CHINA March 27 2014 5:05 PM

LONDON (Scrap Register): British banking giant Barclays expects a steady growth in Chinese gold jewellery demand in the medium term.

Chinese jewellery demand was strong in 2013, largely on the back of strong demand in H1 13 (April and June). Likewise, Chinese jewellery fabrication has defied world jewellery fabrication trends, increasing steadily since around the early 2000s.

In fact, 2013 proved to be strong year for gold jewellery demand in China, as despite heavy buying in H1, demand resumed during the last two months of 2013 in advance of Lunar New Year, closing the year at a new sales record of RMB187bn (WGC).

In 2014, according to the latest Gold Demand Trends report from the World Gold Council, almost 80% of Chinese consumers plan on spending the same or more (35% and 44%, respectively) on gold jewellery in 2014.

The Chinese jewellery market is made up of many participants, the largest of which is Chow Tai Fook. The world’s largest solely-focused jewellery maker by market capitalisation, commanding 15% market share in China, is seeing a gradual and steady pick-up in the greater China retail market. Chow Tai Fook’s management expects that the “mass luxury jewellery segment will continue to drive growth,” with continued optimism likely in the medium and long term”.

In its latest fiscal half-year report, same store gold product sales volume increased 5.4%, and particularly relevant, was that mainland sales upsurged, driven by gold products. Part of the optimism around the mainland market was “continuous urbanisation and strong domestic demand, powered by the government’s measures to shift the economy to an internal consumption-driven model.”

Luk Fook, another Chinese jewellery retailer noted in its latest interim report that the sharp new lows in gold prices last year triggered ‘gold rushes’ in April and June. This resulted in “soaring demand” for gold products, thus driving up sales volumes, particularly of gold items as they were the most favoured among Chinese consumers.

Mainland Chinese tourists visiting Hong Kong were a strong driver of overall revenues - a trend seen across the jewellers. Luk Fook said that it maintains a “prudent yet positive” attitude towards overall business growth, and believes that low prices will sustain gold demand, with heightened purchases triggered by sharp moves lower in prices, which we attribute to noticeable price sensitivity among Chinese consumers.

Of note, Luk Fook expects to benefit from wedding and celebration-related sales, given that 2014 on the Lunar Calendar is a year with ‘double spring’ and a ‘leap month’ in the Chinese calendar, which is an auspicious time for weddings, while Valentine’s Day and the Lantern Festival are on the same day.

In Chow Sang Sang’s latest interim report (H1 fiscal 2013), it cautioned that a slowing economy in China, among other warning signs, pointed to continued softness in high-priced jewellery and watches. That said, in 2013, the deep fall in gold prices underpinned a buying spree by both mainland visitors and locals in Hong Kong, and a surge in mainland Chinese jewellery sales.

According to Chow Sang Sang, demand focussed on gold jewellery rather than on collector items such as slabs and wafers. A similar surge also occurred in June, when gold prices fell again, bringing customers back. The company’s outlook highlighted that slowing economic growth should result in demand for top-end luxury goods slowing or stagnating. It went on to say that “there is also little doubt that for gold as an investment, the bulls are no longer running, but the craving for gold jewellery on the part of consumers in April and June seems to indicate that speculation on gains may not be the driving force in consumer behaviour.”

In China, overall gold jewellery demand has grown significantly since 2006, having seen double-digit growth for the seven years since then, averaging 28% growth y/y over that period. Most notable is the aforementioned price sensitivity among Chinese consumers. Over the last few years jewellery demand has surged for this group, as retail price growth fell significantly y/y, a price dynamic which spread across both rural and urban China.

Given that their expectation for lower USD gold prices over the next few years will likely outweigh any change in the USD/RMB exchange rate (Barclays FX strategists 1 year target is 5.95, 1 month: 6.07), Barclays expects steady growth in Chinese gold jewellery demand in the medium term.