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PurposeThe purpose of the paper is to analyse the characteristics, development and implementation of the Chinese labour arbitration system and its role in settling labour disputes.Design/methodology/approachThe paper analyses official statistics and the arbitral cases published on the web sites of government labour and social security departments.FindingsThe paper finds that labour arbitration has become the most important mechanism for settling labour disputes in China since the middle 1990s. This trend indicates the fading of traditional political and administrative means due to the decreasing influence of governmental labour administration and the subordinate status of trade unions, and the emergence of the rule of law in setting labour terms. The effectiveness and fairness of labour arbitration is to a certain extent constrained by its limitations and workers' weak position in employment relations that prohibit it from fully upholding the Labour Law.Research limitationsThe paper shows that there is a paucity of literature devoted to labour arbitration in China. Further research is necessary to study labour arbitration, particularly the issues concerning: the frequency and reasons for workers to compromise in demands when claims, especially unfair dismissal cases; the process and the way in which arbitrators handle cases and make decisions; the fairness of arbitration awards; and the ways for improving competency and neutrality of arbitrators and arbitration committees.Practical implicationsThe paper shows that the party‐appointed method is necessary to improve the two parties' control of arbitration process. The public should be allowed to access to case and arbitrator related information in order to increase the transparency of arbitration.Originality/valueThis is the first paper that introduces the labour arbitration system in China and analyzes its role in setting labour disputes and its potential for improvement.