RAPAPORT... Jade — in both its nephrite and jadeite forms — along with pearls have been treasured by the Chinese for several thousand years, and jewelry adorned with these precious gems has a long history in the country. The modern China diamond industry is a relative newcomer to the jewelry scene, launched in the late 1980s when the first diamond processing enterprises were established in Shandong and Guangdong provinces. As the nation’s economic growth in the 1990s improved the living standard of the Chinese, the demand for jewelry gradually heated up.
After De Beers debuted its proven “A diamond is forever” television commercial campaign in China in 1993, the diamond was quickly accepted by the market as an important gemstone, especially for weddings. Since then, China has become the new frontier for the global diamond industry, attracting the attention of Cartier, Tiffany and other Western luxury brands, as well as the Hong Kong–based brands Chow Tai Fook and Chow Sang Sang, along with such local diamond manufacturers and brand names as Lao Feng Xiang and Jinghua Diamond.
Over the past 20 years, the collective marketing by diamond companies and emerging consumer demand among China’s 1.3 billion population have made the country the second-largest diamond-consuming market, after the U.S., and the second-largest diamond-processing country in the world, second only to India. At the close of 2009, there were 50,000 jewelry companies nationwide, the majority in retail, employing three million people. In gold, platinum, silver, jade, colored gemstones and other luxury consumer products, China is among the world’s leaders.
Second-Largest Diamond Consumer Market
After a short introductory period, beginning with De Beers in 1993, the diamond market in Mainland China entered a fast-growing stage. Even during the recent global financial crisis, the Chinese diamond industry maintained its rapid growth rate. Chinese diamond jewelry sales grew 10.5 percent in 2008 and 28 percent in 2009. Domestic diamond jewelry sales, with an annual growth rate in excess of 20 percent, increased from $240 million in 1995 to $2 billion in 2009. In 2009, China passed Japan to become the world’s second-largest diamond-consumer market, after the U.S., and continued to hold that position in 2010.
Currently, the main purchasing power for diamond jewelry is spreading from the big cities to the medium and small cities, while the rural area has yet to develop. There are 655 sizable cities in China and many more smaller cities, both of which are the main driving force of the jewelry market in China. Different regions have different levels of consumer demand. The consumption capacity of economically developed areas is getting strong.
Wedding jewelry is still the backbone of the market. More than 10 million couples get married each year in China. In 2010, 65 percent of newlyweds purchased diamond rings in the medium to large cities, while the number in some large coastal cities reached 80 percent. Most of the diamonds sold in China are still smaller than 0.50 carat, but there is rapidly increasing demand for diamonds over 0.50 carat and even over 1 carat. Meanwhile, the diamond market is evolving from a wedding-oriented market to a more broad-based diverse market, with consumers buying diamonds to celebrate an anniversary or for general gift-gifting, or just to reward themselves. At the same time, diamonds as an investment have become increasingly popular.
China, the biggest internet country in the world with 450 million “netizens,” has 2,000 jewelry sales websites. Brand names such as Zbird and 9 Diamond have adopted a “website-plus-showroom” sales model and offer a much lower price than the traditional retailers.
Diamond Wholesale Market
Since its establishment in 2000, the Shanghai Diamond Exchange (SDE), the only diamond exchange in China, has shown a steady increase in membership, with trading volume increasing year after year. On July 1, 2006, the implementation of a new diamond tax policy of 4 percent value-added tax (VAT) and zero percent tariff in the SDE resulted in a rapid increase in the number of transactions. SDE has a unique position in the China wholesale diamond industry, since only a member company of SDE has a license to import diamonds.
According to the Diamond Administration of China (DAC), the total transaction volume — including import, export and intermember transactions — on the SDE soared 91.9 percent year on year to $2.886 billion in 2010. Import of polished diamonds increased to 1.1155 million carats, up 50.3 percent from 2009, while the value surged 87.6 percent to $1.302 billion. In addition, membership in the SDE increased to 281, of which 192 are foreign investors, mainly from Israel, India, Belgium, South Africa, the U.S., Japan, Hong Kong and Taiwan. Outside SDE, there are other diamond wholesale companies that do not have import licenses but that buy from SDE members and resell to retailers.
Shanghai: China’s Business Center
As a very cosmopolitan city and the
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tion’s commercial and financial center,
Shanghai is the city to be in when it comes to establishing a company to import and wholesale diamonds. It is the home base of SDE and has a booming jewelry retail sector, whose sales represent 20 percent of China’s total annual jewelry sales. Most famous jewelry brands have set up branches in Shanghai and the city, along with Beijing, is home to the country’s wealthiest consumers.
