Rapaport Magazine

Hong Kong

Regime Change

By Liana Cafolla
The parallel timing of the presidential election in the U.S. and the
once-in-a-decade change of leadership in Mainland China contributed to a continued lull in activity in Hong Kong’s diamond market.
   Little is known yet about China’s incoming president, Xi Jinping, 59,
and new prime minister, Li Keqiang. Both appear focused on the need to protect the dominance of
the party and ensure social stability. Like the
other newly elected members of the Politburo Standing Committee,
China’s top echelon of power, they are said to be largely conservative rather than reformist. The transition to the new administration will be gradual, with current president Hu Jintao’s term formally coming to an
end in
March 2013.
   Corruption has been a centerpiece of this transition. The increased internet access and travel opportunities enjoyed by Mainland Chinese, coupled with growing income disparity across the country, have led to heightened public outrage against corruption in the party. The country’s leaders have recently issued warnings against the long tradition of officials exchanging valuable “gifts,” which often include expensive jewelry items.
   All the talk of corruption is probably political rhetoric intended as a warning to members of the incoming administration rather than a sign of a real clampdown, said Eliad Cohen of Novel Collection, which specializes in manufacturing natural fancy color diamonds. “I don’t think that the culture is changing in terms of these gift-giving transactions,” he said.
“I think this type of business is going to remain in the future.”

A Dampening Effect
   Cohen said preoccupation with the national elections in the U.S. and Hong Kong has dampened business activity. “October and November have been a little bit slow,” he said. “I think it’s related to the political situation in China. Most of the clients are waiting to see what will happen. They prefer to sit on their money and not to make decisions.”
   Sally Ryder of Ryder Diamonds said wholesalers have been offering better prices recently. “It’s interesting because Rapaport’s prices have
been going up, but dealer prices are becoming more flexible, I think because of the economic strain,” she said. “My expectation is for prices to increase once the economy picks up, especially around this year-end holiday season.”

   Increased labor and gold prices and China’s slowing economy have hit Hong Kong retailer Tse Sui Luen Jewellery International, which said that while its turnover for the six months that ended on August 31 grew
6.1 percent, its net profit was down almost
$4 million year on year because of lower profits on gold products, rising labor and infrastructure costs and the continuing economic slowdown.

Chow Tai Fook Slips
   Shares in retailer Chow Tai Fook fell 5.6 percent on November 9,
a day after the company announced that its gross profit margin could fall
2 percent to 3 percent for the six months that ended on September 30.
It said losses on gold hedging and the slowing retail economy were to blame. The company’s stock was down 32 percent from its December
IPO price of $1.93. While analysts expected the hedging loss to be recovered in the second half of 2013, overall slow sales growth was a concern, they said.

   Deutsche Bank cut the company’s target price to $1.62 from $2.02
on concerns that the company’s net profit could fall by 30 percent in
the first half of 2013 because of a revenue increase of just 7 percent.
CLSA Asia Pacific Markets told the South China Morning Post that
Chow Tai Fook’s underlying business is suffering “real short-term
pressure with slow sales growth.”

   In more positive news for the company, on November 13, Chow Tai Fook announced a two-year supply agreement with ALROSA, Russia’s state-owned and largest diamond mining company, to take effect immediately. Conroy Cheng, Chow Tai Fook’s executive director, said in a press release that “The greatest challenge for all diamond industry players is the scarcity of authentic natural diamonds. The agreement with ALROSA enables us to secure more reliable supplies of rough diamonds, particularly those specifications that are in greatest demand from our customers.”

New Property Tax
   Anti-Mainland sentiment has continued in Hong Kong, with escalating property prices fueled by cash-rich Mainland buyers just one of the issues. In an effort to curb the rampant real estate speculation and the price
turmoil it has created in the market, as well as foreign investments, the Hong Kong government imposed an immediate 15 percent additional stamp duty on October 26 on property purchases by nonpermanent residents and corporate buyers. Stamp taxes are attached to legal documents and transactions, including property sales and transfers. In effect, this is an additional tax on top of stamp taxes already in effect.

   In a second move to discourage speculation, the government also raised the stamp duty on sales of property held by any owner for less than three years, and warned that further steps would be taken if these measures proved insufficient to deter speculation and cool the market.

Article from the Rapaport Magazine - December 2012. To subscribe click here.

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