VZCZCXRO7339
RR RUEHCN RUEHGH
DE RUEHHK #3914/01 2760028
ZNR UUUUU ZZH
R 030028Z OCT 06
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 8854
RUCPDOC/USDOC WASHDC
INFO RUEHBJ/AMEMBASSY BEIJING 9476
RUEHGZ/AMCONSUL GUANGZHOU 0089
RUEHGH/AMCONSUL SHANGHAI
RUEHCN/AMCONSUL CHENGDU 0923
RUEHSH/AMCONSUL SHENYANG 3397
RUEHIN/AIT TAIPEI 4122

UNCLAS SECTION 01 OF 03 HONG KONG 003914 
 
SIPDIS 
 
State/EB/TPP/ABT LERSTEN 
Commerce/ITA/OTEXA  D'ANDREA 
STATE PAST TO USTR HEYLINGER 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD KTEX EAP
SUBJECT: HONG KONG TEXTILES AND APPAREL SECTOR: UPDATED 
STATISTICS AND PROJECTION OF FUTURE COMPETITIVENESS 
 
REF: STATE 138090 
 
¶1.  Summary and Analysis.  Hong KongQs textile and apparel 
manufacturers demonstrated their nimbleness in responding 
to quota, market and technical requirements in 2005. With 
the elimination of global textile quotas at the end of 
2004, Hong Kong textile producers shifted much of their 
textile and apparel production to mainland factories to 
take advantage of lower operating costs.  Therefore, during 
the first half of 2005, Hong Kong exports of domestic 
textile and apparel fell, whereas re-exports of mainland- 
produced textiles and apparel increased.  However, this 
trend reversed in the latter half of 2005, resulting from 
textile quotas being re-imposed on mainland China by the 
United States and the European Union.  As Hong Kong textile 
manufacturers used up their quotas on the mainland, they 
moved part of their production capacity back to Hong Kong. 
They also took advantage of Hong KongQs Outward Processing 
Arrangement (OPA), which allows garments that are mostly 
produced in China with finishing in Hong Kong to qualify as 
having been made in Hong Kong.   The final result was that 
Hong Kong registered a 4.2 percent growth in total exports 
in 2005 over 2004. 
 
¶2.  Another effect of the re-imposition of textile quotas 
on the mainland by the United States and the European Union 
was that some overseas buyers shifted parts of their orders 
away from Greater China, for fear of shortage of quotas, to 
countries such as Bangladesh, India and Indonesia.  Some of 
Hong KongQs largest textile producers have invested in 
production facilities throughout the Asian region and 
rotate production among their various factories.  Thus they 
have been able to take advantage of both global buying 
trends and lower operating costs in other countries to 
improve their bottom lines. 
 
¶3.  Total textile and apparel exports grew 2.9 percent in 
the first seven months of 2006.  The meager growth may be 
attributed to three factors: a) higher base of comparison 
in the same period of 2005 when Hong Kong manufacturers 
shifted their production to China to take advantage of the 
quota-free environment; b) weaker world demand -- in 
particular in the U.S. and E.U. as a result of the economic 
slowdown there and; c) aggressive diversification of 
overseas buyers for their regional supply sources. End 
Summary and Analysis. 
 
By the Numbers 
 
¶4.  The 2004 Annual Survey of Industrial Production, issued 
by the Census and Statistics Department provided the 
following 2004 data: 
 
Total industrial production: US$ 20.2 billion 
Total textile & apparel production: US$ 5.6 billion 
 
¶5. Census and Statistics Department and Trade Development 
Council figures revealed the following for 2005:  (Comment: 
Both official and industry contacts note that 2005 data for 
total industrial production and total textile and apparel 
production will not be available until January 2007 so we 
have not included this information.  End Comment.) 
 
