China on the Rise: Part Two

Written by coatimundi:Here is the second installment of John Pollard's two-part feature on China's growth in the diamond and jewelry industry.

China on the Rise: Exploding Economy with a Fantastic Future (Part Two)

http://www.pricescope.com/journal/china-rise-exploding-economy-fantastic-future-part-two

Thanks John!

Interesting read, thank you.

Its does seem as the East is changing the rules of engagement in our industry..., will surely be interesting to see how things unfold.

Great article John!

The whole NGTC program sits poorly with my Libertarian leanings but I’m a little confused that it doesn’t work. Maybe it does. If they are consistent in their grading, what does it matter if they aren’t using the same grading scale as the rest of the world? That is to say, if you can directly translate NGTC-VS2 = GIA-VS1 or whatever, that serves the trade just fine and, although it’s a bit confusing for consumers, it basically works there too. Even shifts of partial grades will simply cause the traders in Israel and elsewhere to include this variable in their decision about which stones to send to China. Prices to China on 'high' VS1s will go up and 'low' ones that they will be expected to downgrade will just be sold elsewhere. I would expect it to lead to a booming black market from Hong Kong and overseas traders using foreign documented stones as consumers and even jewelers figure out what is going on, but this doesn’t seem to be what you’re describing. Traders worldwide are pretty savvy at working this sort of system to their benefit and, if they don't, their competitors do. Hong Kong has a long and successful history of smart folks navigating just this kind of government mandated silliness. I'm not a betting man, but if I were I'd be putting my money on them, not the NGTC. The losers are, of course, Chinese merchants and Chinese consumers.

Neil,
From John's article, I think this part could change everything when it comes to the market in China making report adjustments.

" In addition to laboratory grading services, the NGTC is also able to function as the “policing agency” for lab standards. With the authorization of the Administration of Quality Supervision, Inspection and Quarantine, any store with foreign grading reports can be entered by the NGTC, which can remove items for inspection and testing in its lab. Upon testing it’s possible for those goods to be downgraded, in which case the store must pay a fine and negotiate to get the penalized goods back. In extreme cases, the store may be reported in the press for using “unreliable foreign reports.” For all of the incredible growth in China we should not forget this is a one-party Communist country."

Maybe something like the American Federal Trade Commission opening a Lab?

That’ll restrict jewelers but not consumers. If a consumer can get a better stone for a better deal (or at least thinks they can) by buying one in HK or by buying one on the grey market then you can bet a fair amount of folks will do just that. Good for HK jewelers, good for those consumers, not so good for the mainland jewelers who follow the rules and are stuck with overpriced or misgraded goods. It’s handing out a competitive advantage to the foreigners in the name of consumer protection. Controlling markets like this is notoriously difficult, even for the Chinese, and consumers flow to where they can get what they count as the best deal. It’s the same problem as the oft discussed comparison of GIA and EGL. EGL has different grading standards and the result is that similarly described stones are usually less expensive. A few minutes playing with the database here makes it quite obvious. The marketplace accounts for this and EGL branding is seen as a problem that is offset with a discount. In John’s story, GIA, the presumably less stringent lab, gets to trade at a premium for being ‘American’ and costs the dealer less because of the different grading scale. Double bonus. That means more money for the dealers, discounts for their customers or both.

Another example might be the sales tax issues here in the US. B&M jewelers are easy for the taxman to attack and they’re generally well under thumb. For the most part, they charge and submit the taxes without complaint and when they don’t they’re penalized severely. Most of the Internet merchants, on the other hand, couldn’t collect the tax even if they wanted to because of the interstate commerce rules. Consumers generally see this as a competitive advantage for shopping long distance and avoiding local stores. Driving customers out of state with your tax collection procedures is a silly way to run a state, but nearly every state does it, and the argument that consumers are expected to submit the taxes directly rings hollow since so few actually do it. Local merchants lose, local consumers lose, local taxing districts lose, and the big winner is out-of-state merchants. I can just imagine the Chinese compliance rate if they required every consumer who showed up with a diamond from overseas to submit their stone for grading at the government lab and pay a penalty if it came out different from what was expected.

The thoughtful discussion is appreciated.

I have comments of my own to add after reading the responses here, but my recent travel schedule is preventing quality reply-time. I'll return to this thread in a few days when my feet are grounded. Many thanks.

Written by denverappraiser:That’ll restrict jewelers but not consumers. If a consumer can get a better stone for a better deal (or at least thinks they can) by buying one in HK or by buying one on the grey market then you can bet a fair amount of folks will do just that. Good for HK jewelers, good for those consumers, not so good for the mainland jewelers who follow the rules and are stuck with overpriced or misgraded goods. It’s handing out a competitive advantage to the foreigners in the name of consumer protection. Controlling markets like this is notoriously difficult, even for the Chinese, and consumers flow to where they can get what they count as the best deal. It’s the same problem as the oft discussed comparison of GIA and EGL. EGL has different grading standards and the result is that similarly described stones are usually less expensive. A few minutes playing with the database here makes it quite obvious. The marketplace accounts for this and EGL branding is seen as a problem that is offset with a discount. In John’s story, GIA, the presumably less stringent lab, gets to trade at a premium for being ‘American’ and costs the dealer less because of the different grading scale. Double bonus. That means more money for the dealers, discounts for their customers or both.

