Policy Framework on Diamond Trade in China

Changes in the taxation policy and policy on import-export of diamond were effected since 2000. These changes were introduced in order to develop China’s consumer market for diamond jewellery, to give full play to the labour and the technological advantages that China enjoys in this field, and to develop its processing, and increase export, employment and revenue. The changes were prompted by both domestic and international factors.

The policy framework for diamond trade evolved and altered as a function of several domestic and international factors impinging on the diamond trade in China. Taking the international issues first:

As China opened up to the international economic system starting late 1970s, China’s rudimentary but growing diamond market came under severe strain. China’s diamond resources are limited, and prior to the new regulations, diamond trade in China was rather chaotic and lacked regulation. Especially, the composite trade in diamond import was perceived to be high as compared to that in major diamond producing or trading countries, thereby acting as a disincentive to foreign diamond players from investing in China.
Second, China’s diamond processing industry is not only disparate, but its dependence on overseas resources is also large. Figures from China Customs reflect that, in the period between 1995 and 2001, average annual import of diamond in processing trade was US$271 million, while average annual export volume was less at US$226 million. Thus, as China entered the WTO, it realized that unless the existing situation where processing trade was not contributing in value added terms was reversed, the situation would be even more difficult under intensified competitive rules within the WTO.
Third, China is a party to the certificate-based Kimberley process for legal international trade in diamonds. Thus preventing smuggling and non-standard trade in diamonds was an obligation that China was internationally mandated to complete.

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As for domestic compulsions prompting the regulatory changes, the following needs to be highlighted:

First, it needs to be noted that China has emerged in a relatively short span of time as the second largest diamond processing nation, after India. Import of semi finished diamond in 1995 was barely US$ 88.44 million, which increased to US$ 510 million by 2001. Rapid growth in diamond processing in China exhorted a streamlining of the framework of diamond trading.
Second, the diamond jewellery market in China has also undergone rapid development since the 1990s. Sales volume of diamond jewellery in the domestic market was only over 2 billion RMB (about US$ 244 million) in 1995, and by 2001, the figure increased to 14.5 billion RMB (about US$ 1.8 billion). De Beers has declared China as the fifth largest market in the world. As China tries to achieve the goal of rapid economic development and modernization, the prospects for the diamond industry appear to be bright.
Third, in keeping with China’s developmental priority which values development of capital- and technology-intensive industries like diamond processing (which also generates employment), the industry has come in for special focus of the State. China’s processing trade based on import of raw material raises dependency on foreign suppliers, as most need to go through foreign intermediaries for raw material. Second, the processing and trade firms are of small scale, thereby lacking in economies of scale. A further characteristic of the diamond trade in China is that it is incongruous with the country’s resource endowment. For instance, in the period 1995-2001, average annual import of diamond was 450,000 carat, while export was over 7 million carat, making China a net exporter of diamonds. Article source: Articles source: Gems & Jewellery Industry in China, Embassy of India, Beijing

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