Part 2 China Jewellery Market Structure Jewellery

Part 2: China Jewellery Market Structure

Jewellery Market Structure l Production Centre concentrated in China South, which occupies 70% of nationwide production. Shenzhen, Panyu, Shunde, Dongguan are the key production centres.

Production Centre

Key Production Centres

Export Production Centre l 2, 000 Hong Kong export manufacturers with 300 being the major exporters. l Manufacturing centered in the Guangdong area. Mainly gem-set jewellery for export

Domestic Manufacturing/wholesaling Gold Jewellery l 450 official licensed manufacturers/ wholesalers Platinum Jewellery l. Over 100 platinum manufacturers l. Some also manufacture gold Diamond Jewellery l 500 domestic manufacturers

Retailing Gold Jewellery l 10, 000 domestic retail outlets l. Additional of 200 chain store operation by HK retailers Platinum Jewellery l. Sharing the same gold retail outlets l. Additional of over 380 chain stores from HK Diamond Jewellery l. Sharing the same pt and gold retail outlets l. Additional of over 300 chain stores from HK

Retail Consumption Centres l Shanghai, Beijing, Guangzhou and Shenzhen are the first tier jewellery consumption centres l However, 2 nd tier markets are growing. Markets like Hangzhou, Nanjing, Wuhan, Tainjin, Chongqing, Shenyang, Dalian, Wenzhou, Chengdu are the key centres.

First Tier Markets

Coverage of HK Jewellers Second Tier Markets Dailian Wenzhou Shenzhen

Jewellery Retail Shops Well Coverage of HK Jewellers -Covered Nationwide

Part 3: Policy and Regulations

Jewellery Market in China Platinum / Diamond Markets Free Gold Market Regulated

Taxation

Jewellery Market : Taxation Import Tax* Gold Jewellery 17% VAT Tax Consumption Tax l 26. 7% l 17%VAT on added l 5% at retail level l Special license for import and export Platinum Jewellery l 35% l 3% for raw material Diamond Jewellery l 26. 7% for diamond set with gold/silver l 35% for diamond set with other precious metal * As of Jan 1, 2003 value of manufacturing and retailing l 17% VAT on added l 5% at retail level value l 17% VAT on whole value l 5% at retail level

China’s Tariffs Reduction Schedule for Jewellery Imports HS Code Description Rate (%) at date Of accession Committed Rate(%) Under WTO Agreement 2002 2003 2004 2005 71131100 Jewellery & parts thereof, Of Silver 33. 3 30 26. 7 23. 3 20 71131910 Jewellery & parts thereof, Of Gold 33. 3 30 26. 7 23. 3 20 71131990 Jewellery & parts thereof, Of other precious metals 36. 7 35 35 71132000 Jewellery & parts thereof, Of base metal clay with precious metals 36. 7 35 35 71141100 Silversmiths’ wares & parts thereof 36. 7 35 35 71141900 Goldsmiths’ wares & parts thereof, of precious metals 36. 7 35 35 71142000 Gold/silversmiths’ wares & parts thereof, of base metal clad with precious metals 36. 7 38. 75 35 71161000 Articles of natural or cultured pearls 42. 5 38. 75 35 71162000 Articles of precious or semiprecious stones 36. 7 35 35

Part 4: Gold, Pt, Diamond Market Highlights

Gold Market Highlights l Jewellery retail market opened in 1984 l Gold was highly regulated and tightly controlled by the PBC under Gold Monopoly Policy for 50 years. State control purchase, operation and distribution of gold. Special license are needed for production. No bars or foreign gold coins allowed. l However, de-regulation of the gold market was approved by the State Council and freeing of the market is divided in 3 phases: -

Gold Market Highlights l Phase 1: End of gold monopoly system and establish the Shanghai Gold Exchange l Phase 2: Gold licensing system will gradually be removed l Phase 3: Import and export control will gradually be lifted

Gold Market Distribution System Imports by Authorized Commercial banks SHANGHAI GOLD EXCHANGE Only 108 members can trade In the Exchange GOLD 17%VAT IS EXEMPTED IF TRADED IN THE EXCHANGE * New regulations subject to change in June, 2003 Finished Jewellery 17%VAT ON ADDED VALUE R E T A I L E R S WITH GOLD LICENSE* China Gold Mine Supply Smuggled gold jewellery supply from domestic/HK Wholesalers, or direct from overseas suppliers MANUFACTURERS/ WHOLESALERS WITH GOLD LICENSE* • Illegal supply to Manufacturers • Smuggled to HK Smuggled gold to manf. & Jewellery to wholesalers 17%VAT ON ADDED VALUE 5% CONSUMPTION TAX

