A Western buyer at the Canton trade fair protested against higher prices by wearing a T-shirt emblazoned with “Too Expensive” in Chinese. That generated little sympathy from toy seller Clara Zhang.

“We all laughed so hard,” said Zhang, 26, sales manager for Nanjing Happy Toy Co., maker of teddy bears and stuffed ducks. “Then we said, ‘Sorry, sir, you probably need to pay even more.’”

Hundreds of toymakers at the China Import and Export Fair, the country’s largest, are charging more as the world’s second- largest economy battles inflation that soared to an almost three-year high of 5.4 percent in March. Mattel Inc. (MAT), which makes Barbie dolls, and Hasbro Inc. (HAS), owner of the Transformers brand, raised prices earlier this year as Chinese factories pass on higher costs for raw materials and labor.

“If you take into account everything Chinese toymakers are dealing with -- labor, material, exchange rate -- a price hike is only a natural consequence,” said Hua Zhongwei, a macroeconomic analyst with Huachuang Securities in Beijing. “There is a big chance for shoppers in the U.S. to face higher prices for Christmas gifts this year.”

Li & Fung Ltd. (494), the world’s biggest supplier of toys to retailers including Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), will pass on any factory cost increases to its customers, Chief Executive Officer Bruce Rockowitz said.

Toys “R” Us

“Definitely, prices are going up on everything,” Rockowitz said in a May 19 interview in Hong Kong, where Li & Fung is based. “Every type of product.”

Toys “R” Us Inc., the world’s biggest toy retailer, anticipates “some price increases,” Kathleen Waugh, a spokeswoman for the Wayne, New Jersey-based company, said in an e-mailed statement.

There are about 8,000 toy companies in China, according to the government-affiliated China Toy Association. The country exported $2.6 billion worth of toys in the first four months of the year, 17 percent more than a year earlier.

Growth slowed from the first four months of 2010, when toy exports surged 22 percent to $2.2 billion, according to data from China’sGeneral Administration of Customs. The world’s biggest toymaker exported $10.1 billion worth of toys last year.

`Sesame Street'

Global toy sales are an estimated $75 billion, according to the New York-based Toy Industry Association Inc., a trade group for North American producers and importers of toys, games and entertainment products. U.S. retail sales last year reached $21.9 billion, a 1.8 percent increase from $21.5 billion a year earlier, according to the group’s website.

Hasbro raised prices in February by 6 percent to 7 percent, Chief Operating Officer David Hargreaves said April 21. The Pawtucket, Rhode Island-based company makes toys under brands including Transformers, Spider-Man, “Sesame Street” and “High School Musical.”

“We haven’t had pushback from the retailers,” Hargreaves said. “They understand that commodity costs are going up. They accept that the prices need to go up a bit to cover these costs.”

El Segundo, California-based Mattel, the world’s biggest toymaker, said April 15 it imposed a single-digit price increase and retailers understood. The toy business is growing, said Chief Executive Officer Robert Eckert, whose company posted earnings that beat forecasts.

Orders Increase

Mattel buys from China suppliers, including Early Light International (Holdings) Ltd., a closely held toymaker that didn’t attend the Canton fair. Li & Fung’s Rockowitz said about half of the products it supplies to retailers are made in China.

The Canton fair reported a 5.8 percent increase in export orders from the previous one held in September, the weakest growth since the second half of 2009, Dong Tao, chief analyst for Asia excluding Japan at Credit Suisse Group AG in Hong Kong, wrote in a May 17 report. Orders from Europe were up 14 percent and the U.S. 12 percent, while orders from Japan and Hong Kong were down.

“Surging labor costs and labor shortage were the biggest concerns, along with a sharp rise in material costs,” Tao wrote. “Exchange rate uncertainty is also rising.”

Worker salaries have almost doubled in the past year to 2,000 yuan ($308) per month in factories in Guangdong province, the nation’s manufacturing hub, according to toymakers attending the fair.

Oil and Cotton

Wages for the millions of migrant workers running China’s factories soared 40 percent in 2010, Tao said earlier this year. Guangdong province raised minimum wages this year, with workers in Guangzhou city earning at least 1,300 yuan ($200) a month as of March 1, the state-run Guangzhou Daily newspaper said.

Higher commodity costs also are hurting manufacturers’ profits. Crude oil, the source for chemicals used in toymaking, has risen 42 percent in the year through yesterday on the New York Mercantile Exchange. Cotton prices surged 90 percent in the same period.

About 7 percent to 8 percent of the average 10-percent price increase is because of higher material and labor costs, with the rest attributed to yuan appreciation, said Wang Jianhui, an analyst at Southwest Securities Co. in Beijing.

China’s currency advanced 0.12 percent to 6.4975 per dollar as of the 4:30 p.m. close in Shanghai on May 24, near a 17-year high of 6.4892 reached on April 29, according to the China Foreign Exchange Trade System. The yuan will probably appreciate to 6.30 per dollar by the end of the year, according to the median estimate of 29 analysts in a Bloomberg survey.

Day by Day

Early Light is considering raising prices at least 8 percent this year, executive director Karson Choi said in an e- mail.

“To offset the cost increase in labor, materials and other areas, every year we need to adjust our quoting parameters when quoting new items to customers,” Choi said.

Sales for Early Light may fall 5-10 percent this year because of weak demand in the U.S., Choi said. Its best-selling items are miniature cars being offered by Mattel as a tie-in to the Disney Pixar movie, “Cars 2.”

“Wages are increasing day by day,” Jimmy Tang, general manager for Chenghai Junfa Toys Co. in Shantou, said while sitting on a pile of plastic water guns and telescopes at the toy fair. “If you don’t do it, people go somewhere else.”

Source:  Bloomberg News