Simply put, the sudden depreciation of the Chinese yuan and the threateningly sharp increase in interest rates in the US could not have come at a more inopportune time for the diamond market.
Last week, the People's Bank of China, headed by Zhu Xiaochuan, allowed the RMB to drop by almost 3.5 percent, so this currency is currently trading around CNY 6.4 to the US dollar. At first glance, Beijing sought to give the country's economy much-needed momentum, since a cheaper yuan should stimulate exports, making Chinese goods cheaper in foreign markets, especially in the US.
In the diamond industry, the cheaper yuan has had a different effect, as unlike other goods, China is a major consumer of diamonds.
The depreciated yuan makes imports of diamonds to China more expensive for buyers who convert their currency to buy goods in US dollars or sell diamonds in the local market for yuan at the dollar rate. Michael Huang, managing director of the Diamond Index Group, a supplier of expensive diamonds and diamond jewelry in China, told Rapaport News that dealers and wholesalers have already raised prices by almost 5 percent to compensate for their currency losses. Retailers have not adjusted their prices yet, but they are going to do it in the coming weeks, he said.
As a result, Chinese buyers of diamonds that have been cautious during 2015 may begin to seek large discounts to compensate for the weakened currency, Huang said. The mood of buyers at the Hong Kong Jewelery Fair coming in September will be a good barometer of demand from China.
Opposite opinion
Efraim Zion, the managing director of the Hong Kong-based company Dehres Limited, which specializes in large gemstones and diamonds of fantasy shape and color, already now expects little about the exhibition. But he denies that the yuan at the current levels will have a large negative impact on consumption.
"It can affect the market, but only if the yuan will go down to CNY 6.70 or 6.90 - then it will have a real impact," he said. Instead, he notes greater market pressures, such as a general slowdown in China's economic growth and tougher measures to combat corruption and wastefulness.
Undoubtedly, it is expected that the weakened yuan will cause a further decline in consumer demand. In particular, many Chinese tourists traveling abroad to buy luxury goods will now have fewer dollars to buy in stores such as Tiffany, LVMH and Cartier.
In China itself, a new level of the yuan, perhaps, will also reduce the demand for gold jewelry in response to the decline in gold prices in dollars (see chart). Chinese consumers usually rushed after gold, when prices fell. So it was in April 2013, when a sharp drop in gold prices caused a sharp increase in sales of jewelry in China and Hong Kong. Although a weaker gold rush was observed in July of this year, when gold prices sank by 6 percent during this month, consumers were probably more cautious about the market after the ensuing fall of the yuan.
In search of a safer haven
In any case, not everything is so bad in the industry. China's currency and stock market volatility, along with its bursting soap bubble associated with real estate, should increase investment demand for gold and diamonds, as people transfer their funds to solid safe haven assets. This can become even more important, as the Chinese economy is experiencing prolonged growth illness as it moves from an infrastructure-oriented and export-oriented model to an economy driven by consumption.
But now people calculate their losses. A lot of money was sent to the stock markets during the boom in the last few years. Most of this money was lost in the last two months.
Juan sees a ray of hope among the clouds that hang over the diamond industry. "People in the short term will be upset because they do not have the money to spend," he explained. "But in the long run, recent declines have shown that stock markets and other investments are volatile. They need assets that demonstrate fair value and are sustainable, and diamonds are so. Therefore, I believe that in the long run people will return to diamonds. "
Zion agrees that at the moment consumers do not think about diamonds. He would like to see that the government is taking measures to restore confidence, for example, continues to lower interest rates further - well below the current record low of 4.85 percent.
Observers believe that the recent weakening of the currency was an attempt by the authorities to reduce the supply of money as it directs its economic transition along with a change in the dynamics of global development. Analysts at VTB Capital explain that China's monetary policy potentially follows US policy, as it has a "creeping" peg to the dollar.
http://www.diamonds.net/News/NewsItem.aspx?ArticleID=53181&ArticleTitle=%2bIs%2bDiamond%2bDemand%2bDetermined%2bin%2bBeijing%2band%2bWashington%253f
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