Platinum Market Highlights l Platinum entered the market in 1996, starting from a zero base market with now a 40 -60 tonnes market l Under the “Gold & Silver Administration” Regulation, there is no control on platinum for import/export, manufacturing, wholesaling and retailing l No special license required foreign and domestic players for production, wholesale and retailing for domestic market

Platinum Market Distribution System Mostly ILLEGAL Pt RAW MATERIALSUPPLY FROM HK Smuggled Pt Jewellery supply from domestic/HK Wholesalers, or direct from overseas suppliers No need to apply License SHANGHAI GOLD EXCHANGE 17%VATEXEMPTED WHEN TRADED IN THE EXCHANGE Finished Jewellery 17%VAT ON ADDED VALUE No need to apply License R E T A I L E R S Currently only 108 members can trade In the Exchange. Will recruit more members MANUFACTURERS/ WHOLESALERS Official Importers. China Platinum Cooperation Smuggled Pt Jewellery to wholesalers 17%VAT ON ADDED VALUE 5% CONSUMPTION TAX

Diamond Market Highlights l Rough Diamond is traded in Shanghai Diamond Exchange. The Center has 94 members, 63 of which are foreign-funded or from overseas. It was authorized to deal with all diamond import and export for general trade.

Diamond Market Highlights l China imported nearly US$1 billion worth of diamond and related products through the Shanghai Diamond Exchange Center, the only legal trading channel in China, in 2002. l The figure marks a rapid growth in the import of diamond through legal channel since the central government allowed the center to be exempted from tariffs on diamond products last June. l However, such an import volume lags far behind consumer demand for diamond products in China. Diamond smuggling is still a widespread problem.

Diamond Market Distribution System • Illegal supply to Manufacturers • Smuggled from HK Smuggled diamond Jewellery to wholesalers Finished Jewellery No need to apply License DIAMOND Only 94 members can trade In the Exchange DIAMOND 3% IMPORT TARIFF, VAT AND CONSUMPTION TAX ARE EXEMPTED IF TRADED IN THE EXCHANGE Finished Jewellery 17%VAT ON WHOLE VALUE R E T A I L E R S Import of Rough Diamond No need to apply License MANUFACTURERS/ WHOLESALERS SHANGHAI DIAMOND EXCHANGE Smuggled diamond Jewellery supply from domestic/HK Wholesalers, or direct from overseas suppliers 17%VAT ON WHOLE VALUE 5% CONSUMPTION TAX

Recent Development

Recent Development l Free gold jewellery retail price control by State Price Bureau : Aug 1, 2001 l License system for gold jewellery retailing abolished in Nov 1, 2001 l Shanghai Gold Exchange officially operated in Oct, 2002 PBC relinquished its role for the purchase and allocation of gold Raw material purchased in the exchange exempted from the 17% VAT Gold Price quoted daily by the exchange

Gold Transaction in SGE Oct 2002 - Aug 2003, 166 tonnes of gold was traded in SGE Month/Year Au 9995(KG) Au 9999(KG) Total (KG) Oct/2002 232 418 650 Nov/2002 4, 869 1, 266 6, 135 Dec/2002 13, 570 2, 700 16, 270 Jan/2003 13, 570 2, 700 16, 270 Feb/2003 9438 7, 547 16, 985 Mar/2003 6768 7, 667 14, 435 Apr/2003 12, 648 6, 526 19, 184 May/2003 13, 932 1, 676 15, 608 Jun/2003 17, 748 1, 314 19, 062 July/2003 15, 974 5, 217 21, 191 Aug/2003 18, 242 2, 138 20, 380

Recent Development l State Council announcement made on March 25, 2003 – Abolition of special license for Gold manufacturing and wholesaling from PBC, only register in the provincial Business Registration Bureau. Only apply to Chinese entities – The liberalization implemented in June 2003 (actual provincial implementation may take longer time) – Though not allow participation by foreign entities yet will provide a springboard for easy entry into domestic markets l Special license for gold import / export still in place

Pt Trading in SGE l On July 30, Shanghai Gold Exchange (SGE) started trial platinum trading among its 108 members and their agents. Now Pt 99. 95 is the 3 rd transaction product following Au 99. 99 and Au 99. 95 since SGE opened on October 30, 2002. l Aug 13 – official pt trading in SGE l According to the authentication of Ministry of Finance and State Administration of Taxation, China Platinum Cooperation is the only authorized importer of platinum at SGE.

Recent Development l Platinum traded in the SGE is exempted from 17% VAT on raw material l 5% consumption tax charge on retail level rather than at manufacturing level.

