As temperatures soared above 90 degrees Fahrenheit in recent
weeks, Hong Kong was reeling not only from the heat but also from a series of
high-profile scandals, including political scandals, the arrest of some of the
city’s leading tycoons on suspicion of graft and growing concerns about the
state of China’s economy. The recent slowdown in retail business cannot be
blamed solely on the economy, however. It is partly due to the usual seasonal
departure of many people from the city during the hot months of July and
August. “Based on past experience, we expect a rapid pick-up in August,” said
Sally Ryder of Ryder Diamonds.
The general gloom did filter down to the diamond market,
with wholesalers reporting very slow business at the Hong Kong Jewellery &
Gem Fair, held June 21 to 24. Dealers said there were few buyers and fewer
sales. Wholesalers said that falling prices were not resolving their problems
in a slowing market. “Right now, I can buy goods at cheaper prices, but I can’t
sell them,” said one wholesaler who spoke off the record.
Lower diamond prices are having some positive effect on
retail sales. “Given that people are aware that the price of diamonds is more
flexible at the moment, the feeling is that now is the time to buy,” said
Ryder.
One investor who got that message loud and clear is the
single, male private buyer from Ordos in Inner Mongolia in the northern part of
China, a city that has many new millionaires thanks to its coal reserves. The
man paid almost $2.4 million for 104 diamonds ranging in size from .70 carat to
5 carats from Beijing retailer City of Love Diamonds. The shop’s chairman said
it was the biggest single sale of diamonds in recent years. The buyer said he
was investing in diamonds because he believed gold prices to be unstable.
POLITICAL SCANDALS
The July 1 Hong Kong holiday, which celebrates the city’s
return to Chinese rule 15 years ago, also witnessed the inauguration of the
city’s new chief executive, CY Leung. Leung came to power after the former
chief secretary Henry Tang — who had been expected to win the election after
receiving behind-the-scenes approval from Beijing — was defeated following
revelations about extramarital liaisons and illegal structures in his home.
Violations of rules governing land and buildings are hot topics in Hong Kong,
where land scarcity and tight government control have made property prices
among the very highest in the world.
But the inauguration didn’t end the politics. During the
election campaign, in response to Tang’s illegal structure controversy, Leung
stated that there were no illegal structures on his premises. It came as a
shock, then, that even before Leung took office, local media uncovered five
illegal structures at Leung’s home, triggering complaints to the Independent
Commission against Corruption, Hong Kong’s highly regarded graft buster, and
calls for him to step down for lacking integrity and misleading the public.
TYCOONS IN TROUBLE
In another dramatic event that has rocked the city, Hong
Kong’s highest-profile graft case solidified against two elderly brothers from
the city’s Kwok family, owners of Sun Hung Kai, one of the world’s biggest
property developers. They were charged in mid-July, along with another former
chief secretary, with bribery in connection with unspecified favors that are
believed to involve land sales. Shares in Sun Hung Kai have fallen by about 15
percent since the brothers’ arrest in March.
MORE ECONOMIC BAD NEWS
Shares in Chow Tai Fook, the Hong Kong jewelry retailer that
went public in December 2011, were down by almost 9 percent following
disappointing quarterly results for the quarter ending June 30. The company
said that gem-set jewelry accounted for 22 percent of sales, down from 27 percent
for the 12 months that ended in March. Same-store sales growth in Hong Kong and
Macau, which accounts for about half of the company’s revenue, was down by 1
percent from a year earlier. Overall, the company’s shares are down more than
31 percent from their initial public offering (IPO) sale price so far in 2012,
according to Bloomberg News.
Other luxury brands in the city have seen similar share
price falls recently. Shares for Prada, which listed on the Hong Kong Stock
Exchange in June 2011, fell 4.6 percent in a single day on July 12, according
to The Financial Times.
Meanwhile, across the border, Mainland stocks fell in
mid-July to their lowest levels since March 2009 on worries about corporate
earnings and the health of the general economy. The Shanghai Composite Index
was down 37.94 points, or 1.74 percent. Analysts expected the sell-offs to
continue.
To encourage more overseas investment, China announced a
reduction of up to 50 percent in the withholding tax paid by foreign companies
taking profits out of the country and on dividends paid by Chinese companies to
foreign shareholders. The cuts apply to countries that have a double-taxation
agreement with China. China also has cut interest rates in an effort to revive
a wobbling property market.
The Marketplace
- In wholesale, VS to SI is selling well, but little else is
selling.
- Stones of 2 carats and up have been selling strongly in
retail in recent months.
- Increases have been seen in sales of VS1-and-higher
stones, particularly to Mainland Chinese buyers.
Article from the Rapaport Magazine - August 2012. To subscribe click here.