Rapaport Magazine

China Market Report

Exporters Eye Domestic Market

By Julius Zheng
RAPAPORT... After more than three decades of development, Guangzhou, the capital city of Guangdong province in South China, has earned its unique position in the diamond and jewelry industry. In 2007, Guangzhou was the home of more than 500 jewelry and diamond manufacturing firms exporting in excess of $2 billion of goods and accounting for more than 30 percent of national jewelry exports.

Among these firms, approximately 70 percent are capitalized by Hong Kong–based companies. Panyu, Conghua and Huadu are the most important manufacturing regions in the city. Panyu alone has more than 400 firms employing approximately 80,000 workers. The majority of jewelry with Hong Kong brand names is manufactured in Panyu. The export-oriented manufacturing in Guangzhou supplies the U.S., Europe, Middle East and Hong Kong markets.

Forbes recently counted 42 billionaires in Mainland China. The number of millionaires increased by 20.3 percent to 415,000 in 2007, registering the second-fastest growth rate after India’s 22.7 percent, according to the 12th annual “World Wealth Report” by Merrill Lynch and information technology group Capgemini. The new middle class is emerging. World Luxury Association (WLA) reported that China’s total consumption of luxury goods — including jewelry, leather products, fashion clothing and perfume but not including private planes and yachts — reached $8 billion in 2007. WLA, noting that China currently accounts for 18 percent of global luxury consumption, also said it expected that percentage share to grow.

Approximately 80 percent of top-brand international luxury goods have established points of sale in the major Chinese cities of Beijing and Shanghai, and many of them have penetrated small and medium-sized cities. But despite the enormous potential for luxury products in China, WLA said that some problems need to be solved before the market becomes more mature. Two characteristics that it noted as signs of the market’s immaturity: The nouveau riche class is eager to display their wealth but sometimes lacks sufficient brand knowledge and a portion of the middle class is actually willing to go into debt to purchase branded products.

The domestic market becomes even more attractive because the global economic uncertainties have taken a toll on Chinese jewelry exports. Soaring gold and energy prices add to the cost of materials, and the rising renminbi currency increases the labor cost since export prices are quoted in U.S. dollars but salaries are paid in local currency.

Meanwhile, the sluggish U.S. demand means fewer sales in that important market.

As the largest jewelry-manufacturing base in China, Guangdong has experienced a reduced growth rate for its jewelry exports. According to the Guangzhou customs office, the province’s jewelry exports totaled $1.76 billion in the first half year of 2008, with a year-on-year increase of 4.3 percent. The growth rate for that same six months declined by 14 percent compared with the same period in 2007. Exports in June were $300 million, with a 0.3 percent year-on-year increase, a modest increase but still better than February, which saw a negative growth of 21 percent.

In the first six months of 2008, gold jewelry exports from Guangdong province fell sharply, with gold jewelry with diamonds, including findings, dropping 16.3 percent to $350 million and other gold jewelry, including findings, falling 4.7 percent to $310 million. During the same period, in the Panyu district of the city of Guangzhou, eight jewelry manufacturing firms closed or moved out of the region.

As the tax rebate policy and foreign exchange rate become less favorable, and the cost of labor, material and energy increases, profits are squeezed for the export-oriented Guangzhou jewelry manufacturing industry. Local firms, with the support of government, are seeking strategic changes and focusing more on the expanding domestic market. Current annual demand for gold jewelry in China is more than 300 tons, second only to India. Using the experience and craftsmanship developed during more than three decades, the industry is now emphasizing branding and design for added value.

The local government has supported such important projects as Shawan Jewelry Industry Park, Worldmart Jewelry & Gems Emporium and the Panyu Lab of the National Gemstone Testing Center (NGTC). More than 30 manufacturers also have joined forces in a domestic sales consortium to raise their competitive strength. All these actions should help the region become a new force in the domestic market, according to Li Zhiwei, deputy director of Panyu’s Foreign Trade and Economic Cooperation Bureau.
The Marketplace
• The market is seasonally quiet but stable.
• Demand is stable for rounds in 0.30 to 0.70 carat G+/VS+.
• Demand is strong for round G+, VS,
½-carat fine-make diamonds with Gemological Institute of America (GIA) certificates, especially triple EX goods.
• Demand is stable for larger, round stones in 1 carat+/VS+/H+, GIA-certified and
fine make.

Article from the Rapaport Magazine - August 2008. To subscribe click here.

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