Platinum Traded in SGE Since Launched August 13 August 30 Sept 1 - Sept 17 4, 276 KG 1, 485 KG

Recent Development l Shanghai Diamond Exchange, open in Oct 2000, but officially operated in June, 2002 - Exempted from 3% import tariff

Recent Development l Beginning Feb 2003, foreign-owned diamond companies who are members of the Shanghai Diamond Exchange (SDE) can now sell diamonds in the domestic market in China without going through some native Chinese company. l This new measure has brought the privileges enjoyed by overseas members in line with those given to the native Chinese company members

Recent Development l The overseas company members can apply for the import and export right with the Shanghai Diamond Exchange Administration office located at the exchange. The processing is free of charge and is likely to take one month. The import and export right is permanent. l With the import and export right, these overseas company members can apply for temporary exemptions from various taxes with the Customs office at SDE and are free to visit their customers with the goods or exhibit and sell their merchandise at trade fairs taking place all over China. They are only required to pay the duties once the deals are closed.

Part 5: CEPA Advantage

CEPA l A Landmark Free Trade Agreement -Cepa Signed on June 30 between the Chinese govt and HKSAR promises to give Hong Kong companies a 2 Year head start into the vast Chinese market over their international rivals. l Zero tariff will apply to 273 products, including many high-tariff sectors, such as jewelry and watch.

CEPA Cepa will enable HK made jewellery products entering the China market with zero import tariff as of Jan 1, 2004 CEPA contains no agreed-upon definition for the "made in Hong Kong" designation. Hong Kong and Chinese negotiators have until the deal takes effect Jan. 1, 2004, to come up with a definition for goods and services originating in Hong Kong, the primary requirement for eligibility for the zero tariff rating.

Serial No Mainland Product Description 2001 Tariff Codes Mainland 2003 MFN Tariff Rates Mainland 2004 Tariff Rates Under CEPA 149 71131100 Articles of jewellery & parts, of silver 26. 7 0 150 71131910 Articles of jewellery & parts, of gold 26. 7 0 151 71131990 Articles of jewellery & parts, of other precious metal 35. 0 0 152 71132000 Articles of jewellery & parts, of base metal clad with precious metal 35. 0 0 153 71141100 Articles of silversmiths’ wares & parts 35. 0 0 154 71141900 Articles of goldsmiths’ & silversmiths’ wares & parts, of precious metal 35. 0 0 155 71142000 Articles of goldsmiths’ & silversmiths’ wares & parts, of base metal clad with precious metal 35. 0 0 156 71151000 Catalysts in the form of wire cloth or grill, of platinum 3. 0 0 157 71159000 Articles of precious metal or of metal clad with precious metal, for technical laboratory use 3. 0 0 158 711459090 Articles of precious metal or of metal clad with precious metal, for other use 35. 0 0 159 711461000 Articles of natural or cultured pearls 35. 0 0 160 711462000 Articles of precious & semi-precious stones 35. 0 0

Latest Development of CEPA l “Principal Processes” likely to apply as Hong Kong Made Products like stone casting and setting. l Criteria regarded as too narrow

Latest Development of CEPA l Even if HK made products could enjoy zero tariffs, the 17% VAT and 5% consumption tax on the total value will make the products not competitive in the China market.

Latest Development of CEPA l Hong Kong Manufacturers Associations submitted proposal to the government l Principal Processes should also include – Stone Cutting and polishing – Stone Matching – Design and Model Making l Relaxing licensing for gold jewellery manufacturing, wholesaling, retail and import/export for Hong Kong manufacturers l Details of the requirement has yet to finalize in end Sept. No immediate action will be taken by the trade.

CEPA Impact l Low end jewellery will not be benefited – more cost effective to produce in China l High value-added jewellery will have the potential

CEPA Impact l Italian companies in corporation with HK companies l Setting workshops in HK to quality for HK made products l Potential for Italian Branded Jewellery officially entering into the market. l Potential at medium to high end market

Part 5: Consumer Insight

Preference of Jewellery in China Source: HK TDC Survey

Preference of Jewellery in China l Platinum is the most preferred jewellery, especially in Beijing and Shanghai l People in Shanghai comparatively prefer to diamond l Gold is more preferable in Guangzhou & Beijing l K-gold in Guangzhou is more acceptable, rather than in Shanghai

Ownership of Piece Type Source: HK TDC Survey

Piece Type Purchased in Last 12 Mth Source: HK TDC Survey

Favourable Piece Type l Necklace is the most favourable item, followed by ring: nearly 80% people owned these product l Earrings and bracelet/bangle are the next: ownership over 40% l There’re differences between cities: - More people in Guangzhou have bracelet/bangle - More people in Shanghai prefer pendant/charm - In Beijing, ownership of ring and earring is higher than other cities, but bracelet/bangle and brooch was comparatively lower

Spending

Average Spending by City Overall Average Spending was RMB 1, 400 (Euro 158) Shanghai got the highest, RMB 2, 000 (Euro 225) RMB Source: HK TDC Survey

Jewellery Spending l Shanghai and Beijing were comparatively higher, RMB 2, 000 (Euro 225) and RMB 1, 700 (Euro 191) respectively l Nearly 40% respondents are willing to spending RMB 1, 000 l 13. 5% of respondents willing to spend over RMB 5, 000 (Euro 563)

