The train wreck known as China’s manufacturing sector took another tumble down the hill as India imposed a six-month ban on toy imports – one of China’s largest exports. The setback for China underscores our ongoing warnings to investors that neither a multibillion stimulus plan or anything that Beijing throws at its ailing economy will promise investors those speculative profits of yesteryear.
We recently reported that China’s unemployment rate hit a 30-year high as the global recession both dampens demand for exports and forces manufacturers in the West to seek out lower cost factories in South and Southeast Asia.

Mumbai’s sudden ban on Chinese toys was attributed to some political strife surrounding Pakistan or as an aggressive protectionist move disguised as new safety guidelines. Regardless, it hits China as toy factories continue to close in Guangdong Provence at a rapid pace. Whether or not the toy ban could inflict further damage on China-Indian trade relations remains to be seen, but if in fact dealings deteriorate China could feel the economic pain.

India’s imports from China surged by 60% in 2006-07 to reach $17.4 billion from $10.9 billion in 2005-06, according to the Global Network of Exim Banks and Development Finance Institutions (G-NEXID). China is now India’s largest trading partner.

In turn, the past few years have seen China grab 60% of the Indian toy market – displacing domestic manufacturers.

The ban came just a day after the Chinese Ministry of Commerce posted statistics revealing that nearly 1,000 Chinese toy exporting companies in its Guangdong province had closed in 2008. The carnage was caused by a combination of unsafe toys being exported to the U.S. and a rise in raw materials.

Guangdong province cranks out approximately 70% of China’s toy products. According to Chinese customs statistics, 922 toy exporters in Guangdong went out of business in 2008, leaving 2,167 left from the 3,089 toy exporters which were operating in late 2007. Dongguan, the toy manufacturing center in Guangdong, was once hailed as the world’s “toy capital” with more than 4,000 toy factories and nearly 2,000 suppliers.

For investors, the message is loud and clear: China is in for a long slog.