The key is the prospect of safeguard quotas. When China joined the World Trade Organisation in 2001, it agreed to allow the United States and other WTO nations to place one-year interim quotas on Chinese textile imports to protect their domestic industries. The agreement remains in force until the end of 2008.

Textile firms want to move more manufacturing to the mainland to take advantage of the end of formal quotas, but still need to hedge against the risk of safeguard quotas over the next four years.

Hong Kong provides a solution. While garments assembled in China might attract safeguard quotas, those assembled in Hong Kong will escape them.

Hong Kong manufacturers plan to increase production capacity in the city and Macau under an 'outward processing arrangement' (OPA) when the quotas are lifted.

This allows them to make semi-finished garments in China and import them to Hong Kong and Macau, where they will be finished for quota-free export.

Those planning expansion of their Hong Kong OPA operations next year include Henry Tan, chief executive of Luen Thai Holdings, the largest publicly listed garment manufacturer in Hong Kong.

'I expect to hire several hundred OPA workers in the next few years,' Mr Tan said. 'It will all depend on the amount of business we are able to generate from the US.'

After taking over the company from his father, Mr Tan has streamlined Luen Thai from a traditional exporter to a designer-to-store operation, cutting out the middleman by designing and manufacturing directly for big-name retailers. Customers include Polo Ralph Lauren, and Liz Claiborne.

He believes Luen Thai and other large Hong Kong textile companies are well placed to benefit from the end of global import quotas.

'We are poised to capture the immense market potential created by the elimination of quotas in the next two and a half months,' he said.

'There are few large garment companies in the world. Compare us with Yue Yuen, the shoe manufacturing company - we are 15 per cent their size ... the reason that garment manufacturers are smaller is because in the past we have been constrained by quotas.'

Luen Thai is building four factories in China. The first on a 600,000-square-foot site in Dongguan has been completed, with the others slated for completion within three years.

'Consolidation with China is inevitable,' Mr Tan said. 'It is an exciting and challenging moment for the industry, not only for the manufacturers, but for everyone in the supply chain.'

Taking off his jacket, he showed a reporter his white cotton shirt, pointing out the various components: collar, yoke, sleeves, cuffs etc. 'These can all be made at our factories in China, then assembled by skilled workers here in Hong Kong,' he said, 'This means they will be quota-free. The possibilities are endless.'