Some manufacturers and economists said a controversial labour contract law aggravated an already difficult operating environment, and was one of the worst state policies. The labour regime that enforces employers' responsibilities in favour of workers' welfare had fuelled labour disputes and raised costs, said senior officials of home appliance maker Eastern Sources Housewares (HK) and railway engineering and equipment company Faiveley Transport Group of France. Compounding the hardships of businesses were high raw material costs, an economic slowdown in the United States, and the continual appreciation of the yuan, which squeezed profitability and risked triggering inflation in the economy, economists said. 'Inflation, minimum wage [increases] and the new labour contract law are a number of unfortunate events hurting manufacturers,' Deutsche Bank chief economist Asia-Pacific Michael Spencer said yesterday at a seminar organised by credit insurance firm Coface. 'Compression of profit margins on manufacturing that became visible at the beginning of this year had a direct impact on banks with exposure to exporters and on ports and expressways in coastal provinces like Guangdong, Shanghai and Jiangsu.' Eastern Sources financial controller Peggie Lau conceded the group had difficulty meeting the challenge. 'The problems all came at once, which was unprecedented. The key is in passing on cost increases sufficiently and quickly to customers while not hurting our long-term relationships and keeping our bankers and investors happy.' Ms Lau added that customers in Europe and eastern Europe were more willing to absorb factory-gate price increases due to the strength of the euro. Meanwhile, Ulysse Wurtz, the managing director of Faiveley's Far East operations, said he believed the mainland's manufacturing industry would move higher up the value chain.