What’s Causing China’s Diamond Slump?

In mid-2023, as China’s real-estate crisis lingered, property firms started to offer gold bars as an incentive to buy their apartments.

Unlike real estate, gold is perceived to hold its value, the theory went. Then again, companies also presented new cars, cell phones, free decorations and parking lots to woo customers and boost sales.
Their efforts bore little fruit, however, as supply continued to outweigh demand. Housing starts have fallen by more than 60% relative to pre-pandemic levels, according to a February Report by the International Monetary Fund (IMF).

The property slump, along with several other factors, is having a marked effect on consumer confidence and the diamond market, acknowledged participants in the Presidents’ Meeting of the World Federation of Diamond Bourses (WFDB), which took place in Shanghai in early March.

“People put a lot of money in real estate, and some in stocks, so when you see the downturn at such a high level, it has a major impact,” said Abhishek (Andy) Golecha, general manager of KGK Shanghai, the local branch of India-based diamond manufacturer KGK Group.

Along with the property crisis, trade tensions with the United States and the pandemic are having a residual effect on consumer spending, panelists noted in a discussion titled “Natural Diamonds in the Chinese Markets.”

The Covid-19 effect

The economy was already under pressure before the pandemic, but Covid-19 and China’s long lockdowns caused anxiety over households’ limited income, Golecha added.

That cautious sentiment remains as the country ended its lockdowns only in January last year. “The [Chinese New Year] holiday that just past was technically the first [holiday] since Covid-19,” noted Kellan Bo Dong, president of Kimberlite Diamond, a Shanghai-based retail jeweler.

China did not experience a post-Covid-19 bump similar to the one in the US where government-stimulus checks fueled spending. Households in China did not receive that type of financial support during the pandemic, explained Professor Zhang Jun, dean of the School of Economics at Fudan University, who addressed the WFDB executive separately.

“That’s why there’s a really high propensity for families to save,” he said. “They feel they may have to pay more in the future for education, medical, housing, so precautionary saving is still rising, especially after the pandemic.”

Household consumption as a percentage of gross domestic product (GDP) is well below the global average, Zhang stressed.

Depreciating assets

Chinese consumers exert caution when the economy stagnates, and they tend to avoid purchasing assets in a downward-trending market — as was evident in real estate over the past few years.
That is another reason why they have shied away from diamonds, panelists at the Presidents’ Meeting noted.

“The challenge for the diamond industry is that consumers see diamond prices coming down,” explained Lawrence Ma, founding president of the Diamond Federation of Hong Kong, China, and CEO of the Lee Heng Diamond Group, which is engaged in diamond wholesale and jewelry retail. “They don’t want to buy because they see that prices are weakening and don’t want to be seen for a fool.”

In contrast, there has been a boom in demand for gold products, particularly 24-karat gold, and Chinese consumers seem to believe gold jewelry can have good investment value, Ma stressed.

Gold resurgence

While gold jewelry has deep roots in traditional Chinese culture, it has seen a resurgence in popularity among younger consumers in recent years.

“Five to 10 years ago, young people didn’t buy gold jewelry; it was considered an older-generation thing,” said Kent Wong, managing director of Chow Tai Fook, considered the largest jewelry retailer in the region. “But they’ve changed their preferences because of marketing, social media and culture, while gold jewelry also improved its storytelling, making use of Chinese culture to help consumers decide.”

At the same time, in recent years, technology and innovation have improved the functionality of gold and enabled more versatile, more colorful and better designs, increasing the fashion appeal of gold jewelry, Ma added.

Sales boost

Jewelers have capitalized on the renewed popularity of gold, as sales in that category have compensated for weakness in diamonds.

Chow Sang Sang reported same-store sales in mainland China went up 12% in 2023, driven by a 21% rise in gold jewelry and products and 9% growth in watches. Those increases offset a 23% decline in gem-set jewelry, weighed down by…