Hong Kong - A spiky-haired magician, who called himself "The Joker", baffled the few onlookers who passed by his stall by turning three red balls into a big foam cube.

But for Chu's Magic Company, the Hong Kong toy firm that makes the tricks "The Joker" was showing off, bewitching cash-strapped buyers at the annual Hong Kong Toy and Games Fair will take more than the wave of a wand.

"We have seen less than half the number of buyers visiting our stall this year compared to previous years," said Amy Chu, the third generation of her family to work in the business.

The firm, which started 70 years ago when Chu's grandfather began building props for top magicians, makes its tricks and gimmicks at a 100-person factory in Dongguan, a manufacturing hub in southern Chinese province of Guangdong.

The area has boomed in the last 30 years, as global manufacturers of toys and other merchandise relocated to take advantage of cheap labour that flooded to China's factory belt from rural areas.

As a result 70% of the world's toys are now made in China, but the rapid slowdown in demand from both Europe and the United States, as the two economic powerhouses slip towards recession, has hit toymakers hard.

One industry group said this week more than 100 Hong Kong manufacturers, employing some 100 000 workers locally and in China, faced more than $10m of losses due to the bankruptcy of US retailer KB Toys, which collapsed in December.

"We have still got our regular customers, so I think we will be OK, but there is no new business at all," said Chu, who said many toy factories in Dongguan had closed in recent months.

She added that the strengthening of the yuan, demand for higher wages, tougher labour and safety regulations and the incessant pressure from buyers for lower and lower prices had all taken their toll in recent years.

"Buyers usually ask for something really, really cheap, but this year we are just hardly seeing any of them at all," she said.

Jay Horowitz, president of American Classic Toy Inc, agreed there had been a drastic drop-off in buyers at the fair, the largest exhibition of toy-makers in Asia.

"The body count is much less than we have had before. Last year people were queueing at the stall," said Horowitz, whose Ohio-based firm holds the rights to hundreds of old US toy favourites and manufactures products in southern China and Mexico.

Remaining optimistic

"In 2008, we had a good first half and in the second half, we lost orders. I just don't know what is going to happen this year, but I have to remain optimistic or I would not be in business."

Toys are a key element of China's crucial export sector, which has driven the country's spectacular growth in recent years.

But more than half of the mainly small firms that made toys for export went out of business in the first seven months of last year, Chinese state media has reported, with more expected to fold.

The toymakers' struggles reflect the widespread pain being felt by China's exporters with the overall value of Chinese exports slipping 2.2% in November, government figures showed, the first year-on-year drop since June 2001.

A monthly survey of manufacturing in China by Asian brokerage CLSA found the sector was "close to technical recession", with backlogs of orders rapidly disappearing as demand dried up.

Worryingly for Beijing, the survey found those factories that have survived have cut their workforce for each of the last five months, raising concerns about social unrest.

To try and counter the slowdown in demand from the United States and Europe, the organisers of this year's fair have spent HK$80m ($10m) flying in 10 000 new buyers from less established markets in eastern Europe and the Middle East.

Despite the gloom, sellers said there are opportunities at both the bottom and the top end of the market.

Horowitz said he would be focusing on bargain gifts for next Christmas, while Jan Pieter, a Dutch dealer in special editions of toys linked to hit films or computer games, said the market for collectibles remained robust.

"I actually had my best year ever last year," said Pieter, whose PBM Express supplies stores across Europe.

"But if the Titanic sinks, we are all going down."

- AFP