The hidden bell of the state of the Chinese economy – The diplomat

Indicators of the real state of the Chinese economy are not found only in the debt, growth and output statistics released by the Chinese government.

Indeed, a defining indicator of China’s economic situation can be found in an unlikely commodity sector: pearl jewelry. Affluent Chinese women have significantly reduced their purchases of expensive saltwater pearl jewelry, imported by small Chinese companies that cater to this niche market. Many small jewelers are on the verge of bankruptcy, if they haven’t already.

This trend, however, appears to run counter to other statistics, such as the recent South China Morning Post publication. report that “while retail spending during the pandemic has been slow, many Chinese have turned to luxury shopping as an alternative to experiences like vacations.”

According to SCMP, “China accounts for more than a third of the global luxury goods market and its share is expected to increase as more households earn upper middle class incomes.”

However, if the luxury goods market is only growing in China, as these reports suggest, then why are Beijing’s independent jewelry companies closing their doors? And what does pearl jewelry tell us that other indicators don’t?

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First, and most obvious, the decline in sales of expensive foreign-sourced pearl jewelry indicates that buyers are either more careful with their disposable income until there is greater certainty about the condition. COVID-19 and its effects on the economy, or that they simply no longer have disposable income.

Second, and more subtly, the decline in sales of high-end pearl jewelry indicates that the famous unnamed jewelry small independent jewelers in China generally do not have brand recognition is the most vulnerable sub-sector of the luxury goods market, and is therefore the first to disappear when money is tight.

Beijing Markets Signals

Sources who recently visited Beijing say markets that traditionally depend on a strong international tourism presence are suffering. These markets, especially Hongqiao on the south side of Beijing near the Temple of Heaven, and Xiu Shui near the Jianguomen embassy district, are places frequented by international tourist groups and airline crews, shopping for handbags. counterfeit, cheap jewelry, Chinese handicrafts, small electronics and clothing and accessories.

But the arrival of international visitors to China fell by nearly 80% in 2020. In 2019, more than 145 million foreigners traveled to China; in 2020, that number was just over 27 million, according to Statistical.

When these traders fail, it’s not just their business that is turned upside down; it usually affects entire families as well. The majority of traders in these markets are not from Beijing, and many, if not most, are also not legally entitled to live there, due to strict household registration requirements (hukou) system. These small entrepreneurs generally return to their region of origin in the Chinese provinces.

However, close to the tourism-oriented traders are also businesses that cater not only to foreign buyers, but also to newly established domestic buyers. And these local buyers typically represent a completely different demographic than the tourist buyer. The Chinese consumer wants high-end jewelry, including unique and valuable saltwater pearls from the South Seas. These new wealthy Chinese consumers represent a significant percentage of the customers of expensive pearls and other semi-precious stones. To put it in perspective, a tourist may be looking for a pearl necklace that costs $ 100 or less. The Chinese domestic buyer is looking for a pearl necklace that costs $ 1,000 or more.

In fact, strands of pearls that come from places like Tahiti, the Philippines, and Japan can easily sell for $ 3,000 and up.

Buyers of these expensive pearls are usually women whose husbands own successful small and medium-sized businesses, often manufacturing businesses. The disposable income offered to these women comes from the profits of these companies. But rising prices and major logistics and supply chain disruptions in many industries have hit these Chinese companies hard. Descending orders created exhausted discretionary income.

Statistics of China’s economic decline

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Basic stats tell the story. In the first quarter of 2020 alone, 460,000 shops permanently closed their doors in China. In total, almost 19 percent of small businesses failed in 2020. These companies often have little success in accessing traditional credit, although the government has urged banks to increase their lending to small and medium enterprises by more than 30%, and has also granted tax breaks.

The severe decline in activity in the high-end pearl jewelry industry is a direct and almost immediate consequence, as well as a leading indicator, of these blows to the Chinese economy.

World Bank forecasts don’t keep much hope for a major recovery soon. In fact, the Bank predicts that the Chinese economy will slow down in 2022. Although it points out that the first half of 2021 saw China rebound from the effects of the COVID pandemic, the second half of 2021 saw the economy recover. cool quickly. The Bank also predicts that real GDP growth will decline to 5.1% in 2022. For some countries, this would be a welcome level of growth; for China, it is considered slow.

Pearl trade declines

“The pearl trade is as vulnerable as any other to disruptive market conditions; perhaps even more so, given that it operates across international borders, from often remote oyster beds in the Asia-Pacific region to its main shopping centers in Hong Kong and Japan and end consumers in mainland China, in Europe and the United States ”, Australian Jewelers Magazine reported in April 2021.

The article notes that “the South Sea pearl trade depends to a large extent on the Hong Kong Jewelry Fairs, which are held in March, June and September, as the main conduit for goods to the larger market. from South Sea pearls to the world in China “.

Thus, the cancellation of the three events in 2020 significantly disrupted the market. “It would have been … a huge problem for pearl producers who depended entirely on the wholesale market,” according to the article. “The big problem for the pearl industry has been getting the pearls from the farm to the wholesale market. “

Pearls as an indicator of the economy

The pearl is a symbol of all of China’s economic factors combined. Demand for luxury pearl jewelry from South Sea countries, as well as Japan, was high among newly affluent Chinese women, especially in the past 10 years, until the pandemic hit. If these clients were over 50, these women and their families will likely have grown up in difficult circumstances. Now able to afford the finest things in life, they were able to show and appreciate their wealth by purchasing luxury products. But unbranded luxury goods, unlike a Louis Vuitton handbag or a Rolex watch, are more vulnerable to external shocks and are the first to be lost when making purchasing decisions.

When businesses close or profits decline dramatically, the personal disposable income of owners and their families decreases along with it. The first thing to take off the shopping list is discretionary and expensive purchases. For local Chinese companies that have come to rely on the domestic luxury goods market sector, however, such as in pearl jewelry, they not only lack “famous name” recognition, but also face difficulties. supply which hurt them enormously as they compete with major European and American luxury brands for the disposable income that remains.

When Chinese high-end pearl consumers return, that will be a strong indicator that the Chinese economy has as well. A “pearl necklace” is more than just a term used by international analysts to describe the maritime part of the Chinese government’s “Belt and Road” initiative. According to this definition, the “pearl necklace” theory refers to China’s ambition to create a series of ports that it can control economically and militarily from southern China, across the Strait of Malacca, to ‘to the Red Sea and as far as Europe. Indeed, a real “pearl necklace” is a small but powerful symbol of the health of the economy of small and medium enterprises in China. And as this sector evolves, so does much of the larger economy that depends on it.