Shanghai Diamond Exchange Administration

Shanghai Diamond Exchange Administration (simplified as SDEA) was officially established in April 2000. Approved by the State Council of the People’s Republic of China, it is a government organization co-sponsored by some related departments such as the Foreign Economic Relations & Trade Department, the Customs, the Foreign Exchange Administration and the Industrial & Commercial Administration. It began operations in June 2002.

SDEA has following functions:

Examine and verify the Constitution of Shanghai Diamond Exchange, its transaction rules and procedures.
Exercise diamond export and import administration, customs administration, foreign exchange administration and industrial and commercial administration on related issues with authorization by the foreign economic relations & trade department, the customs, the foreign exchange department, the industrial & commercial department.
Supervise SDE to observe relevant laws, regulations and rules as well as the constitution of SDE, the transaction rules and procedures; put on file the members of the supervision council of SDE, the senior executives and the transaction records of SDE.
Coordinate with relevant policy-making bodies and make suggestions on policy adjustments.

Inside SDEA there are Policy & Research Office, General Office, Customs Administration, Foreign Exchange Administration, and Industrial & Commercial Administration. Along with the creation of an institutional structure in the form of the establishment of SDE, the Chinese government also undertook certain policy changes in order to promote the development of the industry. In August 2001, the government issued a policy document on readjustment of the import export administration and taxation.

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The two policy documents regulating the trading framework of diamond through Customs are:

Provisions of the General Administration of Customs (GAC) on the Supervision of Diamond Entry and Exit at the Shanghai Diamond Exchange and
Notice of the GAC on the Implementation of Policies Concerning Diamond and Diamond Jewellery Imports. The
two documents make it clear that the Shanghai Diamond Exchange (SDE) is a special zone established with the approval of the State Council for the handling of diamond import and export formalities and for customs control in the diamond trade. GAC maintains an office within SDE to carry out closed management.

In May 2002, General Administration of Customs (GAC) also officially promulgated the Rules of Supervision of diamond traded in Shanghai Diamond Exchange (SDE). At the same time, in a notification to all customs posts in China, General Administration of Customs clearly stated that beginning June 2002, all diamond imported into China, except those for processing, will have to be reported for customs purpose at the single customs post created at SDE. Other customs posts will not be allowed for export or import procedures, or for export tax rebate.

The Provisions cover measures for the management of SDE and its members, the supervision of movement of diamonds between SDE and offshore enterprises and between SDE and domestic enterprises, as well as the management of diamond processing. The Notice stipulates that with effect from 1 June 2002, diamond imports and exports under China’s general trade and the domestic sales of diamond under the processing trade are required to complete import and export customs declaration formalities at the SDE customs office; other customs offices may not handle these two categories of diamond imports and exports. The SDE customs will levy importrelated VAT on the domestic sale of diamonds mentioned above (including diamonds in finished products). Diamonds imported into China (except Hong Kong, Macau and Taiwan) through SDE will be exempt from import tariffs.

The new rules also stipulate the following:

The consumption tax formerly collected at the import and processing stage will be postponed until the retail stage.
The consumption tax for unset polished diamonds and diamond jewellery will be collected at a reduced rate of 5 per cent.
Rough diamonds and unset polished diamonds directly entering the SDE from overseas will be exempted from value-added taxes and consumption taxes.
Diamonds traded in the SDE will be exempt from value-added taxes. Full tax refunds will be given based on the difference between the former refund rate of 13 per cent and the tax collected at the processing stage, when the diamonds are exported.
Diamond flowing from the SDE to overseas will not enjoy tax refunds.
Value-added tax shall be duly paid on diamonds imported from the SDE for use in domestic markets, For customs supervision, if diamonds imported in the name of processing trade are to be sold domestically, the diamonds must be sent to the SDE for transactions or filing.

