The story, originally reported by British newspaper The Mail On Sunday, described one factory – run by Hongfujin Precision Industry Co. and dubbed “iPod City” – as a place where 200,000 people work 15-hour days for about $50 per month.

As you can imagine, the news didn’t go over all that well in China. Hongfujin, a wholly owned subsidiary of Taiwan’s Foxconn Technology Holdings, filed defamation charges against two Chinese journalists who were working on the story – reporter Wang You and editor Weng Bao. The Shenzhen Intermediate Court immediately froze the journalists’ personal assets.

But bad publicity can be troubling, even in a communist country. After being publicly criticized by an international journalist advocacy group and a Chinese state-run newspaper, Hongfujin cut its original demand that the reporters pay 30 million yaun (US$3.8 million) “to avoid blurring the issue because of the great public attention on the target of the injunction.”

Instead, Hongfujin is now asking that the reporters be fined a more symbolic 1 yaun (US$.12).

On the day Hongfujin announced its change of heart, the state-run Shanghai Daily published a commentary stating, “The public’s right to know is in danger when sprawling corporate power, aided by distorted legal procedures, attempt to stifle freedom of the press.”

In announcing the reduction, Hongfujin said it would donate any proceeds from the case to charity.

Hongfujin’s original action to sue the reporters had drawn criticism from journalist advocacy group Reporters Without Borders, which published an open letter to Steve Jobs asking the Apple CEO to look into the matter.

“We believe that all Wang and Weng did was to report the facts and we condemn Foxconn’s reaction,” the letter to Jobs stated.

When initial reports of long hours and low pay in less-than-standard working conditions first appeared in the Mail On Sunday, Apple said it would look into it. The company eventually said it had found no serious labor issues, but did promise to investigate charges of excessive overtime and inadequate employee housing. One day before Hongfujin did its about-face, Apple said it was working behind the scenes to settle the dispute.

Meanwhile, Wang and Weng have posted a blog detailing all the trouble the journalists experienced.

“This is the toughest time I have faced since I entered the media business 10 years ago,” Weng wrote.