PRATO, Italy (Reuters) - Shen Jianhe lost both her job and home when Italian police shut down her garment factory in the Tuscan city of Prato.

By day, the 38-year-old mother of four would sew trousers at one of the nearly 5,000 workshops run by Chinese immigrants in Prato, which largely turn out cheap clothing for fast-fashion companies in Italy and across Europe.

At night she slept in a plasterboard cubicle hidden behind a wooden wardrobe at the Shen Wu factory - until the police arrived one cold December morning. They sealed the doors and confiscated the 25 sewing machines under a crackdown on an industry that is booming but blighted by illegality and sweatshop conditions.

Amid rolls of fabric, food leftovers and dangling electric cables lay Shen’s belongings: a pink baby coat, a blue children’s stool, a laptop. She stuffed them into a van, ready to be transported away.

“What choice do I have?” said Shen, tears filling her eyes.

Prato, the historical capital of Italy’s textile business, has attracted the largest concentration of Chinese-run industry in Europe within less than 20 years.

As many as 50,000 Chinese live and work in the area, making clothes bearing the prized “Made in Italy” label which sets them apart from garments produced in China itself, even at the lower end of the fashion business.

In some ways, the Chinese community of Prato has succeeded where Italian companies have failed. Italy’s economy has barely grown over the past decade and is only just emerging from recession, partly due to the inability of many small manufacturers to keep up with global competition.

Yet Prato, which lies 25 km (16 miles) from the Renaissance jewel of Florence, is also a thriving hub of illegality committed by both Italians and Chinese, a byproduct of globalization gone wrong, many people in the city say.

Up to two thirds of the Chinese in Prato are illegal immigrants, according to local authorities. About 90 percent of the Chinese factories - virtually all of which are rented out to Chinese entrepreneurs by Italians who own the buildings -break the law in various ways, says Aldo Milone, the city councilor in charge of security.

This includes using fabric smuggled from China, evading taxes and grossly violating health and labor regulations. This month a fire, which prosecutors suspect was set off by an electric stove, killed seven workers as they slept in cardboard cubicles at a workshop.

Italian officials acknowledge they haven’t cracked down effectively on the mushrooming illicit behavior.

Prato mayor Roberto Cenni, himself a textiles entrepreneur, arrived in 2009 promising to clean up the area. Cenni says he has trebled inspections since then, but still only a small fraction of the factories are monitored regularly.

“We don’t have the ability to fight this system of illegality,” he said, noting that Prato has only two labor inspectors.

In some cases, local officials share the blame. Prato chief prosecutor Piero Tony ordered the arrest of 11 people this month, including a city council employee who is suspected of issuing false residency permits - for between 600 and 1,500 ($820-$2,100) euros a piece - to more than 300 Chinese immigrants since May.

STIFF COMPETITION

Most of Prato’s Chinese come from Wenzhou, a coastal city in Zhejiang province. They started flocking to Prato in the mid-1990s to work in Italian-owned textile factories and quickly mastered the entire production chain.

Andrea Cavicchi, local head of the Confindustria business lobby, says China’s entry in the World Trade Organisation in 2001 sounded the death knell for many of Prato’s local clothing artisans as trade barriers imposed by the European Union to protect its manufacturers were gradually phased out.

As local companies specialized in high-quality fabric began cutting jobs to compete with cheaper foreign imports, Chinese entrepreneurs started renting abandoned Italian warehouses to set up their own factories. Gradually, the Chinese of Prato offered the speed, efficiency and high productivity that many Italian businesses had lacked.

Now they export millions of low-cost garments - a woman’s cotton shirt sells for under 2 euros, a coat for 12 - across the continent. The Prato branch of Confindustria estimates this business is worth 2 billion euros a year, or half the turnover of Italian-run textile manufacturers in the district.

“Between 2001 and 2011, the Italian textile industry in Prato has seen its turnover and its workforce halve. But the reality is we can’t really blame the Chinese. The problem is our labor and energy costs mean we can’t compete,” says Cavicchi. “Speed is crucial. In just three days they can churn out thousands of garments. And the final result - even though it’s cheap cloth imported from China - is perfect.”

Trucks ferry the clothing to shoppers in the major European markets within a day or two. In the fast-changing fashion business, this gives the Prato workshops a competitive edge over rivals in China, which take 40 days to ship their output by sea to Europe.

Outside Prato’s city walls, the main Via Pistoiese has turned into a bustling Chinatown, with Chinese restaurants, hairdressers, schools, travel agents, and youths practicing the martial art of Tai Chi in the park.

For many years, Prato’s local government did little about the growing Chinese community, whose presence helps the local economy. “There was a tacit pact to look the other way, because the Chinese were also bringing in a lot of money, helping cushion the impact of the global financial crisis on the region,” said Massimo Bressan, a researcher on immigration issues at Prato’s Iris institute.

When Cenni became Prato’s mayor, he promised to restore the rule of law in the city of just under 200,000. In addition to increasing the number of inspections on factories, the local government raised the cost of reclaiming confiscated machinery and introduced a decree that allows a warehouse to be declared “unfit” until it meets safety regulations.

But part of the problem is that 60 percent of Chinese workshops last just two years, often closing and reopening under a different name to evade checks by tax authorities. Illegal immigrants found by the police are ordered to leave Italy within five days, but there is no way of making sure that they actually do so, said the city councilor for security, Milone. “It’s a joke,” he said.

Moreover, many illegal immigrants arrive on three-month tourist visas but stay in Italy for a few years, until they make enough money to go back to China.

“I have done inspections for 15 years, and I can tell you that for every factory we close, another one will sprout the next day. Here the attitude is too lax, there is a form of connivance,” said a judicial police officer who did not want to be named because he is not allowed to talk to the press.

FLAMES

Outside the Teresa Moda factory which went up in flames this month, charred coat hangers and rolls of fabric lie scattered on the ground, the remains of burnt black out curtains preventing people from looking inside.

“Pain has no color” read a sheet of paper outside the gate taped above pictures of the seven victims, whom police say took days to identify because relatives were too scared to come forward. One of the dead suffocated as he tried to escape through a window guarded by iron bars.

A Chinese worker who had come to pay his respects said he made on average 70 shirts a day and was paid 70 cents for each shirt. In a good month, the worker - who said he was afraid to give his name - said he could earn 1,500 euros.

Nearby, at the Shen Wu factory workers had regularly sat at their sewing machines for up to 14 hours a day. Li Hong, 29, had been working there for nearly a month, every day, from 8 a.m. to 10 p.m.

Shen Jianhe was the longest-serving worker at the factory. She had been in Italy for 10 years, and was the only worker there with a residency permit and work contract. “What will happen to my sewing machine? I need it to work,” she said, as police began sealing all tools found on the premises.

Shen said her children did not live with her at the factory, although children’s items - including a storybook with the title “Where is my mummy?” - were strewn across the floor of her windowless, damp cubicle, which measured about 2 square meters and was almost entirely filled by a bed.

“Now I need to find another job. I must feed my children,” she said.

($1 = 0.7296 euros)