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Chinese Caution

Editorial

Jul 6, 2012 5:00 AM   By Avi Krawitz
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RAPAPORT... China’s current ‘Year of the Dragon’ appears to have lost some of its fire as investors and ‎analysts view China’s economy with increasing caution. Chinese diamond buyers have ‎picked up on that sentiment and are holding back from making large-inventory purchases ‎as global economic concerns deepen and local consumer confidence fades. ‎

While China’s economic growth is still enviable by any other country’s standards – ‎expected at around 8 percent for 2012 - the pace of economic development has ‎slackened. ‎

China’s economy grew 8.1 percent in the first quarter of 2012, which was its slowest ‎quarterly pace in three years. Second quarter data, scheduled for release next week, is ‎expected to be weaker at around 7.6 percent.‎

The slowdown was inevitable as the fast-paced growth witnessed in recent years could ‎not be sustained in the long run. It is also a natural part of a maturing process as the ‎country transitions from being an export-driven market to one driven by consumption. ‎China is steadily shifting from the supply side to the demand side of the equation.‎

The World Bank suggested in an April 2012 report that the challenge facing the ‎government in the near-term is therefore to “facilitate a soft landing,” and ensure that ‎growth does not slow too quickly. Government needs to balance its fiscal policy to ‎support and encourage local consumption while it attempts to curb inflation and restrain ‎the overheated infrastructure and real-estate sectors. ‎

It can only do so much. The economy is being impacted by both domestic and external ‎factors. The pace of first quarter growth slowed largely as exports were squeezed by ‎lower global demand for its products due to the persistent euro-crisis and sluggish U.S. ‎recovery. Local Chinese consumption and consumer confidence held relatively steady ‎during the quarter.‎

That changed in the second quarter as those global trends threw further caution at the ‎Chinese consumer. Lower exports have impacted manufacturing and consumers have ‎taken their signals. Next week’s data is expected to show slower second quarter retail ‎growth, which ultimately impacted the diamond jewelry segment. ‎

The weaker sentiment was certainly felt in the diamond market as global demand slowed ‎in June, according to the Rapaport Research Report entitled “Price Pressures” published ‎this week. Among the contributing factors, the decline came as buyers from Mainland ‎China and Hong Kong refrained from large-quantity purchases as they expect prices to ‎soften further in the weak economic environment. ‎

The recent June Hong Kong Jewellery & Gem Fair reflected poor Far East demand for ‎diamonds. Exhibitors observed that consumer confidence is down as people in the ‎retail ‎and private sectors are unsure about the economy. Chinese consumers are increasingly ‎looking at fancy shape and lower clarity diamonds as a means to stay within their tighter ‎budgets. ‎

Henry Cheng, chairman of Hong Kong-based jewelry giant Chow Tai Fook, offered ‎similar perceptions. “[The] retail sentiment has weakened in recent months as consumers ‎became more prudent because of economic uncertainty,” Bloomberg quoted Cheng as ‎saying on June 27. “That’s reflected in lower spending per customer per transaction, but ‎as the size of China’s middle class is growing, this helps to boost total sales.”‎

Despite the pullback in individual spending, the likes of Chow Tai Fook and other large ‎retail jewelry chains are banking on that growing middle class to maintain their sales ‎increases. Their aggressive expansion across China is testament to that. ‎

The numbers therefore continue to stagger. Chow Tai Fook’s revenues grew 61 percent ‎year on year to $7.3 billion (HKD 56.57 billion) in the year that ended March 31, 2012. ‎Chow Sang Sang, the regions second largest jeweler, saw revenues grow 47 percent to ‎‎$2.21 billion (HKD 17.16 billion) in 2011. Similarly, global jewelers are looking at the ‎region to spur growth. Tiffany & Co’s sales in Asia-Pacific rose 17 percent in the first ‎quarter of the year, significantly outpacing its rather depressed growth in other regions.  ‎

Other luxury products have also seen stellar growth in China and are expanding ‎accordingly. Gucci has raised its presence in China from just 4 stores in 2004 to 46 ‎stores across 32 cities in 2011. The luxury label is planning to open 10 more stores in ‎China this year. BMW and Audi this week reported that China’s growing middle class is, ‎quite literally, driving their respective global car sales. BMW’s China sales were up 32 ‎percent year on year in May while Audi’s grew 44 percent during the month. Both ‎companies noted that they see no signs of a slowdown in Chinese demand in their sector.‎

The trend reinforces the strong long-term outlook for demand as China’s middle class is ‎yet to peak and its retail potential remains relatively untapped. ‎

However, demand is vulnerable to short-term risk and economic hiccups, as is currently ‎evident in the diamond market. Sentiment will remain depleted as Chinese consumers ‎adapt to lower levels of growth and it will take at least the rest of this year to restore their ‎former buoyancy.‎

But, consumer spending will ultimately rebound as China is by no means a mature ‎market yet and diamond demand will be stimulated by the emerging markets of the Far ‎East in the medium-to-long-term. While China’s ‘Year of the Dragon’ has not left the ‎blazing trail experienced in previous years, the country certainly has not lost its spark. ‎

The writer can be contacted at avi@diamonds.net
.

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.

Copyright © 2012 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400 begin_of_the_skype_highlighting FREE +1.702.893.9400 end_of_the_skype_highlighting.

Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.

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Tags: Audi, Avi Krawitz, BMW, China, Chow Sang Sang, Chow Tai Fook, diamonds, gucci, Jewelry, luxury, Rapaport, Tiffany
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