Exporter confidence index dipped to a new low of 33.9 percent in the third quarter while Hong Kong's small- and medium-sized enterprises (SMEs) griped about running businesses on the mainland.

A Hong Kong local pen manufacturer based on the mainland has been forced to slash workforce due to rising labor costs.

The manufacturer has invested in technology to automate production to stave off deepening pressure.

"Small factories cannot deal with the rising labor costs," said Jess Tse, a pen manufacturer.

There are more than 14,000 small factories, including those mainland-owned that have closed down in the Pearl River Delta region in the last two years, she said.

Running three factories located in different parts on the mainland with an initial workforce of 1,200, the manufacturer had to cut down 200 workers this year to stay competitive.

"The new Labor Law required us to pay overtime and make social security contribution. For example, we have to pay workers double on Saturday and Sunday and triple on special holidays," Tse said.

"Labor shortages and the increase in the official minimum wage levels in the Pearl River Delta (PRD) have put extra burden on the local companies.

From 2004 to 2006, the minimum wage in Guangzhou has risen between 12.1 percent and 21.5 percent.

Since April 1, Guangdong's minimum wage has further increased by an average of 12.9 percent," Hong Kong Trade Development Council (HKTDC) said in a statement.

"We used to pay 700-800 yuan per worker in our Heyuan factory and it has risen to more than 1000 yuan since last year," Tse said. "Don't assume that wages are higher only in Shenzhen or Dongguan. Workers' wages have gone up in rural areas and shortage of labor is the main reason for this," she added.

Together with the rise in fuel and raw material costs and the appreciation of renminbi, local manufacturers' profit margins have shrunk.

Some are even making losses. "On an average, production costs have increased eight to 15 percent from first half last year," said Edward Leung, chief economist of HKTDC. Some of them may have to move out of the mainland and some may have to close down, Leung added.

According to HKTCD survey in the third quarter this year, manufacturer confidence from all industries dropped to a historical low to 33.9 percent which indicated manufacturers are pessimistic over export market outlook this year.

When asked if he will shift his manufacturing base, Tse said: "It doesn't help. In Vietnam, for example, we may enjoy two-year benefit for setting up factories there but then the government will force us to move to rural areas afterwards. It's simply not worth the sweat."