Shutdown fears for textile factories

PUBLISHED : Monday, 20 June, 2011, 12:00am
UPDATED : Monday, 20 June, 2011, 12:00am


Hong Kong garment makers with factories across the border have warned of a tidal wave of shutdowns if the central government slashes value-added tax rebates on exports.

This alarming prediction is contained in a joint survey conducted last month by the Textile Council of Hong Kong and Hong Kong General Chamber of Textiles, two key business bodies which cover almost the entire textile and garment industry in the city.

There is speculation that Beijing is preparing to cut rebates to as low as 11 per cent from the existing 16 per cent. Any reduction would stifle exporters' cash-flow and eat into profits.

Textile Council chairman Willy Lin Sun-mo said a tax rebate reduction of that magnitude would cripple the backbone of the industry already weakened by sky-rocketing cotton prices, wages, a fresh record high by the yuan against the US dollar, labour shortages and continuing economic uncertainty in Europe and the United States.

'An 11 per cent rebate would be unviable for any garment manufacturer,' he said. 'We are not against the state policy of upgrading the industry, but a sewing job is a sewing job, it can only be upgraded to a certain technology level.'

At present, garment and textile exporters pay an average 17 per cent value-added tax on exports, and the Ministry of Finance rebates 16 per cent, which means a 1 per cent tax levy. If the rebates are lowered to 11 per cent, it means exporters will be punished with a 6 per cent tax rate.

However, cutting tax rebates on exports is seen as a tool by Beijing to rebalance trade and upgrade industrial activities as the nation seeks to become the world's strongest exporter, not just the largest. A Ministry of Commerce spokesman declined to comment on the possible cut in rebates.

Lin said the survey findings had been given to the Ministry of Commerce and the central government's liaison office in Hong Kong.

Polling hundreds of industry players, the survey found that about 40 per cent of them employed a minimum of 2,000 workers in each factory. It also found that three in every four manufacturers had faced an overall increase in operating costs of between 10 and 30 per cent in the past year.

If the cut materialises, about 70 per cent of those questioned would seek to pass on the additional costs to customers and lay off workers.

However, the majority of them were prepared to swallow some costs for fear of losing orders to other countries if factory-gate prices rose too much.

The most worrying finding for Lin was that 30 per cent of the largely small- and medium-sized enterprises would choose to fold.

'Costs are rising by so much and so quickly that it is about 10 per cent more expensive to produce a garment in China than in Romania,' Lin said. 'When factories are in trouble, they may shrink operations by laying off workers. How can the central government boost domestic consumption if workers break their rice bowls? I don't know how many factories will die, but it will be a lot.'

Tommy Lam Chin-ming, who runs a factory making Burberry's children's wear and Armani Exchange clothes in Dongguan, said a lower tax rebate would worsen profit margins.

To reduce the reliance on increasingly expensive Guangdong, Lam last year opened two smaller factories in Sichuan and Fujian.