By Peter Ip
THIS scribbler is an economist, otherwise known as “dismal scientist”, by education and training as well as profession and career. My ingrained instinct is, therefore, to be sombre and lugubrious. I have also been compiling annual reviews and outlooks for Hong Kong’s jewellery industry since time immemorial (I jest: it is more like the better part of a decade). Not in recent memory can I recall captioning my brainchildren so confidently and rosily as above. Perhaps I should have hedged myself and tagged “Fingers Crossed” at the end of the title. But, as they say, “nothing ventured, nothing gained”.
Better economies, better jewellery sales
The reason why, prima facie, I might have come across as gung-ho is that I set considerable store by the proposition that the better that economies near and far perform, the better will be our jewellers’ sales, both at home and abroad. Since the global financial crisis erupted five years ago, followed by the Great Recession, the world economy has been muddling along, almost at all times failing to fire on all cylinders between and among different economies and sporting only isolated pockets of strength within any economy attempting a comeback.
Twenty fourteen promises to be noticeably different – and not before time. In the all-important US economy, the world’s largest, the recovery has been variously described as anaemic, faltering, lacklustre and so forth. In the new year due to begin 1 January, however, it holds out hopes of being relatively inspiring, though given its likely continued subpar showing by historical standards, the emphasis should be more on “relatively” than “inspiring”.
The transmission mechanism of prolonged quantitative easing (QE) – massive purchases of government securities by the nation’s central bank, the Federal Reserve – on the economy remains to be more fully probed and understood. But, as QE boosts asset prices – from stocks to bonds to houses to art and antiques – it has indubitably resulted in a positive wealth effect that is supportive of consumer confidence and personal consumption expenditure. More importantly, deleveraging in America’s private sector has been unfolding steadily and gone further than similar processes in other advanced industrial countries.
Europe and Japan: Welcome aboard the recovery bandwagon
And the United States does not seem to be the “oasis of prosperity” that former Fed chairman Alan Greenspan referred to in 1999, for its counterparts in the West appear increasingly to be jumping on the bandwagon heading for recovery as its destination. Thus, having contracted for six quarters running, the euro zone finally forayed into positive territory in the second quarter of this year; and the prognosis for 2014 is improving. European Central Bank president Mario Draghi’s pledge “to do whatever it takes” to maintain the intactness of the Continent’s single currency has wrought wonders in terms of order and stability as well as confidence.
Even Japan, putatively to have lost not one decade but two (and counting), is currently showing tentative but tantalising green shoots of recovery as Abenomics gradually come on stream and bring rejuvenating effects to bear on the Japanese economy. Inflation targeting, QE Japanese-style, fiscal activism and structural reforms together constitute the bedrock of the ambitious policies of Prime Minister Shinzo Abe, who is pursuing them with a vehemence and determination that are quite unheard of since when Junichiro Koizumi was in the driver’s seat between 2001 and 2006.
China’s is a soft landing – fingers crossed
More importantly, talk and angst of a hard landing for planet earth’s second-largest economy – that of our motherland’s – have largely dissipated or at least been shelved. There is no doubt that China’s economy still has problems galore and that it has conceivably glided to a lower growth range and trajectory. Nevertheless, rebalancing in favour of consumption is taking place slowly, gradually and, on current indications, steadily, partly as a result of circumstances and partly thanks to the deliberate intent of government policy. Thus far into his new position as premier, Li Keqiang has inspired with his blend of targeted stimulus and structural reforms (Likonomics for short).
From the foregoing, I trust my readers will agree when I say that there is some ground for hopefulness about the 2014 prospects for Hong Kong special administrative region’s jewellery shipments overseas. And if that happy scenario does play out, it will stand in stark contrast to developments thus far in 2013: in the first eight months of this year, the value of total jewellery exports rose 6.7 percent over the same 2012 period, during which it soared 21.5 percent on the same basis. Within total exports, domestic exports eased 0.3 percent – even worse than the minuscule 1.4 percent gain notched in the eight months ended August 2012 – while the comparable figures for re-exports were 8.4 percent versus the 2012 period’s 26.4 percent.
Optimism? Yea; but caution too
I hasten to add that while some optimism can be entertained about next year’s jewellery export prospects, caution is still warranted as nothing has been signed, sealed and delivered. In the United States, politics, dominated by inter-party wrangling between the Republicans and the Democrats, is the gravest threat to sustained economic recovery. Ideological struggle, budgetary impasse, debt limit and potential default, government shutdown and the healthcare imbroglio all hang over the economy like swords of Damocles, with any one of them capable of bringing about debilitating fiscal retrenchment.
