China Rocks!

In the diamond industry, there are consumer centers and cutting centers, and usually not much overlap between the two. But China is increasingly a double threat: a potentially gargantuan consumer market that also is becoming a major player in diamond manufacturing.

For now, most attention is focused on the Chinese consumer market. While most Chinese consumers still have limited buying power, the sheer number of possible purchasers (1 billion-plus) is enough to set diamond hearts fluttering.

In fact, it's widely believed that China will one day be the industry's No. 2 market, after the United States and ahead of Japan. In the last few years, it has logged double-digit increases with no signs of slowing down, and momentum might even be building. Polished imports in March 2004, for example, jumped an eyebrow-raising 48%.

Currently, the Diamond Trading Company estimates official diamond sales in China at $350 million, making it the seventh-largest diamond market in the world. The overall Chinese jewelry market has swelled in the last few years from $25 million to $12 billion.

As in other centers, diamonds are the backbone of that industry, accounting for an estimated two-thirds of sales.

With its economy growing at 9% last year—so fast that government officials want it to cool down, lest it overheat—China's middle class is booming. And thanks to a DTC ad campaign that began in 1995, more Chinese want diamonds.

A cultural coup. "Twenty years ago, Chinese people knew gold, silver, pearls, and gemstones," notes Cooper Fu, director of membership affairs for the Shanghai Diamond Exchange, the city's bourse. "The DTC got the Chinese to change their tastes."

As it has done in other cultures, De Beers stoked demand by localizing its pitch. Its first ads tied jewelry to the seasons—an important concept in Chinese culture. It also advertised diamonds not as an engagement gift, as in other markets, but as something bestowed at the wedding—traditionally a time to give non-diamond jewelry like jade. "In China, the engagement is not as important as it is in the West," notes Fu. "But the wedding party is important." Today, wedding gifts and other sentimental occasions account for 29% of all pieces sold.

Most of the diamond consumers are young urbanites; the masses in rural areas still prefer gold jewelry. "Diamonds are considered a symbol of success," says Jack Jiang of Eurostar Diamond Traders in Shanghai. "Gold jewelry is cheap, but if you wear a nice diamond, it shows high-class taste."

Certain facets of the Chinese market are unique. It's a heavy self-purchase market; 69% percent of pieces are purchased by women for themselves. Shoppers favor delicate rather than "showy" designs. It is not a market where size matters: Chinese consumers rarely want stones over 15 or 20 points. Instead they value "purity"—high color and clarity. "Most diamonds sold in the Chinese market are not big, but when it comes to color and clarity, consumers are very strict," says Fang Xiong, chairman of the Shanghai Diamond Exchange Administration, the government body that guides the industry. "They are very cautious about buying an ugly diamond."

Again, this is the result of De Beers' ads, which have convinced brides that the purity of the stone corresponds to the purity of their love. In a way, the ads have been "too successful," Jiang says, because there is now a shortage of high-quality small goods on the market. "Everyone is looking for H, I, J, VVS goods," he says. "We don't have enough."

Like consumers in the other big Asian market, Japan, Chinese purchasers insist on grading reports. "They demand a certificate for a diamond as little as 20 points," says Fang.

Branding mania has not yet taken hold in China (most brands on the market are from Hong Kong) and the country has not embraced "make" and Ideal cutting as have other Asian markets. "Younger Chinese consumers are just starting to realize the importance of cut," says Fang. Although some companies are producing Ideal cuts and other top makes, many consumers think it makes the diamonds too expensive, especially when the preference for high color and clarity is factored in. "People like the Ideal make, but they can't follow the price," Jiang says.

Diamond makers. Speaking of make, China's growth is equally impressive in the diamond manufacturing sector.

The numbers tell the story. Rough imports into the country during March 2004 hit $3.7 million, a whopping 270% jump over figures from the year before. In the mid 1990s, China had only a few thousand diamond cutters. Now there are 200,000, making it by some estimates the second-largest diamond manufacturing country in the world, behind India. In the last two years, big names like Schachter and Namdar have relocated their factories here, lured by China's famously low labor costs.

But China's relatively educated and skilled workforce, like India's, cuts with a proficiency that belies those low wages. Indeed, with India becoming a supreme power on the diamond stage, some are eyeing China as a possible competitor—although the Chinese see their industry as developing and say such competition could be years away.

If Chinese diamantaires have a complaint amidst all this cheery news, it's that things could be even stronger but for a 17% value-added tax on diamond sales conducted outside the bourse. The current 17% is an improvement over the previous 40% rate, but manufacturers feel the tax has had a severe dampening effect, at least on "official" business; some even think China is unlikely to get a sightholder because of the duty. The tax also has led to a sizable "unofficial" market, which even government officials acknowledge.

"Judging from recent statistics, a majority of diamond trading in China is illicit," says Fang. "And it's very hard for the official trade to compete with the prices for illicit goods."

This has led to frequent pleas to the government to eliminate—or at least lower—the levy. The government is receptive, Fang says, especially since the last time the government lowered the levy it prompted the industry's growth spurt and actually raised revenues. Most think by the end of the year the VAT will sink to about 5%—another possible boost to an industry, and a country, that is undoubtedly on the way up.