Rapaport Magazine

Economic Roller Coaster

Hong Kong Market Report

By Gaston D’Aquino
RAPAPORT... On July 20, Hong Kong was riding the crest of a wave, with the stock market at its highest point in history. Across the border, China was posting a near-record expansion of its economy — a 16.4 percent increase in retail sales — and announced a corresponding rise in inflation of 4.4 percent, something quite new for them.

Changing Economies

Then, in a matter of a few weeks, the whole of the world economies went through a drastic correction, fueled by the subprime mortgage fears in the U.S. The Hong Kong stocks lost 15 percent of their value in a matter of days. The U.S. Federal Reserve quickly announced a drop in interest rates, which gave the free fall a respite, and the markets slowly clawed back some of their losses. The Hong Kong market hit another record high on August 27, making the recent downturn seem like a bad dream.

Although China reacted slightly to the global situation, it very quickly did an about-face and continued on its merry way, setting more new records as it went. China’s Central Bank announced an increase in bank rates, the fourth this year, but this had little effect on the frenzy.

Money is strictly controlled in Mainland China and it is not possible for outsiders to enter the market and take out their winnings, so the pot just keeps on growing. In fact, many enterprises, both private and government organizations, have used company funds to invest in the market and have used the resulting profits to enhance their balance sheets and, in turn, increase the value of their own stocks.

If the world is concerned about the subprime mortgage situation in the U.S., where homeowners are defaulting on loans, at least those loans have tangible collateral. But in China, if the bubble bursts, which it must in time, the only thing that the investors will be holding will be useless share certificates.

One thing that is certain is that there is a global credit crunch in the making, and in today’s credit-oriented businesses, such as diamonds and jewelry, there are signs of payment delays and defaults.

Another thing that is quite frightening is that, while there is the specter of a downturn in business looming, inflation is on the way up. Rents have been raised by avaricious landlords demanding huge increases.

Many Indian diamond dealers are leaving the central districts in Hong Kong and moving to the Hung Hom factory area in Kowloon. First of all, they will be nearer to most of the jewelry manufacturers’ offices. Manufacturers moved their production facilities to the Mainland years ago, but still maintain their buying and sales offices in Hung Hom.

The rents are also priced as factory space and are therefore much cheaper compared to the prohibitively expensive central district in Hong Kong Island. The profit margins are so thin in the diamond business nowadays that every penny saved is important for survival.

Vacations Slow Market

Demand has been sluggish as August is a time when scores of Hong Kong consumers go off on summer holidays with their families. There are still calls for special stones but the demands are very specific. Dealers continue to buy regular Hong Kong merchandise, expecting things to improve in September, but cannot be tempted to buy more speculative qualities, unless they are at throwaway prices.

There appears to be both a surplus of goods being offered in the market and, at the same time, an acute shortage of regular goods. While the local dealers hope to buy at a cheaper price in order to justify holding goods until the market improves, producing markets in Tel Aviv or Antwerp are getting better prices from customers who visit them, so smaller quantities of the desirable goods are being sent to Hong Kong.

Undeclared Diamonds

It has been reported that some undeclared diamonds were sent from Hong Kong to the U.S. through FedEx, but while the senders and the consignees have been identified, the names have not been revealed as investigations are still going on. Similar, undeclared diamonds reportedly were also shipped from some of our neighboring countries to the cutting centers in the U.S. and Antwerp. Speculation that these diamonds may be from suspicious sources has not been officially confirmed.

Laser Inscription

There is a trend among consumers in the region demanding that the diamonds they buy have a Gemological Institute of America (GIA) certificate with laser inscription. It is a selling tool that is gaining popularity. It is not sufficient to have the diamonds certified; the buyers need to match the diamond to the certificate visually.

GIA has opened an office in Hong Kong to take in diamonds, which are then sent to the U.S. for grading and also for laser inscription. The company does offer a fairly quick turnaround of two weeks, but even this is not fast enough for some people in the trade.

Hong Kong caters to dealers from the region and they are here only for a few days and cannot wait for two weeks to have the goods laser inscribed. It has been suggested that GIA might consider sending only stones that need grading to the U.S. and do the laser inscribing either in Hong Kong or China, which would cut down both on costs and, most importantly, on time.

The Marketplace

• Large sizes dominate demand — stones over 3 carats — but buyers are critical of prices and qualities.
• Demand for 1.5 to 2 carats is weaker, but still moving.
• 1 caraters are moving well.
• Dossiers 0.50 and larger are moving well.
• Demand is very strong for 0.80 pointers, which are in very short supply. Demand is more sluggish for smaller sizes.
• In fancies, demand is mostly for large stones but quality must be very good or else buyers aren’t interested.

Article from the Rapaport Magazine - September 2007. To subscribe click here.

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