Rapaport Magazine

Government May Slow Economy

China Market Report

By Caroline Yuan
RAPAPORT... Demand has been weakening a bit. A hike in the cost of supplies met with price resistance from the buyers, and the overall wholesale price remained almost unchanged.

One of the new trends is that, especially in Shanghai, demand for higher-color grades of G to D is on the rise, while lower-clarity grades, SI to piqué, are becoming more acceptable. Demand in cuts is also being upgraded, mainly concentrated in very good to excellent make and hearts and arrows.

Buyers from Shanghai are starting to ask for whiter goods with color grade G and up, in sizes ranging from 30 to 50 points; previously, the demand was for H to J. Demand from Beijing is H and up. Other cities also upgraded their color to H and I, instead of H through K, which is what they had been buying. Lower-color, VS-plus goods are facing more rejection in this choosy market.

China Economics

Booming consumption, rising inflation, the increasing appreciation of the yuan and a surge in the trade surplus have led to widespread expectation that the government will apply further tightening policies in a bid to slow the economy and prevent it from overheating. The forecast came after China’s Consumer Price Index (CPI) hit a 27-month high of 3.4 percent in May.

It’s rather complicated to describe the stock market at the moment. It was the best of times when the benchmark Shanghai stock composite index surged from 1,657 points on May 30, 2006, to 4,335 points on May 29, 2007, an increase of 160 percent in one year!

Some diamond dealers complained that it was hard to make appointments between 9 a.m. and 3 p.m. — working hours of the stock market — because many of their clients were busy with the stock market. Other dealers have benefited from the recent market surge with big sales, especially in large-size stones, to customers cashing in gains.

The stock market is also seeing the worst of times, when the stock index plunged 21.5 percent in five successive days, beginning May 30, when the government, in an effort to cool down the roaring market, announced a rise from 0.1 percent to 0.3 percent in the stamp tax on the trading of securities.
Interestingly, a jewelry retailer in Shenzhen told RDR that traffic increased noticeably in jewelry shops during the stock market plunge. His explanation was that people had time to do some shopping because they had stopped watching the stock index.

By the end of May, the number of stock exchange accounts exceeded 100 million in the country, which is an indication of the impact stock index movements have and the attention they get.

In other June market activity, there was reaction to two government policy adjustments. First, in an effort to reduce the trade surplus, China announced it would slash the export tax rebate for nearly 3,000 categories of export products starting July 1. Shares of export-oriented enterprises were among the most severely hit while imports, such as diamonds, were encouraged to offset the surplus.

In a second government move, on June 20, the China Securities Regulatory Commission announced rules allowing eligible securities and fund management companies to get licenses as qualified domestic investors (QDII) as of July 5.
This opened the way for more domestic companies to make overseas investments, redirecting some of the investment capital out of the country and decreasing the pressure on the Hong Kong stock market. Currently, there are nearly 30 companies meeting the requirements of QDII.

The domestic market dropped 2.07 percent on the date of the announcement over fears that the QDII scheme will encourage capital flow overseas, while the Hong Kong index hit historical highs the same day.

Diamond Market Stable

In spite of the puzzling picture of the market in China, diamantaires feel that the recent adjustments pose little risk for the diamond business and may even prove to be supportive. According to the statistics bureau, sales of all categories of jewelry rose 37 percent in May on a year-to-year basis.

Although China’s economy faces a number of challenges and risks, the country’s 10 percent annual economic growth can be sustained and will not “suddenly slow down,” said Fan Gang, a renowned economist and member of the central bank’s monetary policy committee.

The Marketplace

• 10-per-carat, good make, VS+/H-I, are selling at approximately $620 to $660.
• 6-per-carat, good make, VS+/H-I, are selling at approximately $830 to $870.
• 4-per-carat, good make, VS+/H-I, are selling at approximately $1,040 to $1,080.
• 3-per-carat, good make, VS+/H-I, are selling at approximately $1,400 to $1,500.
• 10-per-carat, good make, VS+/I-J, are selling at approximately $550 to $580.
• 6-per-carat, good make, VS+/I-J, are selling at approximately $780 to $830.
• 4-per-carat, good make, VS+/I-J, are selling at approximately $900 to $950.
• 3-per-carat, good make, VS+/I-J, are selling at approximately $1,250 to $1,350.
• Demand increased for 40-points-and-up size range, H+, VS-VVS in very good or excellent makes.

Article from the Rapaport Magazine - July 2007. To subscribe click here.

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