The Ministry of Finance and the State Administration of Taxation (SAT) jointly issued a notification in December 2001, announcing a new tax policy starting 1st January 2002. This policy allowed duty-free import of all types of diamond through the customs post established at SDE, while at the same time making downward adjustments in consumption tax. After this readjustment, actual import tax on semi-finished diamond and finished diamond products fell by nearly half. This was a major policy decision to promote the development of diamond industry in China. Thus by narrowing the cost-gap between standard and non-standard import of diamond, smuggling activities were controlled to a certain extent. This also introduced order into the market and curbed tendencies of fierce and virulent competition on the part of small and dispersed enterprises.

The results brought about by these institutional and policy reforms were quite visible. Trade of various kinds of diamond reached 7.764 million carat in 2002, with a total value of US$ 157 million. That year, VAT proceeds on diamond import through SDE reached 67 million RMB (about US$8.2 million), a 13-fold increase in import tax proceeds over the previous year. Total volume of diamond traded was 15 times the export-import volume of diamond under general trade. Volume of diamond finally entering domestic market through SDE was 2.44 million carat valued at US$ 47.696 million, accounting for 30.4% of all diamond traded at SDE. To put things in perspective, in the first two months of 2004, 4.02 million carat of diamond was traded in the SDE under general trade head, with a total transaction value of US$ 40.1 million.

However, the domestic industry is not completely satisfied with the changes.

First, import taxes on both semi-finished diamond and processed finished goods (not inlaid) have been abolished, thereby raising apprehensions of large-scale influx of foreign finished products.
Second, although trade within SDE is tax-free, diamond needs to be taken out of SDE for processing purposes, and VAT is imposed on processing at the rate of 17%, which eats into the low profit margin of entrepreneurs.
Third, although consumption tax on diamond has been reduced from 10% to 5%, due to the changed tax base of processors and retailers, there has not been much actual reduction in taxes.

In over 10 years, both diamond processing industry and diamond jewellery markets have registered high growth. As a labour-, technology- and capital-intensive industry, this is encouraged by the State for development. However, in terms of resources, it is mainly dependent on supply of raw materials from overseas. (China produces good quality diamond, which is primarily exported, while it is a net importer of diamond).

Following are the major trends in the industry after SDE started operations:

First, the undervaluation of imports rampant in the past has been curbed effectively. For instance, during 1995-2001, the average import price of various categories of diamond under general trade was about US$ 4-5 per carat, whereas the price is 16 to 17 times higher at US$70-80 per carat for diamond traded or imported under central administration of SDE.
Second, diamond smuggling has been partly controlled, even as trade through regular channels has gone up.
Third, the number of SDE members with foreign capital has increased.

Scale of China’s diamond production and processing:

Number of diamond processing enterprises Over 70
Manpower involved Over 16000
Annual volume of processed diamond 2.4 million carat
Annual production value US$ 0.8 billion
Proportion of global production 20%

China’s diamond processing enterprises are mainly concentrated in Guangdong, Shanghai and Shandong. Conghua in Guangdong is a place of relative concentration of the diamond processing industry. Most of these are FIEs engaged in processing of imported raw materials. Diamond processing in Guangdong is known for high value addition and quality products. Panyu district of Guangzhou is another area of relative concentration of the jewellery industry, exporting most of its products. Shanghai has established a complete market for important raw materials for jewellery market.
Gold, Diamond and Silver Exchanges have also been established in Shanghai. The city government of Shanghai, in order to coordinate with the development of SDE, has opened up two diamond processing zones, namely Lujiazui Diamond Processing Zone and Longhua Diamond Processing Zone. Shanghai accounts for one-fifth of all diamond consumed in China.

Developmental goals of SDE:

Year Sales 2002 : volume of diamond US$ 0.4-0.6 billion, Manpower in industry > 20000
Year Sales 2003 : volume of diamond US$ 2-3 billion, Manpower in industry > 60000
Year Sales 2004 : volume of diamond US$ 3-5 billion, Manpower in industry > 100000

(Source: SDE)

Shandong is a major processing centre for diamond in China, with 20 enterprises and over 3000 workers by end-2003, processing a total annual volume of 200000 carat. With cost advantage in terms of labour and quality advantage in terms of technology, Shandong is able to supply lowprice polished diamond of reasonable quality.

Articles source: Gems & Jewellery Industry in China, Embassy of India, Beijing
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