessmen's Association in Dongguan, an industrial hub in the Pearl River Delta in southern China.

Calvin Chang, general manager of Jinghua China Investment Consulting in Shenzhen, said the law could increase labor costs by 8 percent next year. He expects many firms to shift to inland provinces like Jiangxi and Hunan or countries such as Vietnam.

"Hundreds of small-sized Taiwan-invested firms in Dongguan and Shenzhen will be dead next year due to the new law," he said.

The law requires firms to give open-ended contracts to staff who have worked for 10 years or have completed two fixed-term contracts. These contracts mandate higher company contributions to pension and insurance funds. And firms must pay sacked employees a month's wages for every year they have worked.

"The labor contract law totally favors labor, which will significantly increase operating costs," said Tseng Wen-hsiung, an adviser on tax in China with Deloitte & Touche in Taipei.

Karen Lin, a senior fund manager at Paradigm Asset Management Co in Taipei, said the law would add roughly 25 percent to the cost of labor, which typically accounts for 10 percent of total manufacturing costs. Companies that fail to adjust will start to feel major pressure on their profits within 5-6 years, Lin said.

"In this period, Taiwan companies will have to think about how to raise their competitiveness, because they'll have less and less opportunity to take advantage of China's cheap labor."

HARDER TO SACK

Jun Ma, chief Deutsche Bank economist for China in Hong Kong, said that, over time, the law would reduce labor disputes and make workers more loyal to good employers.

"In the short term, however, many firms in sectors such as supermarkets, restaurants, construction and low-end manufacturing will be vulnerable due to reduced flexibility to abuse cheap labor and evade social security payments," he said in a note to clients.

Firms have been scrambling to adapt to -- or circumvent -- the law, which was passed last June and takes effect on January 1.

Companies from IT equipment makers to liquor producers have been playing a "fire and hire" game, rushing to terminate existing contracts and rehire staff on new contracts to start the clock ticking anew on their length of service.

Huawei Technologies Co Ltd HWT.UL made headlines by requiring some 7,000 employees with more than eight years' service to "voluntarily resign" and reapply for their jobs.