Meanwhile, in Europe, the nascent recovery has yet to find its footing. The unsettled political scene in Germany may yet bring strange bedfellows together but may also result in policies that are too German-centric for the good of the euro zone as a whole. Across the seas, in Japan, while the four “arrows” of Abenomics promise to be potent weapons of mass rejuvenation, the worry lingers that structural reforms that are positive from a long-term point of view could, if launched too hastily and extensively, undermine growth that is sorely needed in the short to medium term. As well, the renewed strength of the yen – thanks in no small measure to dollar weakness – could militate against reflation, corporate profits and economic activity again.
Beware of austerity China-style
At the outset of 2013, the single biggest worry about the Chinese economy is what looked back then like a probable hard landing, featuring a growth rate in the real gross domestic product with a five or six in front of the decimal point, inflation in excess of 4% and complete with a full-blown financial crisis. Now, as noted above, those worries have subsided. They may yet return, however, particularly if local public-sector debt, already reported to be in the trillions of renminbi, should turn out to be significantly bigger than consensus estimates. Problems may be accentuated if, among other reasons, overcapacity and idle infrastructure, coupled with a tighter-than-expected monetary stance as the residential market heats up anew, should turn the screws up.
Of course, even if the Mainland’s economy manages to stave off the worst thinkable, a slower growth range is now but a foregone conclusion. Amidst a curtailment of loan growth and an uncompetitive exchange rate, it may not provide much of a fillip for luxury, including jewellery. Renaissance Capital (RC) probably sums things up best:
China is a key market for the luxury goods industry due to Chinese consumers’ affinity for these products. The slowdown in economic activity, harsh measures introduced to curb the housing market (higher interest rates and deposit requirements) and a drive to curb public-sector corruption have led to softening trends in sales of luxury goods growth since the second half of 2012.
As part and parcel of the anti-corruption drive, the powers that be are cracking down on lavish corporate entertainment and gifting practices (and one hastens to add that this is all to the good of the country). The anti-corruption campaign, in turn, is adjunct to a rigorous effort on the part of Zhongnanhai to promote conservation and frugality as a lifestyle. All told, RC reckons that the effect can be seen most strongly in wine and jewellery.
Domestic sales still going strong
The foregoing having been noted and given that Mainland China and Hong Kong are akin to lips and teeth (that is, one cannot do without the other), it may come as something of a surprise that within HKSAR, retail sales of jewellery, watches, clocks and valuable gifts have been doing remarkably well in 2013 to date (Figure 2). In the first eight months of this year, such retail sales leapt by 30.4 percent by value and 30.5 percent by volume as prices remained broadly stable; the comparable figures for the corresponding 2012 period were 8.3 percent and 1.3 percent, respectively.
There can be no doubt that domestic sales of jewellery have been helped immensely by tourist arrivals, foremost those hailing from north of the border and not least those visiting HKSAR by way of the Individual Visitor Scheme that has spread to theMainland’s inland regions.
But already there have been signs of consolidation – even slowdown – in the growth rate of visitor arrivals. Thus, in the eight months ended August, overall tourist arrivals grew 12.6 percent over the same 2012 period. That was respectable by most standards but represented a retreat from the year-ago outturn of 16 percent. Chinese visitor arrivals continued to rise at a pacesetting clip – of 18.8 percent - but again this denoted a climbdown compared with 23.4 percent in the first eight months of 2012. That said, China still accounted for 75 percent-plus of total tourist arrivals. Mainland Chinese visitors are thus pivotal for the performance and prospects of HK’s tourism industry, comprising – as said – jewellery.
The China connection: too important to be neglected
By one press-reported estimate, each of these visitors spends some HK$8,500 during their sojourn in HKSAR, one-third of which is expended on jewellery. For what it is worth, my personal hunch is that the portion accounted for by jewellery is larger – and would continue higher. The reason is that as our motherland’s economic growth and development becomes more widespread territorially and inclusive society-wise than hitherto has been the case, there will be more would-be jewellery purchasers and owners; the pent-up demand, it can be believed, is formidable.
As Mainland tourists skimp on food and lodging (as they reportedly have already been doing), they are likely to splurge to the hilt on the traditional status symbols of watches and jewellery. Besides awaiting their arrival, another potentially rewarding way of capitalising on Chinese consumers’ immense and expanding appetite for jewellery is to gear up for the increasingly important and popular digital trade of luxury in general and jewellery in particular. Hong Kong’s jewellery practitioners would be well advised to consider setting up their own websites and related portals within China itself as this would facilitate electronic access by Mainland-based buyers and avert possible delays and inaccessibility.
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