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Chinese Caution


Jul 6, 2012 5:00 AM   By Avi Krawitz
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RAPAPORT... China’s current ‘Year of the Dragon’ appears to have lost some of its fire as investors and ‎analysts view China’s economy with increasing caution. Chinese diamond buyers have ‎picked up on that sentiment and are holding back from making large-inventory purchases ‎as global economic concerns deepen and local consumer confidence fades. ‎

While China’s economic growth is still enviable by any other country’s standards – ‎expected at around 8 percent for 2012 - the pace of economic development has ‎slackened. ‎

China’s economy grew 8.1 percent in the first quarter of 2012, which was its slowest ‎quarterly pace in three years. Second quarter data, scheduled for release next week, is ‎expected to be weaker at around 7.6 percent.‎

The slowdown was inevitable as the fast-paced growth witnessed in recent years could ‎not be sustained in the long run. It is also a natural part of a maturing process as the ‎country transitions from being an export-driven market to one driven by consumption. ‎China is steadily shifting from the supply side to the demand side of the equation.‎

The World Bank suggested in an April 2012 report that the challenge facing the ‎government in the near-term is therefore to “facilitate a soft landing,” and ensure that ‎growth does not slow too quickly. Government needs to balance its fiscal policy to ‎support and encourage local consumption while it attempts to curb inflation and restrain ‎the overheated infrastructure and real-estate sectors. ‎

It can only do so much. The economy is being impacted by both domestic and external ‎factors. The pace of first quarter growth slowed largely as exports were squeezed by ‎lower global demand for its products due to the persistent euro-crisis and sluggish U.S. ‎recovery. Local Chinese consumption and consumer confidence held relatively steady ‎during the quarter.‎

That changed in the second quarter as those global trends threw further caution at the ‎Chinese consumer. Lower exports have impacted manufacturing and consumers have ‎taken their signals. Next week’s data is expected to show slower second quarter retail ‎growth, which ultimately impacted the diamond jewelry segment. ‎

The weaker sentiment was certainly felt in the diamond market as global demand slowed ‎in June, according to the Rapaport Research Report entitled “Price Pressures” published ‎this week. Among the contributing factors, the decline came as buyers from Mainland ‎China and Hong Kong refrained from large-quantity purchases as they expect prices to ‎soften further in the weak economic environment. ‎

The recent June Hong Kong Jewellery & Gem Fair reflected poor Far East demand for ‎diamonds. Exhibitors observed that consumer confidence is down as people in the ‎retail ‎and private sectors are unsure about the economy. Chinese consumers are increasingly ‎looking at fancy shape and lower clarity diamonds as a means to stay within their tighter ‎budgets. ‎

Henry Cheng, chairman of Hong Kong-based jewelry giant Chow Tai Fook, offered ‎similar perceptions. “[The] retail sentiment has weakened in recent months as consumers ‎became more prudent because of economic uncertainty,” Bloomberg quoted Cheng as ‎saying on June 27. “That’s reflected in lower spending per customer per transaction, but ‎as the size of China’s middle class is growing, this helps to boost total sales.”‎

Despite the pullback in individual spending, the likes of Chow Tai Fook and other large ‎retail jewelry chains are banking on that growing middle class to maintain their sales ‎increases. Their aggressive expansion across China is testament to that. ‎

The numbers therefore continue to stagger. Chow Tai Fook’s revenues grew 61 percent ‎year on year to $7.3 billion (HKD 56.57 billion) in the year that ended March 31, 2012. ‎Chow Sang Sang, the regions second largest jeweler, saw revenues grow 47 percent to ‎‎$2.21 billion (HKD 17.16 billion) in 2011. Similarly, global jewelers are looking at the ‎region to spur growth. Tiffany & Co’s sales in Asia-Pacific rose 17 percent in the first ‎quarter of the year, significantly outpacing its rather depressed growth in other regions.  ‎

Other luxury products have also seen stellar growth in China and are expanding ‎accordingly. Gucci has raised its presence in China from just 4 stores in 2004 to 46 ‎stores across 32 cities in 2011. The luxury label is planning to open 10 more stores in ‎China this year. BMW and Audi this week reported that China’s growing middle class is, ‎quite literally, driving their respective global car sales. BMW’s China sales were up 32 ‎percent year on year in May while Audi’s grew 44 percent during the month. Both ‎companies noted that they see no signs of a slowdown in Chinese demand in their sector.‎

The trend reinforces the strong long-term outlook for demand as China’s middle class is ‎yet to peak and its retail potential remains relatively untapped. ‎

However, demand is vulnerable to short-term risk and economic hiccups, as is currently ‎evident in the diamond market. Sentiment will remain depleted as Chinese consumers ‎adapt to lower levels of growth and it will take at least the rest of this year to restore their ‎former buoyancy.‎

But, consumer spending will ultimately rebound as China is by no means a mature ‎market yet and diamond demand will be stimulated by the emerging markets of the Far ‎East in the medium-to-long-term. While China’s ‘Year of the Dragon’ has not left the ‎blazing trail experienced in previous years, the country certainly has not lost its spark. ‎

The writer can be contacted at

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to or contact your local Rapaport office.

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Tags: Audi, Avi Krawitz, BMW, China, Chow Sang Sang, Chow Tai Fook, diamonds, gucci, Jewelry, luxury, Rapaport, Tiffany
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