Export slump bogs China's toy makers

Guo Lili's stall in the Yiwu market displays painted ceramic tea sets and kitchenware produced in her nearby factory. In addition to retail supermarkets and wholesale distributors, Guo's company, Lida Colored Ceramics, makes custom engraved tea sets directly for corporate clients.

"Banks like to have their name engraved on the side and give them to clients as gifts," she said.

Ten years ago exports accounted for 70 percent of total sales. Today, domestic sales account for 60 percent, Guo told Reuters.

Barometer of pain

Beyond the anecdotes, data also suggests that Yiwu is struggling.

The "Prosperity Index", which is based on data on sales volume, turnover, and gross profit margins, among other measures, reached 986 in June, down from its recent high of 1,126 in September last year and well off its all-time high of 1,250 in September 2006. A reading below 1,000 indicates contraction.

"These are exporters that really can't hike prices. At the same time they are affected by currency appreciation more than most because they don't have the margins to cushion the losses," said Simpfendorfer, who conducted in-depth research on the Yiwu market for his book 'The New Silk Road'.

Margins for low-cost manufacturers are getting squeezed by rapidly rising labor costs.

"Workers that I used to get for 2,000 yuan ($310) a month now want 3,000 yuan," said Ho, who told Reuters his net profit margin has fallen from 10 percent a few years ago to 5-6 percent today.

Despite the difficulties, Ho remains defiantly optimistic. He has seen plenty of Yiwu factories go bankrupt in recent years, but he moved his own operation to a larger factory earlier this year.

"Business is cyclical," he said. "There are good times and there are bad times. But Christmas comes every year."