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    China's Diamond Market Could Have A Tougher Year Ahead

    Major global jewelers may remain bullish about their prospects in mainland China market, but storm clouds remain over the industry as Beijing's anti-corruption drive hits conspicuous consumption and consumers go for smaller, lower-quality rocks in the year ahead.
    Jing Daily
    Jing DailyAuthor
      Published   in Finance

    Anti-Corruption Drives, Fly-By-Night Bosses, Lower-Quality Demand Could Crimp Short-Term Prospects#

    Major global jewelers may remain bullish about their prospects in mainland China market, but storm clouds remain over the industry as Beijing's anti-corruption drive hits conspicuous consumption and consumers go for smaller, lower-quality rocks in the year ahead. While China's luxury market as a whole could show a rebound from last year's mixed results, changing consumption modes in top-tier cities in particular has the potential to crimp sales in the short-term, according to Asia Cracked.

    Speaking with a China-based diamond trader, the blog notes a number of issues converging in the mainland China and Hong Kong diamond markets in early 2013, among them "the rough/polished stone price squeeze, an increase in late payments, diamond bosses going AWOL, higher retailer inventory, diamonds as an investment and the carat size favoured by...customers."

    While we can't independently verify the dealer's observations, the blog presents an interesting overview of certain important trends in China's luxury market, among them the potential effects of Beijing's current corruption crackdown. The article also touches on listed Chinese jewelers like Chow Tai FookLuk FookEmperor Watch and Jewellery and Chow Sang Sang, which will likely have to work hard this year to come back from an overall disappointing 2012. Though many jewelers are starting off 2013 in China on the back foot, however, signs are there that medium-term sales will be strong even if the next few months are tougher than brands would like.

    From Asia Cracked:

    What the trader is hoping for



    : The trader is hoping for either 1) improving consumer confidence or 2) the market finding a price level that can sustain a gradual increase in prices over a period of time. This will lead to stronger retail sales, which will “eventually straighten things out.”



    Some incremental improvement signs



    : “Recently (last month or so), we’ve seen some improvement in polished prices, especially in the lower quality stones, as well as smaller sized stones. If the price level truly finds its bottom and starts to improve, I think sales will also improve, as people see diamonds as an investment product and are more willing to buy in a rising price environment.”



    Rising payment problems a concern



    : Echos of Wenzhou and Erdos with bankrupt CEOs going AWOL.



    “There has been at least 1 instance per month of a big diamond or jewellery company going bankrupt and the CEO running away with the goods. Almost all of the cases have been in Shenzhen and Hong Kong, but we’ve also experienced delays in payment from our customers.”



    2011 saw bigger rock size



    : The trader noted that carat size differs greatly between cities. Interestingly, his sales (in Beijing) track the roll-out of China’s massive 4 trn fiscal stimulus.



    2010: Half carats were popular.



    2011 – Boom time! He sold a lot of 1 carat stones (ie. carat size doubled in 1 year!) and also a lot of very large stones (largest being 8 carat).



    2012: First half of the year, 1 carat still popular, but towards the end of the year he was selling a lot of low quality, low value, promotional 1 carat stones.



    Fancy coloured stones also boomed in 2011



    : Fancy coloured demand started at the beginning of 2011, peaked around the end of 2011 and now is very low again. Fancy stones are probably a good indicator of peak market demand – when it’s high, it’s probably the top of the market.

    Again, while we can't confirm the dealer's independent observations, we've seen hints of several of the points made in the article over the past year. Last May, citing “adverse market conditions,” the luxury diamond brand Graff Diamonds postponed its planned US$1 billion Hong Kong IPO, and Hong Kong sales growth at Tiffany & Co. slowed to 10 percent in the first three months of 2012. However, given China's historically and culturally strong appetite for gold, the article points out that gold demand has risen year-on-year, indicating that while Chinese buyers may not be buying the highest priced, rarest diamonds this year, they will almost certainly continue buying jewelry.

    Still, one factor left out in the article that bears repeating is that

    it may not be that Chinese buyers have turned away from diamonds altogether#

    -- they are likely just buying more outside of mainland China and Hong Kong. By most estimates, well over half of luxury purchases made by Chinese consumers are done outside of China, and with Chinese tourists flocking to Europe in record numbers, it's highly likely that quite a few are taking home some serious stones.

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