Key Points:

China has introduced a labour law that enhances rights for the nation's workers, including open-ended work contracts and severance pay.

"The Government making the most concerted effort to protect workers' rights is China," said Auret van Heerden, Geneva-based head of Fair Labor Association, which monitors work conditions in 60 countries. That "goes against the conventional wisdom that China is leading the race to the bottom."

Higher costs may drive manufacturers with low margins out of China, damping investment in factories that helped push inflation to a 10-year high. Olympus, the world's No 4 digital camera maker, and Yue Yuen Industrial, the biggest maker of shoes for brands such as Nike, are among companies shifting some production to Vietnam to cut costs.

"We are likely to see more factory closures next year," said Stanley Lau, vice-chairman of the Federation of Hong Kong Industries. The new law will make it more difficult for companies to hire temporary workers, a practice favoured by exporters to cope with fluctuations in orders, he said.

The Labor Contract Law aims to improve job security for workers, making open-ended terms of employment for those who have completed two fixed terms. The legislation limits overtime, sets minimum wages and guarantees one month's pay for each year worked for sacked employees.

The new law "will definitely raise our costs," said Edmund Ding, spokesman for Hon Hai Precision Industry. Taipei-based Hon Hai, the world's biggest contract manufacturer of consumer electronics, has 61 units in China making products including mobile phones and music consoles.

Some companies have been terminating contracts and asking employees to resign ahead of the law.

Huawei Technologies, China's largest maker of telecommunications equipment, offered about 7000 workers new contracts with benefits if they terminated their old agreements, spokesman Ross Gan said in an email.

Some employees accepted, while others chose not to sign and left. The move wasn't aimed at evading legislation, Gan said.

- Bloomberg