The Chinese Year of the Rabbit began February 3, 2011. When the Chinese look at the moon, especially during the mid-Autumn Festival, they see a white rabbit standing on the moon under a Cassia tree, holding the elixir of immortality. During the festival, when the moon is supposed to be at its fullest and loveliest, family members gather together. Paper rabbit lanterns are a decorative part of the festival that are popular with children. In the Chinese zodiac, the rabbit symbolizes graciousness, good manners, kindness and sensitivity to beauty. Those born in the Year of the Rabbit are considered graceful and diplomatic.
For China’s economy, a placid Year of the Rabbit is a welcome time to reinforce the country’s achievements, fix its problems and provide a much-needed respite after the fast-paced Year of the Tiger in 2010. The growth rate of the country’s gross domestic product (GDP) is projected to slow to 8.7 percent this year and 8.4 percent in 2012, from 10.3 percent in 2010, but will still be the “Energizer Bunny” of the Asian economy. By comparison, the World Bank estimates the global GDP growth rate at 3.9 percent in 2010, 3.3 percent in 2011 and 3.6 percent in 2012.
Soft Landing for Economy
A key challenge for China in 2011 will be to ensure that anti-inflationary measures do not “significantly” reduce the country’s growth, World Bank representatives said in January. Despite the expected slowdown in growth, China will continue to lead Asia’s economic expansion.
As one of the side effects of the fast-growing GDP, China’s consumer price index (CPI), a main gauge of inflation, accelerated to 5.1 percent in November 2010, a 28-month high. Most economists predict that it will range between 4 percent and 4.5 percent in 2011. The government has announced a number of measures designed to curb inflation and ease the surging property prices. “For China, a big concern is how to ensure a soft landing of the economy without significantly reducing growth when the government takes measures to curb inflation,” said Hans Timmer, director of development prospects at the World Bank.
In the precious metals, jewelry and diamond sector, inflation has driven people to seek vehicles to store value, resulting in much-increased sales of gold jewelry and gold bars. Diamond dealers specializing in big diamonds also reported increased sales to clients from Mainland China, especially wealthy people who fear that the domestic currency they are holding will lose value.
Yuan Appreciation
On January 13, 2011, the midpoint price of the yuan against the U.S. dollar breeched an important barrier of 6.60, reaching 6.5997, the first time it has broken through 6.60. The yuan has appreciated approximately 3.6 percent since June 2011 (see related story on page 62). Ardo Hansson, lead economist of the World Bank’s Beijing office, said China needs more flexibility in its foreign exchange policy in order to fight inflation. For years, U.S. politicians have been calling for more appreciation of the yuan to ease the trade gap between the two countries. Several economists have predicted that the yuan will appreciate by 5 percent to 6.6 percent this year at “a moderate pace.”
In principle, the rising yuan will boost importing. But, on the other hand, when importers in the Shanghai Diamond Exchange (SDE) import diamonds based on their dollar amount, sell the diamonds domestically in yuan after holding them for a while, and then buy dollars with the yuan when they pay back their international suppliers, the change in the exchange rate affects their profit margins.
According to a statement on its website on January 13, China’s central bank has launched a pilot program to permit banks and enterprises in areas that allow yuan-settled trade to directly make yuan-denominated investments overseas. Although the yuan is increasingly being used in cross-border transactions, it is not yet used in diamond trading. The Bank of China recently started to offer transactions in yuan in its branches in New York City.
According to data from HSBC Bank, the average monthly volume of yuan-settled trade skyrocketed from $90 million in 2009 to more than $10 billion between June and November 2010. As much as one-third of China’s cross-border trade may be settled in yuan by 2016, as the government pushes for the internationalization of the currency. Depending on government and trade policies and on acceptance by the international diamond industry, it is still uncertain whether — or when — diamonds will be traded in yuan.
Hainan Offers Tax Rebate
The Chinese government announced that foreign tourists can collect an 11 percent tax rebate on purchases made in the tropical island province of Hainan in the South China Sea as of January 1, 2011. To qualify, tourists must purchase more than $120 of merchandise in certain categories, such as jewelry and watches. Food, alcohol and vehicle purchases, if they leave the country, would not qualify. The tax rebate is one of the measures designed to promote Hainan as a tourist destination and to shift the economic emphasis in the country from export to domestic consumption.
The Marketplace
• The wholesale market was busy filling orders in January in preparation for the seven-day Chinese New Year holiday, a popular time to get married. The preparation also includes Valentine’s Day.
• Retail sales for the Christmas season and Gregorian New Year were satisfactory and the market mood is high. The general consensus is that the China market will continue to grow in the coming years.
• Demand remains very good and there are even shortages for rounds in 0.30 carats to 1.10 carats, D-H, VS, Gemological Institute of America (GIA)-certified diamonds in Triple EX, Double EX and EX cut grade with none to faint fluorescence.
• Sales for gold jewelry and gold bars are up significantly.
Article from the Rapaport Magazine - February 2011. To subscribe click here.