China and Diamonds: Is the Dragon Rising Again?
March 02, 23
by Erez Jacob Rivlin, a diamond market analyst and diamond mining consultant. Served as an advisor to the Russian Government, (Minister Bychkov), on diamond issues, and to the Angolan President dos Santos. erezrivlin@yahoo.com
It seems the eastern sunshine is finally breaking through the clouds of COVID-19. Good economic news shines from every corner of the Chinese giant. Just in time for the start of the The Hong Kong Diamond, Gem and Pearl Show on Wednesday, March 1st. On the same day, Peter Hoskins, a BBC business reporter, published the better-than-expected results of the Chinese PMI, the manufacturing purchasing manager's index.
It's a measure of economic trends, presented as a number from 0 to 100. A monthly reading above 50 indicates expansion in activity compared to the previous month. Below 50 is a contraction.
The BBC reported that in February the PMI rose to 52.6 from 50.1 in January - the highest monthly reading since April 2012. This is a clear indication that with the ending of the COVID lockdowns, the Chinese economy is back on track. For the diamond industry it means Chinese demand is likely to rise in the coming months.
I spoke with Mr. Chirag Shah just before he left for the HK show. He heads Anita Diamonds, a major polished diamond trading firm and one of the fastest-growing companies in the diamond trade in the last five years. I asked him how the Chinese slow-down has impacted his business, and his answer reflected what many traders that I spoke with felt: "We have high expectations from this trade show specifically and from the return of the Chinese clients in general. In fact in 2019 we had plans to open an office in Hong Kong, so obviously we delayed this move during the Corona crisis. But it seems that the crisis is finally behind us, and we could reconsider the plans regarding our operations in China."
Diamantaires and jewelers are world experts on 'all that glitters is not gold'. The fact that the Chinese economy may shine again, as during the pre-COVID times, does not mean that all risks are gone. Three main factors must be taken into consideration when observing the eastern giant: geopolitics, ideology and demographics. All three would impact the Chinese economy to some extent, and with it the demand for diamonds.
On Wednesday March 1st, Matt Pottinger from the Hoover Institution was interviewed on CNBC television's Squawk Box. The former American deputy National Security Adviser has closely followed the speeches of President Xi Jinping, in which he regularly gives guidance to the 95 million members of the Chinese Communist Party. Mr. Pottinger concluded that President Xi "is not concerned with the growth of the Chinese economy, he is concerned with political consolidation of power". He also said: "Economic growth, further trade with the world are distant second or third tier priorities for this leadership. He (President Xi) is about politics, he is about ideology."
The post-communist new Chinese and Russian ideologies have one fundamental common denominator: The opposition to liberal democracies and autocratic rule. The two giant states cooperate closely, and both have a major impact on the diamond industry. One of the major future disrupting scenarios could be a Chinese invasion of Taiwan. China has never given up its claim on the territory. Hopefully, the bitter and drastic losses of its Russian sister-in-arms, would reduce the Chinese leadership's appetite for any such moves in the near future.
Chinese ideology, and the geopolitics of the region, have therefore, lowered the chances for drastically surprising the diamond industry. On the other hand, the third factor, Chinese demographics, would certainly impact the glittering recovery of its economy in the longer term. On January 16th this year, the New York Times related how China's 1.41 billion population is likely to be surpassed by India this year. The most critical change is not India's growth. It's China's shrinking population. According to the NYT, China, together with Japan and South Korea, has one of the lowest fertility rates in the world. Aging population, higher pensions and medical costs and fewer youngsters moving the economy forward, have the combined effect of reducing consumption in general and specifically the demand for diamond jewelry.
While I was writing this article, Mr. Shah of Anita Diamonds arrived in Hong Kong. In a short call, after completing two days of the show, he sounded very optimistic "The Chinese clients are back and for us it is so far, a very good show," he said. But an Israeli diamond dealer who is also at the show, and specializes in the very expensive larger sizes sounded much less enthusiastic, saying: "Most of the clients are busy with small and medium sizes. We have a very low attendance of larger-size buyers." Manufacturing activity in China has been growing faster in the past month than at any time in the last decade. But factory owners buying more expensive diamonds may have to wait just a little longer to enjoy the fruits of the latest but very positive economic news.