Hong Kong companies may shut 20,000 factories in neighboring Guangdong Province in the Chinese mainland this year due to increased costs from higher fuel prices and wages, an industry association said yesterday.

"At the end of this year, maybe only 50,000 Hong Kong-owned businesses will remain" of about 70,000 in the province, according to Danny Lau, chairman of Hong Kong Small and Medium Enterprises Association. "The increase in fuel costs comes on top of several other major issues firms have been grappling with recently," such as rising employee expenses related to a new labor law and the appreciation of the yuan, he said.

The mainland last week raised gasoline and diesel prices at least 17 percent, the second increase in seven months, after global crude-oil prices surged to records. The government this year imposed a labor contract law mandating minimum wages and severance payments.

The yuan gained 4 percent against the US dollar in the first quarter, cutting demand for Chinese-made goods in overseas markets. Employee costs have jumped 30 percent this year at Kam Pin Industrial (HK) Ltd, Lau's company.

The maker of building materials, which employs 300 workers in the mainland, has seen fuel costs almost double this year, Lau said.

Higher employee costs in Guangdong prompted Foxconn International Holdings Ltd, based in Shenzhen, to set up production sites in lower-cost Hebei and Shanxi provinces in north China, Samuel Chin, chairman of the world's biggest contract maker of mobile-phones, said last week.

"China's export competitiveness is definitely declining fast," said Sun Mingchun, an economist with Lehman Brothers Holdings Inc in Hong Kong. The volume of goods and services sold overseas has declined to "single-digit" growth, he told Bloomberg News.

Profitability of Hong Kong-owned manufacturers was also hurt by lower export rebates from the mainland, Lau said.

Last year, the mainland cut rebates on overseas sales of products, including textiles, toys and steel products to ease trade friction with the United States and Europe.

(Shanghai Daily June 27, 2008)