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Wave of Guangdong factory closures expected to worsen

The surprise decision to lift fuel and power prices has added to the cost burden of Hong Kong entrepreneurs across the border, raising fears that the wave of corporate closures will worsen.

Manufacturers said that aside from the higher transport, energy and raw materials costs, they will have to contend with the strengthening yuan, which recently hit fresh record highs against the US dollar and the pegged Hong Kong currency.

In terms of higher energy costs, industries that are huge power consumers such as electroplating and metals businesses will be hit hardest.

Hong Kong Small and Medium Enterprises Association chairman Danny Lau Tat-pong said the price inflation would trigger the demise of about 20,000 of the 65,000 Hong Kong factories in Guangdong this year and that about 10,000 had been forced out of business since the beginning of this year.

'This is a new headache on top of a string of problems we are already facing,' Mr Lau said.

He was referring to the impact of the floods in Guangdong, adverse trade policies, the new labour contract law, the continuous appreciation of the yuan and the increase in the other costs of production.

Alice Kwan, whose factory in Shenzhen makes packaging products for Coca-Cola and Disney, said higher diesel prices forced the factory to switch to sourcing electricity from local power plants, which was cheaper, rather than use its own diesel-fuelled generators.

'The announcement was so sudden that it had a huge impact on our costs,' she said. 'We're lucky that we bought some diesel stock yesterday, but next time we will have to pay more.'

Ms Kwan added that the company could not pass on the extra costs for orders placed previously.

Mr Lau pointed out that manufacturers were not necessarily better off buying power from local plants, which are subject to Guangdong's power rationing.

Power supply in some parts of industrialised Dongguan and Shenzhen is suspended for three of five working days.

Danny Tam, a wholesaler of iron, aluminium and copper for Hong Kong and Taiwanese exporters, said he would restructure his fleet of container trucks after suffering a minimum 20 per cent jump in fuel costs.

Yang Tiefeng, a spokesman from Beijing-based China Logistics Association, said the soaring fuel prices could inflict huge losses on his industry and force some players out.

'Most mainland logistics companies have not [passed on] the fuel price rise to customers in the face of intense competition. Medium-sized logistics companies are expected to shrink their business scope and modify operational procedures, while small-scale logistics companies could go bankrupt,' he said.

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