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China's New Year Challenge

Editorial

Feb 20, 2015 1:10 AM   By Avi Krawitz
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RAPAPORT... The diamond industry is navigating slow economic growth in this Chinese New Year of the Goat. No longer considered the new frontier for the diamond market, China has matured and demand has softened in the past year. The country was the difference between an okay diamond market and a weak one in 2014 into 2015. As a result, the industry has lacked its usual buzz ahead of this Chinese New Year season.

Otherwise known as the Spring Festival, the Chinese New Year Golden Week – taking place from February 19 to 24 – is China’s busiest retail period, and has served as a boon for the diamond trade in the past decade. During a normal diamond trading cycle, as U.S. jewelers are completing their inventory buying for Christmas, their counterparts in the Far East are beginning theirs for the Chinese New Year. This prolonged selling season is followed up by the first quarter restocking period in both markets which has traditionally sustained the trade for the rest of the year.

This year, the diamond market has not received that boost.

The World Gold Council (WGC) noted that the Chinese New Year occurred about three weeks later this year than in 2014, which meant that jewelry retailers deferred their year-end stock building from December to January. Low premiums witnessed in the fourth quarter confirmed the absence of this seasonal effect, the WGC observed.

However, the diamond industry stayed eerily quiet in January, affecting the mood ahead of the festival. In fact, diamond market sentiment has been weak in the past year due in large part to cautious demand from China.

There are a number of factors that continue to influence this slowdown.

Significantly, the economy is in transition as the government realized it is too dependent on exports and infrastructure investment, and not enough on consumption. The shift toward being consumer-centric will take several years, and in the interim will likely result in even slower economic growth. Gross domestic product (GDP) rose 7.4 percent in 2014, which was its slowest pace in 24 years, and the government has set a growth target of around 7 percent for 2015.

President Xi Jinping’s government, which came to power in a once-in-a-decade leadership change in March 2013, recognized that double-digit growth experienced in the preceding 10 years was not sustainable. Its efforts to normalize the economy toward consumption has naturally brought some growing pains. As part of those efforts, the government has moved to restrict credit in order to reduce the buildup of debt in recent years, and it is also trying to stem capital from leaving the country in order to curb the pressure on the yuan currency.

Therefore, liquidity levels are low and diamond buying has been affected. Anecdotal reports from the Hong Kong trade suggest some caution in selling to buyers from Mainland China out of concern that payments will be restricted by money transfer controls.

While 7 percent economic growth is still impressive, a bottleneck has inevitably resulted from the slowdown. As an analogy, consider that when a car speeding down the highway at 100 miles per hour suddenly slows to 80, traffic unsurprisingly backs up behind it. While the diamond and jewelry market continues to grow, the trade is adjusting to these new market conditions.

Diamond dealers note that jewelry retailers in the region ended 2014 with relatively large inventory as a result of fairly aggressive buying in 2013 and the first quarter of last year. As a result, it seems they had enough inventory of bread-and-butter goods to sustain consumer demand until now. Similarly, Chinese demand fueled strong trading and price increases of 0.30-carat to 0.49-carat diamonds in 2013, but the market matured last year and prices dropped, according to Rapaport’s RapNet Diamond Index.

Jewelers became increasingly selective and cautious in their diamond buying as their jewelry sales stagnated.

Chow Tai Fook, Chow Sang Sang and Luk Fook Holdings are all expected to report sales declines in their respective annual reports to be published in the coming months. Already, Chow Tai Fook, the largest jeweler in the region, cautioned that its group same-store sales fell 18 percent during the three months that ended on December 31, 2014. Luk Fook reported that its same-store sales declined 7 percent.

Both companies are trying to shift their reliance away from gold jewelry toward diamonds, which offer better margins. But while the decline in sales of their gem-set jewelry was softer than their declines in gold jewelry, the two markets are connected. As consumers have not kept pace with the gold buying frenzy of 2013, gem-set jewelry demand also fell.

The WGC noted that jewelry demand further weakened due to the continued crackdown on corruption by the Chinese government. One Hong Kong-based official stressed in an interview with Rapaport News late last year that spending at the very high end has slowed because the government is discouraging people from being extravagant.

“There are many government agencies and state-owned companies in China, which are encouraged to be frugal and have cut down on luxury spending,” he explained. “Gifting – which is normal in China as it is in other developing countries – has declined and diamond jewelry was among the gift items, especially for larger, more expensive items.”

Indeed, many of the high-end luxury brands have noted softness in the Chinese market – among them LVMH, Burberry and Gucci. Bain & Company reported that luxury spending in China showed a negative trend for the first time in 2014 due to greater controls on luxury spending and changing consumption patterns. However, Bain added that while the market in China contracted, Chinese consumer spending continues to grow in other markets.

A report by Ruder Finn and IPSOS Group found that there has been a shift in spending patterns among China’s luxury consumers. Travel is now the number one luxury category for Chinese consumers, and spending by Chinese travelers is expected to drive growth in luxury markets outside of China, the report stated. Bain estimates that Chinese consumers now represent about a third of the global luxury market.

Regardless, China remains the second largest diamond jewelry market and still represents the industry’s strongest growth opportunity. Therefore, the diamond trade is cautious because of uncertainty in China. With the political and economic changes taking place, the industry is uncertain how long it will take for China to settle, or how the market there will play out in the long run.

Certainly, it seems that the transition will continue in 2015 – the Chinese Year of the Goat – or according to some, the sheep. Expectations are therefore understandably low for the market during Golden Week and the year ahead. Indeed, as sheep are naturally inclined to flock together toward new pastures, the diamond industry is challenged to find ways to navigate this now maturing market.

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz and on LinkedIn.

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


Copyright © 2015 by Martin Rapaport. All rights reserved. Rapaport USA Inc., Suite 100 133 E. Warm Springs Rd., Las Vegas, Nevada, USA. +1.702.893.9400.

Disclaimer: This Editorial is provided solely for your personal reading pleasure. Nothing published by The Rapaport Group of Companies and contained in this report should be deemed to be considered personalized industry or market advice. Any investment or purchase decisions should only be made after obtaining expert advice. All opinions and estimates contained in this report constitute Rapaport`s considered judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Thank you for respecting our intellectual property rights.
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Tags: Avi Krawitz, Chinese New Year, Chow Sang Sang, Chow Tai Fook, diamonds, jewellery, Jewelry, Luk Fook, Rapaport, Spring Festival
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