Average Spending by Jewellery Type Ring: The Highest Ave Spending, RMB 1, 200 (Euro 135) RMB Source: HK TDC Survey

Brand Preference

Brand Preference in China HK Brands are more preferable while Int’l Brand does not have advantage. 44. 10% 37. 90% 4. 40% Source: HK TDC Survey

Int’l Brand Preference in China Consumers in BJ more prefer Int’l Brand Source: HK TDC Survey

Brand Preference l Hong Kong brands are popular in China, especially in the South l In Shanghai and Chengdu, famous local brands have firm foothold l Local brands are popular at their own cities only, but there’s no dominant nation-wide local brands

Shopping Behaviour

When to Shopping Source: HK TDC Survey

When to Shopping l 70% people go to shopping during weekend or holiday l It’s popular for people in Beijing and Shanghai go to shopping at weekend/holiday l Long holiday was the second highest occasion, like Chinese New Year, Labour’s Day and National Day are the peak shopping season

Where to Shopping Consumers prefer Jewellery Counter in Dept Store Source: HK TDC Survey

Where to Shopping l Department store is the hottest place for shopping, chain/independent store follow suit l In Beijing, dept store is the overwhelming shopping place l Chain/Independent store is more preferable in Shanghai because there’re many famous local jewellery brands which have good reputation among consumers l In Guangzhou, dept store, chain/independent store and store at mall are evenly accepted by consumers

Reasons of Purchase Reason of Purchasing Jewellery Percentage To Please Myself 53. 7% Good Design 37. 2% For Gifting 22. 0% Discount 16. 5% To Please Someone 13. 1% For Work 8. 1% For Wedding 6. 6% For Special Occasion 5. 5% To Relatives/Friends Wedding 5. 0% Investment 4. 6% No Special Reasons 12. 5% Source: HK TDC Survey

Reasons of Purchase l People buying jewellery is mainly ‘To please oneself’ l Good design is another reason attracting people to buy jewellery l Gift market is also important for jewellery

Impulse vs Planned Purchase Impulse Purchase occupied two third in Purchase Source: HK TDC Survey

Buying Behaviour l Over 50% people buying jewellery is to please herself/himself, which is mainly for self-satisfaction. That is why people tend to impulse purchase l Impulse purchase is popular in Shanghai, then Beijing and Dalian l People in Guangzhou is comparatively more pragmatic, more planned purchase

Considerations for Purchase Jewellery Source: HK TDC Survey

Satisfaction on Current Jewellery Store Source: HK TDC Survey

Consumers Expectation l Reputation, quality and price are three most important areas when people consider buying jewellery l Consumer expectation in Shanghai and Dalian are the highest. Shanghai consumers request more trendy and fashionable designs. l In Beijing, people look more serious to word-ofmouth, brand image and popularity.

Consumers Expectation l Most consumers satisfy with current jewellery stores in the areas of store, product, services and branding. l Respondents suggested areas to improve: - More choice in fashionable and trendy design - Craftsmanship could be further improved to international standard - Warm and courtesy service; more professional advice; free maintenance l Consumers are still looking for better “Design and Craftsmanship”

Effective Advertising/Promotion Source: HK TDC Survey

Advertising/Promotion l Undoubtedly, TV is the most effective vehicle. However, effectiveness of advertising/promotion are varied in different cities l In Beijing, instore promotion is the best vehicle after TV; Celebrity works the best in Guangzhou

Effective Communication Channel Source: HK TDC Survey

Effective Communication Channel l Nearly 40% respondents stated department store/mall is the best channel to get jewellery information l As a result, we could see both instore and abovethe-line are important for consumer communication

Summary and Insights

Summary & Insights l Jewellery market growth rate average at 810%. Expected to growth to RMB 150 billion (Euro 16. 9 b) by 2010 l Gold consumption is not making much headway has a lot to do with the regulations and close control by the government. The under-development of the domestic market, which still has broad prospects and is waiting to be tapped

Summary & Insights l Central policy is to liberalize the market l New management team from the PBC (from the governor to the directors of the Gold & Silver Administration dept) will only be interested to manage the central gold reserves. Liberalization of the gold market is high on the agenda. l China is still traditionally an important consumer nation for gold. But in the large and medium-sized cities, gold is slowly being taken over by platinum and diamond-set jewellery.

Summary & Insights l Diamond market will dominate the future jewellery market and platinum overtaking 24 -Karat gold as the new market "favourite“ l We’ve also seen a trend of Karat gold penetrating well in the retail sector driven by the higher price of platinum and the good craftsmanship, varied designs and high profit margin of Karat gold.

Summary & Insights l CEPA advantage for medium to high end Italian products to market brand jewellery into China.