SHENZHEN, China (Reuters) - While China has been butting heads with Europe and the United States over its garment exports this year, Sit Chat Keung has been scratching his for ways to stay in business.

It hasn't been an easy year for the Yimi Brassieres and Underwear Factory Co. Ltd., of which Sit is general manager.

Business has been tested by "safeguard" measures the European Union and the United States adopted to hold back the wave of Chinese clothing imports after the abolition of a decades-old quota system on January 1.

Sit watched as some of the underwear and bras that his workers snip and sew were suddenly placed on the restricted lists, and orders have been delayed. When more than 80 million Chinese garments piled up at EU ports, barred from entry, about 100,000 items from Sit's factory were among them.

"Nobody thought this would happen. Everyone thought things would work according to the WTO rules," Sit said.

More than anything, the conflicts and confusion since January have forced Chinese clothing exporters' to be nimble. Diversify has become the name of the game.

This week, after Beijing and Washington failed in their third round of talks to reach a comprehensive agreement on textile and garment trade for the coming years, the industry looked set for more uncertainty.

"We have to adjust," Sit said. "We're trying to think of ways to do things in countries where there aren't quotas. We're now starting to think of ways to get into the domestic market."

In previous years, 60 percent of his clothes went to Europe and most of the rest to Australia and the United States. Now, he says about 50 percent will be shipped to wholesalers in Australia, where there are no restrictions, and he is aiming for about 20 percent of sales to go to the Chinese market, he said.

BANKRUPT

Yimi, which churns out 270,000 bras, briefs and stringy, lace-fringed lingerie each month, is trying to sell to the United States items blocked in Europe, and vice versa.

In anticipation of the end of quotas, China saw many new companies enter the clothes-making business, while existing firms expanded their capacity or tried to shift into exporting.

The result was disastrous for some.

"Quite a number of them have become bankrupt," said Daniel Poon, Assistant Chief Economist at the Hong Kong Trade Development Council.

"I think for China, and also for the U.S. and the EU, there are no winners. All of them are losers," he said.

Indeed, the only winners appear to be low-cost production bases in Southeast Asia and beyond where orders are being diverted.

Hong Kong, too, has seen re-exports climb as manufacturers with plants in China take advantage of outward processing agreements that let them slap "made in Hong Kong" labels on clothes that are only partially produced in the city.

But even Hong Kong manufacturers, many of whom kept factories in Hong Kong open in case there were problems, will be squeezed by the 10-20 percent higher cost of doing production runs outside of mainland China, Poon said.

Clothing makers producing in China will have to stay on their toes.

"There will be lots of uncertainty ahead," Poon said.

"For businessmen," said Felix Chung, director of the Hong Kong-based Global Apparel Group Ltd., "uncertainty is the worst thing in the world".