China’s diamond processing industry began in the 1980s, when Jinghua Diamond opened the country’s first large-scale, professional diamond processing enterprises in Qingdao, in the Shandong province. The 1990s saw further expansion of the industry as diamantaires from Europe, Israel and other regions came to China, establishing processing centers for diamond cutting in Guangdong, Shandong and Shanghai.
At their peak, these centers were home to approximately 70 factories employing 50,000 people, with an annual processing trade of 3 million carats. These numbers put China in second place in the world — after India — in diamond processing volume. Like its Indian counterpart, China’s diamond processing industry suffered a major blow during the global financial crisis, which resulted in 20,000 skilled workers — representing more than 40 percent of the country’s manufacturing capacity — losing their jobs. Today, China’s diamond industry is gradually recovering. In 2009, the value of China’s total trade — import and export — in diamond processing reached $3.72 billion. In 2010, it exceeded $4 billion, representing 20 times growth from the early 1990s.
Most of China’s polishing business is still contract cutting, with the rough supplied by foreign companies and the finished products exported back to these foreign countries. Some of the finished exports are then imported back into China for resale on the domestic market.
The mines in China produce 170,000 carats of rough diamonds each year, which accounts for only 0.14 percent of the global total. Due to insufficient financing and underdeveloped rough purchasing channels, there are no sightholders in China. In comparison, India has 61 sightholders, many of whom have formed a seamless, efficient industry chain from diamond manufacturing to jewelry design and manufacturing to retail.
A recent analysis by KPMG, an international tax and accounting firm headquartered in the Netherlands, forecasts that by 2015, the global share of China’s diamond processing industry will reach 21.3 percent, while India’s share will decline from its current 57 percent to 49 percent. That projection, however, is not a guarantee for China. The country’s increasing labor costs, its labor shortages, the uncertainty of its rough supply and inflation of its currency, the renminbi, might undermine that growth.
The Aging Population
Currently, China is enjoying the benefits of what is called a demographic dividend. According to the latest United Nations (U.N.) population data, in 2010, China’s percentage of the population aged 60 and over stood at 12 percent, lower than the global average. At the other end of the age spectrum, the country’s “one family, one child” family planning policy, designed to prevent overpopulation, has effectively decreased the percentage of the population in the younger, dependent-child category. Those two trends have expanded the percentage of the population in the middle, able-bodied adult worker segment. With fewer of the country’s resources required to meet the needs of the old and the very young, more resources are available to pour into economic development. That is the gist of what is meant by a demographic dividend.
But that dividend will not pay off for China forever. According to the Organization for Economic Cooperation and Development (OECD), an international organization established in 2002 to promote economic trade and growth, in the 30 years after 2011, the population aged 60 and above will increase by 16.55 percent each year in China, and will account for 28 percent of the entire population by 2040 and 30 percent in 2050. By 2030, China’s percentage of senior citizens over 65 years of age will surpass that of Japan.
The report by OECD indicates that China’s demographic dividend will peak in about 2013 and then begin to decline. The ratio of working-age population to total population will increase until 2015, when the absolute size of the working population will reach its peak of approximately one billion people, but thereafter, it will begin to shrink. The fact that fewer people will be available in the country’s labor force and the increased amount of resources required to provide for the young and the elderly — especially since most of the elderly population in China are not well-off financially — are expected to affect the growth of per capita gross domestic product (GDP) and to have a profound influence on the macroeconomy of China.
Labor Shortage
The current labor shortage in the nation’s many manufacturing sectors, spreading from coastal to interior regions of China, is not a result of demographic shifts so much as economic and lifestyle shifts between urban and rural areas. China, as the “World Factory,” heavily relies on migrant workers coming to the cities from rural areas seeking work. In the past, they have come because of the lack of farmland to work in their rural homes and the fact that they could earn so much more in the cities. They took jobs in the city factories to earn money to support their families back home, to prepare for the cost of marriage or to build a house, and many of them had to separate themselves from their families for a long time to accomplish that. Traditionally, the migrant workers returned to their hometowns during the Chinese New Year period for a long family reunion, and then returned to their jobs in the cities.
This past year, however, saw a change in the workforce pattern as many of the workers chose not to come back to their city jobs in the beginning of 2010 and some of them went home earlier at the end of 2010 in advance of the Chinese New Year. The main reason was that the cost of living in the cities has risen so fast in recent years that the workers were finding it more difficult to save money. But a second contributing factor was that, during that same time, the living standard and the overall economy back home in the rural areas had significantly improved and there were more jobs available. With a rise in the prices of agricultural products, there was more need for workers in the agricultural sector and they were able to support themselves and make a living staying in their hometowns with their families.
In addition, some factories have moved to rural areas and that is a win-win situation. The factories have access to a cheaper labor supply and they save the cost of providing living space for their workers, as they would in the city. At the same time, the workers are much happier because they can go back home to their families every day at the close of their work shifts.
Potential Way Out
There are three important factors to keep in mind concerning China’s future work force.
First, since China is a big country in area, development and resources vary widely by region. The central western region of the country will continue to have the advantage of low-cost labor for many years to come and will benefit from the transfer of labor-intensive industries from coastal areas. In fact, some diamond factories are considering moving their manufacturing facilities to the region, just as the Hong Kong companies moved their jewelry manufacturing to Mainland China years ago.
Second, as China’s demographic dividend begins to shrink, labor costs will rise. The emphasis will shift from hard physical labor by hand for low value-added contract cutting to different types of jobs that will require more training and that will involve more added-value creativity and skills. The demographic dividend advantages that China is enjoying now are projected to continue until about 2020. At that point, the country will have to look beyond its demographics to promote growth, perhaps through the establishment of the social security system, an improvement of the labor market and the expansion of education and training.
Third, for the long term, it will be vital for China to secure its own supply of rough and to develop an efficient banking system to support diamond manufacturing. Only when the Chinese become independent and stable in sourcing rough and cutting, and only when more local Chinese investors become involved in the industry will China’s diamond industry be strong enough for major companies of sightholder caliber to emerge.
Demographics 2009
|
Population (millions) |
% Population Under 25 |
% Population Over 65 |
Median
Age |
GDP Avg.
2005-2009 |
|
|
U.S. |
308 |
35% |
13% |
36.8 |
1.0% |
|
India |
1,200 |
54% |
5% |
25.9 |
8.0% |
|
China |
1,340 |
39% |
9% |
35.2 |
11.4% |
|
Japan |
128 |
21% |
23% |
44.6 |
-0.1% |
|
Europe |
498 |
29% |
17% |
NA |
0.9% |
|
U.A.E. |
4.9 |
42% |
30% |
30.2 |
7.2% |
Article from the Rapaport Magazine - February 2011. To subscribe click here.