More Hong Kong manufacturers on the mainland are expected to close or scale down their production because of the global financial tsunami after being hard hit by rising labor costs and new regulations tightening standards, the Federation of Hong Kong Industries said yesterday.

The federation's deputy chairman, Stanley Lau, expected that export volumes for next year will be dropped, given that clients in United States, Europe and Japan are pessimistic about the economy next year.

The federation earlier expected that 10 percent of the 70,000 Hong Kong businesses on the mainland will close or scale down production after a surge in production costs, the appreciation of renminbi, increasing salary costs and disputes between staff and employers after the implementation of the labor contract law in January.

Manufacturers have expanded the human resources section of their factories, and some even hired lawyers to advise on solutions to tackle labor disputes following the enactment of the contract law.

Lau expected that more manufacturers will scale down production following the financial crisis, adding that manufacturers with capital may hold back their plans to expand or upgrade their production because of the uncertainty.

"They may gradually receive less production orders and close their plants at the end," he said.

Lau described the recent financial crisis as a condition worse than the SARS outbreak in 2003, when the economy was hard hit.

"We were confident (during SARS) that the economy would be revived in four or five months time," Lau said. "Now, we are not sure whether we have reached the end of this financial crisis."

Lau added that manufacturers will still be able to survive should their business drop by not more than 10 percent.

"But no one knows whether what we are facing now is the worst moment," he said.

The banks and financial institutions are more cautious in lending money to the manufacturers, resulting in cash-flow problems.

"Some financial institutions have overreacted to the crisis. They suddenly stopped lending money to the manufacturers who had a good track record of settling debt. It is getting more difficult for the manufacturers to find a second bank to secure loans," he said.

He urged the mainland government to slow down the implementation of new regulations, giving manufacturers more time to face the difficulties.

(HK Edition 10/01/2008 page1)