Despite continued controls on the gold industry, China's jewellery business is booming, with gold, diamonds, platinum and silver all now freely available. This is in stark contrast to most of China's recent history. During the autumn of 1966, Red Guards in Shanghai alone are reported to have seized some 35 tonnes of gold and 450 tonnes of gold and silver jewellery.
The ownership of gold in any form remained illegal until 1982. It was not until 1999 that gold bullion was offered to the Chinese public, for the first time since 1949, in the form of gold bars to celebrate the new millennium. More recently a Beijing jeweller was allowed for the first time to purchase antique gold previously all sales were to or from the People's Bank. Coins have been available for some time, though the high local mark-up made them unattractive.
As early as 1994 Johnson Matthey had identified platinum as an alternative metal to gold with a bright future in China. Neither its price nor its import were subject to official regulation, and it melded well with the then current market for diamonds in China. Platinum also offsets the colour of diamonds better than gold or white gold, both of which tend to taint the purity of the stone with a yellowish tinge. A further twist was that China produced no domestic platinum – it really was a rare metal for consumers.
China has now emerged as the world's second largest platinum consumer after Japan, taking close to lm troy ounces in 1999 – a rise of more than 50 percent on 1998. Platinum still lags gold consumption, which is perhaps running at nearer 6m troy ounces annually. It is however significant that, after a considerable period in which gold jewellery has been more freely available, demand in Shanghai is reported to have fallen from 22 tonnes in 1993 to only nine tonnes in 1998 and again in 1999. Furthermore, 87 percent of Mainland buyers at the Hong Kong International Jewellery Show in March opted for platinum as the metal of choice for jewellery in 2000.
The gold sector has noted the progress of platinum with some alarm. Gold is still subject to stringent controls in China, although smuggling has run at epidemic proportions. The World Gold Council (WGC) had already identified Chinese demand for gold jewellery as one of the forces to drive world gold demand. Faced with a rising market for platinum, it instituted marketing programmes in conjunction with local jewellers and the media. In 1998 the WGC worked with Shanghai's Lao Miao Gold Co to set up a publicity campaign using a local television series Love in Shanghai to launch the Amour range of jewellery. Lao Miao's sales rose some 15 percent after this campaign.
It was followed in late 1999 by a bigger media campaign, again organised by the WGC and Lao Miao Gold, but this time launched in 18 major Chinese cities. This campaign was linked into Lao Miao's range of 24-carat jewellery collection, ?Forever,? with items from the collection again worn in a 20-episode television programme. The major target were young women office workers, with monthly salaries in the region of Yn2,500. In 1999 Lao Miao registered a rise in sales of 31.5 percent. Not surprisingly, it has identified the major sales periods as being the Chinese New Year and St. Valentine's Day, not a traditional Chinese festival.
More sophisticated products
The World Gold Council, through its regional offices, continues to find new ways to promote gold: in mid-2000 it enlisted the Chinese actress Xu Jing and pop star Dave Wang in a campaign entitled `yellow gold is back.' Here the themes are love, purity and fidelity. Four manufacturers and 800 retailers have signed up, and a major new collection (Gold Virtuosi) will be trailed around Beijing, Shanghai and Taiwan. Perhaps the young will lean more towards this kind of sophisticated jewellery than the rather garish astrological year signs of electroformed gold snakes, rats and cows that adorn many Chinese gold promotions.
At the recent Financial Times World Gold Conference in Paris, Mr. Bryan Parker of the World Gold Council revealed the key to all this activity. Gold jewellery now accounts for 90 percent of all gold use worldwide, he said, while the next biggest user, the electronics industry, uses only 8 percent. In addition, while gold consumption in jewellery worldwide is running at about 3,000 tonnes a year, in stark contrast to only 1,000 tonnes in the 1970s, the world's central banks are offloading gold at a steady pace, and the price of gold remains stubbornly low. Some analysts predict it may even drift down from its current US$275 to US$200 or below. If China, with its vast and increasingly affluent population, can be persuaded to import more than its current 200 tonnes or so a year, it may staunch the price weakness.
The authorities in China have their own reasons for keeping the gold price stable. They appear, however, to have accepted that the pull of market forces is stronger than administrative measures, at least in the case of gold jewellery. Mr. Vincent Chow, general manager of Hong Kong's Chow Sang Sang jewellers, points out that by end-1999 some Beijing shops were already selling jewellery below the mandated Yn99 per gramme of the national price band. The main constraint to greater sales of gold jewellery, he believes, is not the price of gold but the level of taxation, with VAT of 17 percent and a 5 percent sales tax. Imported jewellery attracts a 40 percent tax. Levels of taxation such as these may, however, be more indicative than real.
In summary, the Chinese market for precious metals appears to have compressed Western experience into a few short years. Demand for gold has probably passed its peak, at least in crude form and in the east of China; platinum may ride high for a while yet. The Chinese silver market was deregulated in January this year, and could easily provide a different and alternative kind of impetus to jewellery demand.
Some commentators feel that Chinese consumers now have a much wider array of items on which to spend their disposable income, such as consumer goods, travel, housing and eating out. But gold supporters are ever optimistic: a liberalisation of the Chinese gold market from January 1, 2001 is even now being mooted, along with a surge in demand from the west of China as this area catches up in income with the east coast. Any further fall in the price of gold may remove its lustre as an investment, while platinum remains both rare and prized. Over to the marketing managers.
This article was written by John Adams, director of China Financial Services and author of The Deregulation of the Gold Market in China He is leading a jewellery delegation to China in November. E-mail contact on j.s.adams@talk2l.com
