"The main reason for the closure is we are too dependent on the US market, which has become sluggish," Xu Xiaofang, a Smart Union human resource worker, said.
After losing money for the first half of the year, its cash flow finally dried up.
China Daily reports that Smart Union's Hong Kong owners disappeared several days ago and could not be reached by telephone.
Thousands of workers were standing in front of closed factories Thursday unsure of what to do.
Smart Union is one of many manufacturers in China affected by worldwide economic turmoil. An official from China Toy Association, who spoke on condition of anonymity, said Smart Union was not alone after many toy manufacturers had gone bankrupt this year.
Smart Union announced more than a HK$201 million (US$25.9 million) loss to the Hong Kong stock market in the first half of this year following weak demand and rising costs. Weak US demand, rising labor costs, expensive raw material prices and the yuan's appreciation had all added to pressure.
"The cost for each worker has risen more than 12 per cent since the labor law took effect at the beginning of this year," said Xiaofang.