THE Zhangmutou Township government of Dongguan City, Guangdong Province announced on October 16, 2008 in a notice pinned to the Hejun Toy Factory gate that the company had gone into liquidation. The notification was accompanied by a few wanted ads for workers at other local enterprises.

The Hong Kong-invested toy factory of more than 6,000 employees had been declared bankrupt a few days earlier. News of the factory's closure sent ripples of foreboding through the many other enterprises in Dongguan, a city synonymous with manufacturing.

Employees at the Hejun Toy Factory,anxious after the enterprises announced bankrupcy.

The Hejun Harbinger

Two months later on December 9, Lan Jiezhou, special assistant to the director of the Longchang Toy Factory a few kilometers away in Dongguan's Changping Town, had few comments to make on the collapse.

The media had earlier described the Hejun event as the "first case of bankruptcy in China's tangible economy as a result of the American financial crisis," implying that it was harbinger of future bankruptcies due to plummeting orders and shrinking assets.

"Even though the Hejun bankruptcy is in some ways attributable to the international financial crisis and rising costs, the actual culprit was ruptured fund chains as a consequence of erroneous investment decisions and general mismanagement," Lan Jiezhou said.

The investment decision Lan referred to was Hejun's RMB 269 million purchase in October 2007 of a 45.51-percent share in the Fujian Tiancheng Mining Industry, with a view to engage in silver mining. The plan was to obtain a mining license in April 2008 and open production in 2009. Hejun, however, failed to complete all the necessary formalities, and its mining license application was rejected. The company was unable to recover its investment, and hence the break in the fund chain.

Rumors of a bankruptcy tide sweeping across Dongguan had in fact been circulating since the beginning of 2008. But data for up to late 2008 collected by the Dongguan Municipal Economic and Trade Bureau showed that the number of bankruptcy cases was within a normal rate of organic birth-death processes in the business world.

In its manufacturing facilities next door to Lan Jiezhou's office building, Longchang Toy's several thousand workers still worked their daily shifts on the production line as usual. Lan Jiezhou's boss Liang Lin became involved in toy manufacturing 44 years ago while living in Hong Kong. He and his brother went back to their hometown of Dongguan in 1980 to set up the Longchang Toy Factory, which was listed on Hong Kong stock market in 1997. The Liang brothers purchased the US Kid Galaxy Inc toy company in 2004, making the Bindos label a Longchang brand. The same year, the Longchang Group built a new factory and established a design center in Changping.

More than 3,000 other factories produced, along with Hejun and Longchang, Barbie dolls, remote-control toy planes and robots, generating one third of the world's toys.

"But the problem is that once established, many enterprises begin investing in other fields, such as finance and mining, which often breaks their fund chains," CEO of Dongguan Yingqi Co., Ltd. Zeng Tianren said.

The Yingqi Co., Ltd. in Dalang Town is a big woolen textile enterprise that employes 6,000 or more workers. The company's Dalang International Woolen Textiles Trade Center stands opposite the plant area. Yingqi has experienced investment temptations similar to those of the Hejun Toy Factory.

Between 2006 and 2007, certain enterprises and real estate developers urged Yingqi to invest in the local real estate market. After making field investigations and analyses, Zeng Tianren reached the conclusion that the local real estate market did not merit investment. "It seemed to me that high risks were hidden behind high profits," Zeng Tianren said, "and I've turned out to be correct. Different trades are often worlds apart. We, unlike Hejun, prefer to stick to what we know, which is woolen textiles. That's the only sure way of preserving our fund chain."

Panic over Diminishing Orders

Although the Hejun Toy Factory collapse is definitely not the "first case of bankruptcy in China's tangible economy as a result of the American financial crisis," the crunch has nonetheless caused a drop in orders and, as such, is the "straw that breaks the camel's back," planning manager of the Dongguan Huakang Computer Technology Company Tang Mo said.

"Rising costs during the first half of 2008 brought lower profits and greater financial pressure," Tang said, citing the appreciation of the RMB, price rises in raw materials such as steel, and higher labor costs as a result of the promulgation of the new Labor Law. "But although profits were lower, we at least had orders. Matters are considerably worse now that orders have fallen off," Tang said. Huakang computer components are mainly exported to Germany, the ROK, the Middle East and South Africa. Since November 2008, export orders have dropped 20 percent.