Don’t be surprised if diamantaires are suddenly talking about Zhou Xiaochuan and Janet Yellen. The actions of the two – who respectively lead the People’s Bank of China and the U.S. Federal Reserve – may put additional pressure on diamond demand and ultimately polished prices.
Simply put, the sudden depreciation of China’s yuan and a looming U.S. interest rate hike couldn’t come at a worse time for the diamond market.
Last week, Zhou’s People’s Bank of China allowed the yuan to depreciate by about 3.5 percent so that the currency is now trading at around CNY 6.4 against the U.S. dollar. At a glance, Beijing sought to give the country’s economy a much-needed boost since a devalued yuan should encourage exports as Chinese products became cheaper in overseas markets – particularly in the U.S.
For the diamond industry, a cheaper yuan has a different effect since, unlike other products, China is a major consumer of diamonds.
A devalued yuan makes China’s diamond imports more expensive for buyers who are converting their currency to buy goods in U.S. dollars – or trading diamonds in the local market in yuan from a dollar base. Michael Huang, managing director of Diamond Index Group, a supplier of high-end diamonds and diamond jewelry in China, told Rapaport News that dealers and wholesalers already raised prices by about 5 percent to compensate for their currency losses. Retailers haven’t yet adjusted their prices but are likely to do so in the coming weeks, he said.
As a result, Chinese diamond buyers, who have been cautious throughout 2015, could push for deeper discounts to offset the effect of the weaker currency, Huang noted. Buyer sentiment at the upcoming September Hong Kong Jewellery and Gem Fair will be a good barometer of Chinese demand.
Efraim Zion, managing director of Hong Kong-based Dehres Limited, which specializes in large stones and in fancy shapes and color, already has low expectations for the show. However, he dismissed that the yuan at current levels would have a major impact on consumption.
“It may weigh on the market but if the yuan devalues further to CNY 6.70 or 6.90, then it will have a real impact,” he said. Instead, he sees deeper market challenges as the general slowdown in China’s economic growth and the government’s clampdown on corruption and extravagance.