China exported 17 billion toys in 2007
More than half of China's toy exporters have been forced out of business this year, according to official figures.
China is the world's largest exporter of toys but officials say the industry is experiencing its most difficult time in decades.
Weaker demand from the US, a stronger Chinese currency and tougher safety standards are thought to be behind the rise in business failures.
Most of the failed companies are small-scale producers.
"Last year was the most difficult time in decades for the Chinese toy industry," said the vice-chairman of the China Toy Association, Liang Mei.
A total of 3,631 toy exporters, or 52.7% of the industry's businesses, shut down in 2008, according to figures from the Chinese General Administration of Customs reported by the official Xinhua news agency.
Last year there were several large-scale product recalls as Chinese toys failed to meet international safety standards.
In response, the Chinese authorities closed hundreds of factories and forced others to comply with regulations.
The licences of 600 Chinese toy exporters were revoked at the beginning of this year, according to the official figures.
The BBC's regional analyst Jill McGivering says the increase in standards seems to have also increased production costs and made some companies fold.
The Chinese report says the US credit crisis has made matters worse.
In the first seven months of 2008, China exported 35.3bn yuan ($5.17bn) worth of toys, up 1.3% from the same period in 2007.
However, the growth rate of those exports was 21.8% slower than last year, Xinhua said.
It said exports to the US dropped 5.2% to $1.62bn over that period.
Officials also blamed small-sized toy producers for not adapting to changing markets.