By Lillian Liu in Hong Kong and Chen Hong in Shenzhen (China Daily)
Updated: 2007-08-13 06:55

The 150-odd workers are gathering toys in a race against time. They know their factory's days may be numbered. The owner of the three-storey factory at Fenggang Town in Dongguan is worried, too. He had never thought he would have to fold up his business in South China's Guangdong Province despite the worsening operational environment.

Vincent Ho saw his worst fears coming true after the central government issued a new policy on processing trade in late July. "It's not just my factory, but also a large number of small and medium-sized Hong Kong-funded processing units in the Pearl River Delta (PRD) region that face the same fate," he says.

Ho took over the reins of the factory from his father in 2000. He exports about 100 TEUs (twenty-foot equivalent units) of auto models to Europe, the Middle East and South Korea every year. "We have encountered several problems from 2002: power and labor shortages, rising prices of raw materials and new industrial standards set by the importing countries. But this time it's different, and I doubt if I can tide over this one."

To cut the exports of cheap, labor-intensive goods from the mainland further, the Ministry of Commerce announced last month that exporters would have to pay a deposit equal to half the amount they spend on importing 1,853 kinds of raw materials such as metal, plastic and textile products.

"If I sign a 4-million-yuan ($529,000), six-month contract with a trading company to import raw materials such as plastic and alloy, I would have to deposit 2 million yuan in my bank account and can get it back only after six months. For a low-profit company like ours, it's really difficult," says Ho.

Factories and businesses owned by him and his likes were well protected when the mainland needed overseas investment to boost the economy. Capitalizing on the geographical advantage, Hong Kong firms for a long time led the way in investment.

Hong Kong firms, many of them in the processing trade and exports, moved their workshops and production lines to the more business-friendly PRD region of the mainland, with more than 90 percent shifting their bases there.

"It was easy for my father to make money for some time," Ho says. "Time was when one looked at a person enviously if he said he was 'working for a Hong Kong company'." Jobseekers and government officials from almost all levels were happy to help develop Hong Kong-invested factories. For two decades Hong Kong manufacturers made hay under the favorable policies of the central government and preferential treatments of the local authorities. In return, of course, they created millions of jobs in South China.

More than 90,000 processing trade firms operate on the mainland. Nearly 70,000 of those are in Guangdong, out of which about 57,500 are Hong Kong-invested entities employing 9.6 million workers, according to the National Bureau of Statistics of China.

The wages drawn by workers in these units range from 500 to 2,000 yuan a month. They attracted many people from across the country because they paid more than what other companies paid.

In the past two decades, the mainland's economy has grown by leaps and bounds. And processing trade has had a role to play in that because every 1 percent growth in processing trade has raised the GDP by 0.29 percent, according to a Hong Kong Trade and Development Council (TDC) report.

But the mainland economy has developed to a stage where it does not need to rely on labor-intensive investment. "Unlike in the early 1980s, the mainland can now afford to be selective with overseas investors," says Chinese University of Hong Kong's associate professor of finance Liu Ming.

The central government is now making serious efforts to restrict the development of high energy and resource consuming and highly polluting industries. That, say some analysts, will spell doom for some factories owned by Hong Kong residents in the PRD region.

A TDC study shows nearly 14,500 Hong Kong firms will be seriously hit by the central government's new policies, with about 1,500 of them being forced to cease production. This will render 375,000 mainland and 10,000 Hong Kong workers jobless. Market observers fear that Hong Kong firms in Guangdong will be the worst hit, with many of them forced to fold up in a year.

But the need to save the environment is among the primary concerns of the central government, as it is with many others in the rest of the world. Wang Qinhua, head of the Ministry of Commerce's mechanical, electronics and high-tech industries department, says: "The new policy will raise costs and hinder the cash flow of exporters, especially those engaged in labor-intensive industries. Exporters will be forced to add value to their products and upgrade their technology."

Many Hong Kong companies, however, lack funds to do that. The situation of processing units that depend on supply of materials is especially grim. Adding value to their products and upgrading their technology are beyond their means because they have to change their mode of production for that.

But there are firms that think otherwise. Billabong Enterprises Co, a Hong Kong-based manufacturer and exporter with factories and production bases on the mainland and Southeast Asia, foresaw the trend years ago and transformed itself from a traditional labor glove maker to a high-end environmental goods maker. "It is the unwritten rule of business that one should always keep an eye on long-term development," says Billabong Enterprises managing director C.B. Chiu.

Chiu founded the company in the 1950s in Hong Kong when labor-intensive factories were the backbone of the city's economy. But today, more workers need water and air filters. "Our job is to meet the need of the community. We have to shift from masks to high-end products and extend our product catalog to more environmental protection sectors," he says.

Not all business people, however, have the foresightedness and the wherewithal of Chiu, and hence face a future of uncertainty.

(China Daily 08/13/2007 page3)