Golden Week, which started October 1, the National Day holiday of the People’s Republic of China, has become one of the more important periods for consumer spending. In 2010, sales in both the Mainland and Hong Kong recorded record growth.
Many people in China take the opportunity of the long holiday to visit Hong Kong and this year, the number of tourists from the Mainland was up by 21 percent, with more than 230,000 crossing the border on the first two days of the week. Local shops enjoyed a sharp increase in business, with some jewelry retailers reporting that sales were up by 20 to 30 percent compared to 2009.
Tourist Attraction
One of the things tourists come to Hong Kong to buy is jewelry, partly because they feel that Hong Kong jewelers are more reputable and they get true value for their money. They also like the design of Hong Kong jewelry, which tends to have a more modern flair than what is available on the Mainland.
But the appeal of Hong Kong jewelry brands and designs is not the only reason. After all, many of the leading Hong Kong jewelry chains have retail outlets throughout China so Hong Kong jewelry is readily available in their hometowns. Chow Tai Fook, one of the leading jewelry chains, already has 1,000 outlets in Hong Kong and the Mainland and plans to open another 1,000 retail outlets on the Mainland in the next decade.
So why do Chinese consumers make it a point to include jewelry purchases as a must-buy when they visit Hong Kong? A big reason is the considerable savings in taxes. On the Mainland, sales and value-added tax (VAT) make the purchase of jewelry more expensive. Hong Kong is a tax-free port for all the raw materials involved in jewelry manufacturing and even though some of the jewelry is actually manufactured in China by Hong Kong–based jewelry companies, it is re-exported to Hong Kong free of taxes, and those savings are passed along to consumers.
Anticipation
Chinese diamond traders bought quite heavily in the July-to-September period in anticipation of Golden Week and, although they were prepared to replace the items they sold, they are now finding that prices have gone up significantly, compared to what they still have in inventory.
Demand in the market generally has shifted to lower price points, which is putting some pressure on better-clarity goods. Everybody is now looking for VS and SI goods instead of VVS goods, which had been the main staple of the diamond market in China. Manufacturers are trying to maintain price levels by using diamonds of a slightly lower clarity and color.
China has reached the point of developing into a leading diamond center, not only as a domestic consumer market, but also as a major diamond producer. To promote that effort, the Chinese government has made strategic investments in various African nations in an effort to assure a stable supply of rough diamonds into the future. Despite the fact that the U.S. government routinely rants at the Chinese government for keeping the value of the yuan low and causing ever-larger budget deficits, the Chinese government has in fact slowed its purchasing of U.S. debt and is instead using its huge reserves of U.S. currency to extend its influence in Europe and Africa. Increasingly, the government is choosing to invest in diamonds rather than in the U.S. dollar, which it sees as overvalued because of the overprinting of U.S. currency to fund the billions in bail-out money during its economic crisis.
Local sales in Hong Kong have weakened as dealers struggle with higher prices. As usual, the local market lags behind prices achieved in the overseas cutting centers. This has led to brisk intertrader dealing because fewer goods are being manufactured due to the high cost of rough.
The market is seeing prices that in some cases are back to the highs that were reached in 2009 before the big price collapse. However, there has not been a corresponding increase in the Rapaport list to reflect the higher prices. That raises concern that the industry is once again on the train that took it to record highs in 2008 that preceded the fall at the end of 2008 and early 2009.
Exchange Rate Impact
While dealers and retailers try hard to resist the higher prices, some are suggesting that the present situation is not so much the result of the rise in the price of diamonds, but rather in the declining value of the U.S. dollar, on which diamond prices are based.
Gold is at an all-time high and investors worldwide are looking for ways to hedge their money. Works of art, special and rare diamonds and expensive real estate are all magnets for money looking for a safe haven.
The Marketplace
• Stones 5 carats and larger are still in demand, but buyers are balking at the high prices. Many of these stones are now fetching premiums, rather than discounts.
• With the price escalation in larger stones, 2 carats have become more popular than 3 carats.
• 1-carat stones are still the mainstay, but noticeably higher in price than only a month ago.
• 30-pointers to 50-pointers are doing well. As demand shifts to VS and SI in H color and lower, goods are being sold uncertified, as cost for certification adds unnecessarily to the price.
• 10-pointers to 25-pointers are moving steadily, but here again, there has been a shift toward lower clarity to maintain price levels.
Article from the Rapaport Magazine - November 2010. To subscribe click here.