China: The Promise Hides Risks

We are hanging a decent amount of hope on the Chinese economy and its consumers. While the U.S. and Japan, the diamond industry's two main markets, are not expected to be growth markets, we are counting on China and India to provide us with the new opportunities that the mature markets are not providing any more.

India, an exciting playing field, is closed to most diamond and diamond jewelry firms that are not Indian. If you are not a local, you will find it very difficult to enter that market, unless you are a world class brand such as Tiffany & Co.

It's not like some are not trying. One Antwerp based Sightholder has been focusing its efforts on India for a number of years now, but found that a local partner is needed. The reasons for this are clear. Mumbai already has plenty of diamond dealers, polishers, jewelry makers and financiers needed to develop compete well in that consumer market. Any outsider comes in with a great disadvantage.

China, with a faster growing economy and a larger group of wealthy citizens, is also expected to provide more opportunities for diamond jewelry sales.

But what is the economic promise and is it easier to achieve? Gareth Penny, CEO of De Beers, told IDEX Online in May that they expect diamond jewelry sales in China to double in size and account for approximately 16 percent of global market share by 2016. In 2009, when the U.S. accounted for about 40 percent of global consumer demand, China accounted for around 6 to 7 percent.

We currently estimate the Chinese diamond jewelry retail market at about $1.2 billion-$1.3 billion. With more brides expecting a diamond ring, can this market grow to $2.75 billion (on the conservative side) or even $3.5 billion in just seven years?

That is a large increase and it depends, among other, on a sound Chinese economy.

On Wednesday, BHP Billiton cautioned in its annual production report that "Within China, measures introduced to reduce growth to more sustainable levels means volatility in commodity end-demand is likely to persist."

Earlier this year, China's Prime Minister Wen Jiabao warned that 2010 would be "the most complicated" in terms of economy. The country's GDP in the first quarter raced to 11.9 percent, which "ignited growing concerns about an overheated economy," according to the Shanghai Daily.

At the same time, China's urbanites are seeing their cost of living outpacing salary increases. Over the past few years, banks provided home buyers with larger mortgages that pay for a growing percentage of the cost of purchase. This led to a 140 percent rise in housing prices since 2007 and as a result, according to China's central bank, outstanding real estate developer loans are up 50 percent in just two years.

Naturally, the fear of a housing bauble can not be dismissed, nor the fear that if it bursts, the urban jewelry buyer will have a lot less discretionary money to spend on luxury items.

I guess the security industry is the only sector that can base its growth on fear. The diamond industry shouldn't shy away from China just because an economic fallout may take place. However, as more and more small- and medium-size firms enter that market, it's important that we do it with our eyes wide open.