Hong Kong dislodged Japan in 1971 to become the world's biggest toymaker, but rising costs forced most factories across the border in the 1980s and 1990s.

However the PRD, long a cost-effective haven, is now suffering a production flight of its own amid rising wages and inflation.

Instead of following most factories relocating to remoter parts of the mainland or to Southeast Asia, Lau has chosen to bring back to Hong Kong production that was moved to the PRD two decades ago. Lau established Hermon in 1995 to manufacture moulds for the toy industry.

Lau said costs had swelled so much on the mainland that the gross profit margin of toy mould makers across the border had shrunk to about 10 per cent from about 30 per cent three years ago.

Guangdong's newest industrial policy, which aims to upgrade manufacturing activities by getting rid of labour-intensive, resource-intensive and environmentally-unfriendly factories, is behind a lot of the rising costs.

Guangdong party secretary Wang Yang described the policy as 'emptying the cage and setting the birds free'.

'Wages are going to double in five years in Guangdong, which brings the gap closer with Hong Kong,' Lau said. 'Guangdong is emptying its birdcage by setting the birds free, so why not fly back to Hong Kong?

'Relocating some production back to Hong Kong is not only an option for manufacturers, but gives more job opportunities to the younger generation.'

Just behind the main door of Lau's spartan Fo Tan workshop, two designers in their 20s are working shoulder to shoulder on computers to digitalise two-dimensional images into 3-D ones. With the press of a button the mould-making machine produces samples.

If the samples are flawless, they push another button to mass produce the moulds.

Lau said the Fo Tan workshop, which opened four months ago, employed about five people in all, with most of the work done by machines. The Dongguan factory, by comparison, had 220 workers.

He said the average pay of the Hong Kong staff was about HK$8,000 per month, which was not much higher than that of a well-trained technician in Dongguan, who earned about 5,000 yuan (HK$6,100).

Wages keep rising on the mainland as a result of the combined effect of yuan appreciation, labour shortages and a mandated increase in minimum pay as part of the 12th five-year plan to 2015.

The relocation thus makes business sense for Lau as wages account for half of the cost of making a mould in Dongguan, but only a quarter in Hong Kong. Most of the investment in Hong Kong was in the German-made machine, which cost Euro800,000 (HK$8 million).

Lau said Hong Kong also had other advantages. It offers better protection for intellectual property, a crucial factor for a manufacturer producing popular toys pitched to a mass audience.

In 2000, Hermon became the first company in Asia to use computer technology to produce moulds but four senior managers at the Dongguan factory subsequently left, taking the technology with them. They then separately set up about 60 companies to compete with Hermon.

Hong Kong Small and Medium Enterprises Association chairman Danny Lau Tat-pong said Hong Kong was now a viable location for factories relocating from Guangdong.

'Industries with higher levels of technology and automation, and which take up less space are suitable for relocation,' he said. 'Other than mould making, watch components can be produced in Hong Kong, too.'

Danny Lau urged the Hong Kong government to offer more incentives to attract manufacturing activities back to the city, which would help create jobs.

He called on the government to grant smaller firms cheaper land at industrial estates in Tai Po and Tseung Kwan O.