Toy story: What toy sales tell us about China's future

For decades, China has been the world's toy factory, churning out popular designs that are shipped abroad and sold to legions of waiting children.

That hasn't changed -- the country still makes around 75% of the world's toys.

But over the past five years, toy manufacturers in Mainland China have started to sell to an entirely new target demographic, much closer to home: lower-income Chinese consumers.

That's right. China itself is becoming a major consumer of toys.

Market research firm Euromonitor International says retail sales of toys and games in China have been growing about 13% each year since 2008. In 2013, total sales were just shy of $20 billion.

Euromonitor also predicts that in the next five years, China will be the fastest growing market globally for traditional toys and games. They say the market will grow 57% by 2018.

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John Liu, the Marketing Director of Zenit, a Chinese company that sells high-quality wooden toys, said that he first realized two years ago that there was a strong opportunity to sell in China.

Zenit launched their product on the Mainland in 2013, and made $500,000 in their first year of operation. Now, China accounts for 20% of the company's export volume. Liu says it's simple: Chinese parents want higher quality, safer toys.

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Shaun Rein, the author of The End of Cheap China, said that businesses should work to harness the spending power of Chinese consumers.

Many observers, he said, are "underestimating the purchasing power of low-income Chinese. And more importantly, they're underestimating how wealthy they're going to be three to five years from now."

Rein estimates there are 850 million Chinese workers earning less than $500 a month. Salaries are going up 15% a year, leaving them with more disposable income than ever before.

Rein said toy purchases allow consumers to show off some of their newly-acquired status.

"You have toys, such as Lego, that are doing very well. They're cheap enough that they're accessible for low-income Chinese. But they're expensive enough to get prestige."

"So instead of buying a Louboutin bag, people buy Lego for their family members," Rein said.

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Lego is beginning to push its brand to second and third-tier Chinese cities, according to Euromonitor. The company has opened stores in 14 new cities -- including Xi'an, Dalian and Foshan. Lego has also increased investments in its education arm.

Alice Tsang, an economist with the Hong Kong Trade Development Council, said the market is only going to grow as China loosens its one-child policy -- which means an extra 1-2 million babies born each year.

Utku Tansel, Head of Toys and Games Research at Euromonitor International, said that toy sales in China are ripe for more growth.

"In 2013, the average spend per child in China was just $41. Compare that to $345 in Japan," he said. "Same region, massive difference."

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