Textiles/apparel share of Hong Kong exports (domestic 
exports + re-export): 14.2 percent 
Textiles/apparel share of Hong Kong imports: 10.8 percent 
 
Exports in textiles and apparel to the US: US$ 10.1 
billion, up 10.3 percent from 2004 
 
Total manufacturing employment (December 2005): 167,367 
Total textile and apparel employment (December 2005): 
41,973 
 
¶6. Data for January-July 2006 
 
Textiles/apparel share of Hong Kong exports (domestic 
exports + re-export): 13.6 percent 
Textiles/apparel share of Hong Kong imports: 10 percent 
 
Total exports (domestic exports + re-export) of 
 
HONG KONG 00003914  002 OF 003 
 
 
textiles/apparel rose 2.9 percent from the same period of 
2005 
 
Imports of textiles/apparel rose 0.4 percent from the same 
period of 2005 
 
Exports of textiles and apparel to the US: US$ 5.7 billion, 
down 0.6 percent from the same period of 2005 
 
Total manufacturing employment (March 2006): 161,482 
Total textile and apparel employment (March 2006): 39,471 
 
(U) Questions/Responses: 
 
--      Are host country producers receiving lower 
prices due to heightened international competition?  Have 
manufacturers received more, less, or the same number of 
orders as in years past?  Have foreign investors, 
particularly Asian investors, closed factories or 
otherwise pulled out of local production? 
 
Indicators are that quota prices have dropped in the first 
eight months of 2006.  This decline contrasts with a surge 
in prices during the same period in 2005 due to quota 
speculation.  With more quotas becoming available, some 
factories have moved production back to China. In general, 
Hong Kong producers are receiving lower prices in 2006. 
 
--      Has the host government implemented, or is it 
considering implementing, safeguards or other measures to 
reduce growth of imports of Chinese textile and apparel 
products into the host country? 
 
The Hong Kong government to date has not implemented and is 
not considering implementing, safeguard or other measures 
to reduce growth of imports of Chinese textile and apparel 
into Hong Kong. 
 
--      Has increased global competition affected local 
labor conditions by causing employers to reduce wages, 
seek flexibility from government required minimum wages, 
or adversely affected union organizing? 
 
In terms of real wages, workers in the apparel industry 
registered a 3.7 percent increase year-on-year in the first 
quarter of 2006, while workers in the textiles industry 
recorded a 5.1 percent pay rise during the same period. 
 
--      Has the host government or private industry 
taken action to increase the country's competitiveness, 
such as improving infrastructure, reducing bureaucratic 
requirements, developing the textiles (fabric production) 
industry, moving to higher value-added goods, or 
identifying niche markets?  Does post think that the host 
government or private industry's strategy will be 
successful? 
 
The Hong Kong textiles and apparel industry sees the 
imposition of U.S. and E.U. quota restrictions on Chinese- 
made textiles and apparel as an opportunity to redevelop 
the industry and expects some local manufacturers to 
relocate part or all of their manufacturing operations to 
Hong Kong, or to expand their production in Hong Kong.  In 
January 2006, the government approved a plan allowing 
manufacturers to import Chinese workers by maintaining a 
1:1 ratio with one Chinese worker to one Hong Kong worker 
for the garment sector and one Chinese for every four Hong 
Konger for the knitwear industry.  However, industry 
response to the worker importation scheme has not been 
keen.  As of mid-September, the industry has imported only 
70 workers from China. 
 
According to Daniel Poon, Assistant Chief Economist, Trade 
Development Council, Hong Kong can be competitive in 
textile and apparel exports given heightened global 
competition.  The Hong Kong textile and apparel industry 
has been developing itself into producing high-value added 
products prior to the elimination of the quota system.  In 
order to stay competitive, the industry is targeting 
higher-end markets, focusing on fashion design, developing 
brands, and developing China's fashion market under the 
 
HONG KONG 00003914  003 OF 003 
 
 
Chinese-Hong Kong Closer Economic Partnership Arrangement 
(CEPA).  Under CEPA, Hong Kong-origin textile and apparel 
products enter China with zero-tariff.  This includes both 
local and overseas manufacturers and will encourage the 
expansion of their existing production facilities in Hong 
Kong. 
 
With respect to government assistance, the Trade and 
Industry Department has streamlined import and export 
arrangements for textile and apparel products and removed 
all quota-related measures and charges, which directly 
leads to reduced operating costs.  The Innovation and 
Technology Commission (ITC) has set up the R&D Centre for 
Textile and Clothing to promote the application of R&D work 
and technology transfer.  Small- and Medium- Sized 
Enterprises (SMEs) in the textile and fashion sectors can 
seek support from the SME Funding Scheme in acquiring 
business facilities and equipment, resolving working 
capital needs, expanding overseas markets and enhancing 
their overall competitiveness.  In addition, with the 
government's support, the "DesignSmart Initiative" promotes 
the wider use of design and innovation in industries to 
help them move up the value chain. 
 
CUNNINGHAM