Another example might be the sales tax issues here in the US. B&M jewelers are easy for the taxman to attack and they’re generally well under thumb. For the most part, they charge and submit the taxes without complaint and when they don’t they’re penalized severely. Most of the Internet merchants, on the other hand, couldn’t collect the tax even if they wanted to because of the interstate commerce rules. Consumers generally see this as a competitive advantage for shopping long distance and avoiding local stores. Driving customers out of state with your tax collection procedures is a silly way to run a state, but nearly every state does it, and the argument that consumers are expected to submit the taxes directly rings hollow since so few actually do it. Local merchants lose, local consumers lose, local taxing districts lose, and the big winner is out-of-state merchants. I can just imagine the Chinese compliance rate if they required every consumer who showed up with a diamond from overseas to submit their stone for grading at the government lab and pay a penalty if it came out different from what was expected.

Neil your comments are thoughtful and as usual offer an interesting insight.
I guess from a Gov't point of view where every detail of everyday life has been prescribed by a paternalistic gov't, it is natural they would try to regulate large expensive purchases.
In many regards the people of China are both very nationalistic, and very proud of their long (conformist) history. I guess their overall desire to follow the rules is the main thing that sets China and India apart.
The next 15 years will be very interesting. The Japonese still seem by and large to be that same type of society. Even after 2 post war generations.

Personally I applaud them for enforcing grading standards and wish the ftc would do similar.
The current system stinks for consumers.

Karl,

NIST, the people in the US who are responsible for defining grading scales and terms used in trade won’t touch the diamond grading scales. These are the folks who define what is a gallon, a second, a mile, a degree, a bushel, etc. so that people are using a common language in trade and science. They take their business very seriously and, as far as I can tell, they’re doing an excellent job of it. It’s what you’re asking for but it would require a complete redesign of the way diamonds are graded in order to make it possible and I’m not actually convinced it would be an improvement even if it were done. If, for example, clarity were to be defined as the amount of impurities per cm3 (which is how purity of material is measured in lenses for example), and there were some scale attached, what is really gained? Some impurities are more egregious than others after all. There’s plenty of people out there who are prepared to discuss color in a sensible way who can only laugh at our scale but would consumers really benefit from a Pantone type system for grading color? They might, but I’m not convinced. The primary attributes that most customers are looking for in diamonds are beauty and value, neither of which is conducive to this sort of evaluation.

Written by Garry H (Cut Nut) » October 30th, 2010, 12:34 am:

Written by denverappraiser:That’ll restrict jewelers but not consumers. If a consumer can get a better stone for a better deal (or at least thinks they can) by buying one in HK or by buying one on the grey market then you can bet a fair amount of folks will do just that. Good for HK jewelers, good for those consumers, not so good for the mainland jewelers who follow the rules and are stuck with overpriced or misgraded goods. It’s handing out a competitive advantage to the foreigners in the name of consumer protection. Controlling markets like this is notoriously difficult, even for the Chinese, and consumers flow to where they can get what they count as the best deal. It’s the same problem as the oft discussed comparison of GIA and EGL. EGL has different grading standards and the result is that similarly described stones are usually less expensive. A few minutes playing with the database here makes it quite obvious. The marketplace accounts for this and EGL branding is seen as a problem that is offset with a discount. In John’s story, GIA, the presumably less stringent lab, gets to trade at a premium for being ‘American’ and costs the dealer less because of the different grading scale. Double bonus. That means more money for the dealers, discounts for their customers or both.

Another example might be the sales tax issues here in the US. B&M jewelers are easy for the taxman to attack and they’re generally well under thumb. For the most part, they charge and submit the taxes without complaint and when they don’t they’re penalized severely. Most of the Internet merchants, on the other hand, couldn’t collect the tax even if they wanted to because of the interstate commerce rules. Consumers generally see this as a competitive advantage for shopping long distance and avoiding local stores. Driving customers out of state with your tax collection procedures is a silly way to run a state, but nearly every state does it, and the argument that consumers are expected to submit the taxes directly rings hollow since so few actually do it. Local merchants lose, local consumers lose, local taxing districts lose, and the big winner is out-of-state merchants. I can just imagine the Chinese compliance rate if they required every consumer who showed up with a diamond from overseas to submit their stone for grading at the government lab and pay a penalty if it came out different from what was expected.

Neil your comments are thoughtful and as usual offer an interesting insight.
I guess from a Gov't point of view where every detail of everyday life has been prescribed by a paternalistic gov't, it is natural they would try to regulate large expensive purchases.
In many regards the people of China are both very nationalistic, and very proud of their long (conformist) history. I guess their overall desire to follow the rules is the main thing that sets China and India apart.
The next 15 years will be very interesting. The Japonese still seem by and large to be that same type of society. Even after 2 post war generations.

An interesting phenomenon in China is that many consumers - though nationalistic - are not confident in the quality of some Chinese products. I've been told by my Chinese friends that when they have the opportunity to travel abroad they will purchase a Sony camera (for example) in a foreign market, or even at a foreign airport, rather than at home. The reason is a general feeling that the goods coming out of the Chinese Sony factory aren't held to the same standards as Sony's production for the west. The same feeling persists in different sectors and I definitely felt it regarding foreign grading reports.

It may help to know that the NGTC has not always had a reputation as a strict lab. It was the opposite some time ago. Their grading strictness grew in concert with the growth of the diamond engagement tradition - to the point where they're now considered overstrict. No doubt this is because the government wants to drive consumers to look inward and buy Chinese to stimulate the economy. For now the GIA and IGI both inspire more confidence (my opinion) among consumers than the NGTC does. I would imagine this only makes the NGTC work harder to appear strict-by-comparison to foreign reports - but it's hard to overcome a consumer confidence mindset that has been established across a number of sectors.

Written by Karl_K » October 30th, 2010, 6:23 am:Personally I applaud them for enforcing grading standards and wish the ftc would do similar.
The current system stinks for consumers.

The standards exist. It would be nice if everyone would use them.