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China Labor Cost Rise to Boost Rivals in Asia

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China's rising labor costs will help other South Asian countries gain a foothold in low-end manufacturing, a report from Capital Economics said on Thursday.

"Although many countries can now compete with China on labor costs, it is countries elsewhere in Asia, able to take advantage of strong infrastructure and existing supply chain networks that will be the main beneficiaries of China's move out of low-end manufacturing," said Gareth Leather, an economist at independent research firm Capital Economics.

(Read More: Cambodia Benefits From Rising China Wages)

China remains the world's largest exporter of low-end goods, but has recently started to lose share in key markets such as textiles. Leather singled out Vietnam as particularly likely to gain from a fall-off in China's dominance, due to its low wages and stable political scene.

"Moreover, given its proximity to China, Vietnam is able to benefit from existing supply chains," he said.

While Vietnam's labor costs are currently half those of China's, they are rising quickly. "The global textile industry is notoriously footloose, and it may not be long therefore before suppliers look for alternatives," Leather added.

Outside of Asia, few countries stand to benefit substantially from China's rising costs, according to Leather. While, emerging Europe has the advantage of proximity to the European Union, it is hampered by relatively high labor costs.

In Africa, the reverse situation exists, with a thriving textile sector in countries such as Mauritius, but less developed supply chains. Mexico meanwhile benefits from proximity to the U.S., but suffers from low productivity growth.

Leather added that losing out on low-end market share would not prove a "big deal" for China.

"The change reflects a shift by Chinese producers into sectors where margins are higher, such as digital products and automotive components, rather than a failure to compete."

December's trade data from China showed an uptick in exports, which increased 14.1 percent year-on-year, the fastest rate in seven months.

However, earlier this week, analysts told CNBC that rising labor costs in Asia posed a risk in the form of upward pressure on inflation.

"Everyone thinks inflation is not an issue right now, but it is going to make a come-back and while in the past inflation has been all about food and energy, this time it is going to be about wages, and that is a much more pernicious threat," Frederic Neumann, the co-head of Asian economic research at HSBC, said.

(Read More: Biggest Risk to Asia's Economy? It's Not What You Think)

-By CNBC's Katy Barnato

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