DONGGUAN, China — At the North Pole, the elves are bustling to fill Santa's sack with toys for the world's children.

In the real world, Christmas looks like Dongguan: a gray, industrial city in South China, where mile upon mile of factories house mile upon mile of uniformed young women toiling on production lines. Within a single generation, they have swept up the global toy business.

But are they bustling hard enough? Reports suggest that America's hottest Christmas toys, such as Mattel's T.M.X. Elmo, are running short this year. And some place the blame on China, where rising labor costs and electricity blackouts have disrupted production. Labor shortages, too, though hard to imagine in the world's most populous country, now affect U.S. firms sourcing from China.

"Wages have gone up, the availability of labor is not as plentiful as before, and power shortages continue to happen," says Tom Debrowski, Mattel's executive vice president of global operations.

But Debrowski denies that China's growing pains have hit the Christmas plans of the world's largest toymaker. The real reason for Elmo's scarcity: an "incredible early takeaway in September that surprised us," he says.

American consumers have surprised other toymakers this season. Sales of the $60 Vertical Vengeance Coaster are 35 percent ahead of forecasts, says Michael Araten, president of Hatfield, Pa.-based K'Nex Industries.

"We've had to fly in some product (from China) to meet demand ... but it's worth it even if we're just breaking even, to keep our customers happy," says Araten.

Although U.S. toy retailers are getting better at anticipating inventory needs, and manufacturers are testing new toys earlier in the year, there are "pockets of excess demand," says Carter Keithley, president of the Toy Industry Association (TIA), a trade body representing 85 percent of all toy sales in the U.S.

"Nobody makes money on bare shelves," but predicting sales is "still a gamble in some areas; there is no crystal ball," Keithley says.

Planning is growing more complex. China's low-cost, compliant labor has lured American companies for two decades.

Now, those companies face a raft of new challenges as minimum wage laws raise production costs, raw material prices rise and ethical trading concerns force their Chinese partners, already operating on wafer-thin profit margins, to treat the workforce more fairly.

But, "there's a comfort level about China now — they have the investment and infrastructure, and meet U.S. and European safety standards," K'Nex's Araten says.

You hardly need look for that "Made in China" stamp. "Consumers are shocked that something is made (in the United States)," says Araten, who still makes the bulk of his toys' rods and connectors in the U.S., but assembles 90 percent of the final product in China.

China's toys now constitute 75 percent of world output, according to the China Chamber of Commerce for Import and Export of Light Industrial Products and Arts-Crafts. And the bulk comes from Guangdong province, home to more than 5,000 of China's 8,000 toy factories.

At peak times, 1.5 million workers are making toys in Guangdong, which borders Hong Kong.

"We have ideal conditions for foreign investors," says Li Zhuoming, vice chair of the provincial toy association.

Last year, the province accounted for 78 percent of China's $15.2 billion of toy exports, a 10 percent jump from 2004, according to customs figures.

The toy migration to mainland China from Taiwan and Hong Kong in the 1960s, sometimes via Japan in the 1970s, is epitomized by Chinese firms such as Lung Cheong.

"We have grown with China," says managing director C.M. Leung. "We moved from Hong Kong in 1980 when China just opened up, and now 95 percent of our operations are here."

The 40-year-old firm now employs 5,000 workers, 70 percent of them women, at its Dongguan plants, which boast their own generators to deal with occasional power shortages. Lung Cheong ranks among the most successful toy companies in Guangdong, exporting $50 million worth of toys to the U.S. every year, for clients including Mattel (such as the flying Superman toy), MGA and Hobbico.

But the realities of a highly competitive marketplace are forcing change.

"It has become harder and harder to hire people in recent years," says Leung. "Other places in China have developed, and workers want to stay close to home."

To slow turnover and cut operation costs, the company will unify its production next year in a single factory with improved facilities for workers, including basketball courts and karaoke halls.

Those workers include Zhang Hairong, 28, who packages toys on a production line for $88 a month, the local minimum wage (raised 20 percent this September), for an eight-hour daily shift, 21 days per month.

"It's not bad here, they treat us well," says Zhang, in the presence of management.

But business is tough for many Chinese toy companies, says Chen Huangman, secretary-general of the Guangdong toy association. "There is so much pressure on prices from foreign companies."

U.S. buyers demand prices that are not reasonable, considering the growing labor costs, says colleague Li Zhuoming. "Wal-Mart in particular puts a lot of pressure on prices, and as they order so much from China, it has a large influence," says Li.