Shanghai upgraded its infrastructure for the World Expo 2010 and has efficient citywide taxi, subway and bus systems. Most of China’s major cities are reachable by air travel in under three hours. Shanghai is only a 2.5-hour flight away from Hong Kong, with dozens of flights each day. The recent development of the city’s advanced high-speed train system has expanded the number of cities with which Shanghai can do business within a “one-day circle.” Shanghai is also located near the large consumer cities of Hangzhou, Ningbo, Nanjing, Suzhou and Wuxi, whose residents frequently come to Shanghai to shop.
Beijing, the capital city of China, is also home to many jewelry shops. Other important Chinese cities for diamond and jewelry sales include Hangzhou, Nanjing, Tianjin, Chong Qing, Chengdu and Shenyang.
The Manufacturing Hubs
Shenzhen is the jewelry manufacturing and processing hub for Mainland China, producing more than 70 percent of the country’s jewelry products, valued at about $7.7 billion annually. The jewelry industry is one of the top six industries in Shenzhen and receives a lot of regulatory support from the government. The city is home to more than 2,100 jewelry companies employing 120,000 people.
The Panyu district of Guangzhou city hosts hundreds of jewelry and gemstone factories. It is located very close to Hong Kong, with quick access there by land travel. This unique geographic advantage has attracted a lot of Hong Kong businessmen to set up companies in the city. The Panyu factories were mostly export-oriented before the global financial crisis, but have turned increased attention to domestic sales since then.
Consumer Education
China has its own national diamond grading standards enforced by the National Gemstone Testing Center (NGTC), which is considered stricter than the Gemological Institute of America (GIA). There is mounting pressure that diamonds sold in China should have a local Chinese certificate, especially in the website-based diamond business sector.
In the early stage, the Chinese market accepted only a very narrow range of products, known as “Shanghai goods” — G-H and VS — because they were typically sold in Shanghai and “Beijing goods” — I-J and VVS — anything typically sold outside Shanghai. But, Chinese consumers have expanded their tastes and preferences and now purchase a wide range of goods, including low color and SI. Diamond “education” on the internet, however, lags behind the changes. It still emphasizes hearts and arrows and preaches that only stones with Triple Ex with no fluorescence are worth buying.
Currently, the China jewelry market consists of three types of brand names: Europe- and America-based, such as Cartier and Tiffany; Hong Kong–based, such as Chow Tai Fook and Chow Sang Sang, and local-based, such as Lao Feng Xiang. China now offers 150 well-known brands, according to the China jewelry industry, but there are not yet any world-famous Chinese brands. In fact, many jewelry stores still do not sell jewelry by the piece, instead pricing it on the basis of the weight of the metal plus a process fee. That approach leaves little room for attributing any value to the element of design. Because today’s Chinese diamond and jewelry business is young, there is catching up to do in the areas of branding and design — and a lot of progress still to be made.
The Outlook
Kent Wong, the managing director of Chow Tai Fook, forecasted that by 2020, China will account for 29 percent of the global diamond market, while the U.S. share will shrink to 30 percent. “In my opinion, diamonds are the only imported product that can obtain a long-lasting popularity in China,” said Sun Feng Min, administrative vice president of the Gems and Jewelry Trade Association of China (GAC).
Ken K.C. Fong, president of the Jewellery Gallery Co., Ltd., who has been operating high-end jewelry stores for 14 years in Shanghai and who has personally witnessed the development of China’s diamond jewelry industry, also told Rapaport Diamond Report that he expects many more trade members to come into the diamond jewelry industry from other industries after they have accumulated investment capital to finance their entry. He noted these new players would further boost diamond sales through their promotion of diamonds to their friends and business associates, creating a new pool of diamond investors and consumers. “Although diamond jewelry is not an industry with huge profits, compared to some other industries in China, it is considered a respected and elegant trade,” says Fong.
The overall forecast is that Chinese diamond and jewelry consumption will continue to grow rapidly and that, going forward, the political and financial support of the Chinese government for the diamond industry will increase. It is predicted that by 2015, the annual turnover of the Chinese jewelry market will be approaching $50 billion, an enormous growth achievement for such a young market.
Article from the Rapaport Magazine - February 2011. To subscribe click here.