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China Maturing

Editorial

Jun 21, 2013 8:00 AM   By Avi Krawitz
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RAPAPORT... Among the many landmark developments evolving in the industry this year is that China is changing. Political change has been accompanied by consumer caution, which was already evident in 2012 as economic growth has slowed in the weak global, or rather European, context.

But could it be that China’s jewelry market is maturing in this environment even as it remains the primary driver of growth for the industry?

Certainly the data points to a flattening out of diamond consumption growth. Consider that net diamond imports – total rough and polished imports minus total exports – to China and Hong Kong combined were $4.38 billion in 2007, which grew to $7.43 billion in 2011 and increased by just 2 percent to $7.6 billion in 2012 (see graph on page 2). By this measure, China and Hong Kong overtook the U.S. as absorbing the largest number of diamonds into its system in 2010.

As with its economy, double-digit growth could only be sustained for so long. If these numbers are maintained with even marginal growth, a tremendous amount of diamonds will continue to be absorbed in the country.

It’s important to differentiate between the diamond wholesale market and the jewelry retail market.  At the retail level, the U.S. remains the largest diamond jewelry market by a significant margin, while China is the fastest growing. De Beers estimates that China’s retail diamond jewelry market grew by around 8 to 10 percent in 2012 and held 11 percent of the global market against the 37 percent held by the U.S.   

This is in a market environment where the Chinese are not buying diamonds freely. In fact, while large delegations of diamond suppliers traveled to the Hong Kong Jewelry and Gem Fair this week (June 20-23), they went with low expectations.

Chinese diamond buyers are cautious and loath to carry large inventory. They may have learned their lesson from the bubble of 2011, which was the first market bubble that was driven by speculative Chinese demand. Back then, Chinese buyers aggressively bought goods in the first half of the year fueling price growth, and were left with devalued inventory when prices fell.

However, the recent caution is related more to lower consumer confidence.

Chow Tai Fook, the world’s largest jeweler which has 1,640 points of sale in mainland China and a company that is considered a bellwether of Chinese jewelry demand, reported that its revenue on mainland China fell 5.3 percent to (HKD 30.31 billion) in the fiscal year that ended March 31, 2013. “The drop in sales mainly resulted from weak retail sentiment and slower wholesale business, especially in the high-end gem-set jewelry products,” the company explained in a statement. “Worse-than-expected sales performance during the [October 1] National Day holiday and stagnant economic condition throughout fiscal 2013 led to lower consumer confidence among the group’s retail customers and franchisees.”

Chow Tai Fook may have exhausted its growth in the larger cities and so the company is now focused on expanding into tier-3 and lower tier cities, which are developing as China is rapidly becoming even more urbanized.

And that’s the exciting thing about China. While it may have matured, or evolved, it is still growing at an enviable pace even as its economy is in transition.

A report by McKinsey & Company noted that the Chinese consumer market is rapidly splitting between the still large but less affluent mass market and a new, even bigger group of upper-middle-class consumers.

In contrast to today’s cautionary environment, McKinsey warns companies not to focus solely on consumers trying to meet basic needs at affordable prices, as they will then risk losing millions of customers looking to trade up.

Catering to both segments of the population is making China an increasingly complex consumer environment. But it also signals that despite the current caution, there is reason to believe that confidence will return.

The rising upper-middle class is supplemented by a growing wealthy class, with close to 3 million people who are dollar millionaires in the country. And their spending is not only influencing growth in mainland China, but also in popular travel destinations across the region, Europe, and the U.S.

According to the recently published Chinese Luxury Traveler 2013 by Hurun Report, wealthy Chinese spend a quarter of their time abroad. Despite recording fewer overseas trips in 2012, Chinese tourists spent more on luxury goods than any other nationality for a third consecutive year. The report estimated that Chinese shoppers abroad spent an average of $1,139 (EUR 875) per trip in 2012, which was an increase of 8 percent from the year before and 70 percent higher than the global average. Watches were the most popular gift purchases for men while jewelry was the overwhelming favorite purchase for women.

So while 2012 and 2013 have been challenging years for China’s diamond and jewelry market, there remains steady growth in the country’s consumer space operating both in China and abroad, and a growing desire to spend on jewelry. 

That obviously bodes well for the diamond and jewelry trade. Often in the diamond industry, strength in one major market compensates for weaknesses in another. The June diamond and jewelry show season signaled that the stable U.S. market is supporting the industry while India struggles against its currency and China remains cautious. But one cannot underestimate the Chinese potential for growth. There’s little doubt that China will drive industry growth in the medium-to-long term. It’s just becoming a more complicated market.

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

Follow Avi on Twitter: @AviKrawitz

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

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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, China, Chow Tai Fook, diamonds, Jewelry, Rapaport
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