No longer Asia's export sweatshop, Hong Kong is still a textile hub in the region. Hong Kong warehouses are stockpiling increasing quantities of expensive Italian yarn, as traders take advantage of the city's tax-free status and its proximity to high-end garment factories on the mainland. Large orders for branded garments are flooding into mainland factories ahead of the elimination of global textile quotas on January 1 next year, industry observers say. Chinese manufacturers pay a tariff on imported yarn but get a rebate after the final products are exported. Suppliers are not eligible for the rebate if they store the yarn in China. Hong Kong offers a tax-free solution to suppliers storing the yarn and enables factories to build up yarn stocks without incurring long lead times between duty payments and rebates. 'Many companies in Hong Kong are now setting up yarn warehouses,' said Willy Lin Sun-mo, vice-chairman of the Textile Council of Hong Kong. Industry watchers say European brands are now outsourcing more of their high-end garment manufacturing to mainland factories. Mr Lin said the top 50 European mills maintained yarn stocks in Hong Kong. Milo's Knitwear (International), of which Mr Lin is managing director, is one local firm offering yarn warehousing services. Italian spinner Zegna Baruffa Lane Borgosesia, founded in the 1850s, is stockpiling yarn in Hong Kong. The firm produces about 10 million kilograms of yarn a year, of which about 35 per cent is sold through its Hong Kong office. Most of this was still shipped directly to customers from Italy, but Zegna Baruffa moved about 250,000 kilograms of yarn through its Hong Kong warehouse last year, said Nicola Camissa, managing director of Zegna Baruffa Far East. About 90 per cent of Zegna Baruffa's yarn traded through Hong Kong ends up in factories in southern China, where it is made into export garments for brands such as Giorgio Armani and Prada. Talent Pacific International managing director Alex Wong Wai-hung said more than 80 per cent of the yarn used in high-end brand garments such as Giorgio Armani was of Italian origin. The Hong Kong firm is an agent for nine Italian mills, and traded 1.5 million kilograms of Italian yarn last year, accounting for 15 to 20 per cent of Hong Kong's trade in Italian yarn. 'Italian yarn has beautiful colour and finishing. Ten years ago, dyeing houses in China could not meet the standards required by Italian yarn,' Mr Wong said. 'Now, Chinese factories have improved their technique. In two to three years, most Italian yarn can be dyed in China, mainly in Guangdong and the Shanghai area.'