For quite some time now the acronym of Chindia has been used to name the new economic system - a combination of quickly growing economies of China and India which attract basic hopes in overcoming the global economic crisis. In 2009, these countries demonstrated a convincing growth rate of their GDPs: in China it was up 8.7% and in India it rose 6.7%. Their outlook for 2010 is even rosier - China is expected to add 10.1% (according to the forecast released by Merril Lynch) and India 7% (predicted by the IMF experts). Taking into account that the most optimistic 2010 forecast for the United States says its GDP will grow by 2.5%, in Japan by 0.9%, and in the European Union by 0.6% (according to the UN experts), Chindia may really be viewed as the main and also possibly unique and reliable generator of consumer demand capable to keep afloat luxury markets and first of all the diamond market.
 
For the time being, about one percent of Chinese and Indian nationals derive incomes equal to or greater than the average incomes of the U.S. residents. But considering their huge population - just according to official statistics China has 1.3 billion people and India 1.2 billion – the absolute number of those potentially capable to buy luxury goods in these countries comes nearer to 250 million people. And if we take into account the significant span of the “informal sector” then this figure will most likely exceed 250 million, which is already comparable with the population of the United States.
 
The number of official owners of billion-dollar fortunes in the end of 2009 was 130 in China and 52 in India which is also looking quite impressive (in the United States their number is 359). Experts greatly vary in estimating the number of million-dollar fortunes basically because of the problem with obtaining relevant data on the “informal sector” - Boston Consulting Group, for instance, estimates the number of Chinese millionaires as 450,000 at the end of 2009, while Hurun Report, a Shanghai-based agency, is inclined to estimate the number of “obvious and latent Chinese millionaires” as 800,000. Across India the data fluctuates within a range from 130,000 to 300,000 owners of million-dollar fortunes. If we are to consider the estimated cumulative number of million-dollar fortunes in Chindia including the “informal sector,” it is necessary to recognize that their number has already surpassed one million (in the United States it runs around four million). The qualitative changes taking place in the wealthy population layer should also be taken into account: when in 1999 there was released the first list of the richest people in China, the “entrance fee” to the top-fifty reached $6 million. Now the bottom rating permitting to get on the first-thousand-richest-Chinese list is $150 million - from 2004 to 2009 the average income of the richest 10 percent surged by 255% (according to an estimate of the Credit Suisse experts). Since 2004, the saving rate in China decreased two times - from 24% to 12%.
 
Thus, it is possible to say that today in Chindia there is a potential client base basically capable to change the structure of the world diamond market in a significant way. According to a conservative forecast of De Beers published in the end of 2009, China’s share in the world consumption of polished diamonds will increase from the current 8% to 16% by 2016, and in India it will grow from 7% up to 11%. It is noteworthy that the share of the United States will be reduced down to 35% and that of Japan to 9%. Thus, Chindia + Japan will turn to be the main diamond market on this planet staving off the United States to the second place. The latest events prove that the forecast concerning the redistribution of market shares can come true more quickly than expected: China occupied the second place by the results of 2009 having outstripped Japan – according to the Shanghai Diamond Exchange, its polished imports shot up 30.7% reaching a record of $699 million. Japan’s import dropped by 20% down to $619.2 million. The U.S. net polished import fell by 43%.
 
But the point is not only in redistributing market shares but in Chindia’s ability to compensate the falling demand for diamonds in the world within the nearest two or three years. If the forecast for 2010 concerning the GDP dynamics in the United States, Japan and Eurozone is true and the condition of labour market in these countries will remain at the current level or will change slightly while the saving rate will continue to grow, then there is no use to expect there any essential increase in demand. At the same time, the GIA analysts suggest that 2010 will see a growth of rough supply more than 1.5 times in comparison with 2009 reaching up to $9 billion while the successful January sales by DTC and ALROSA give grounds to give it a higher correction. If with such kind of activity on the rough market the world’s polished consumption will remain at its current level, then the threat of a speculative bubble will become direct and obvious. To set off these risks polished consumption in Chindia should increase essentially and it would be ideal to double it in the course of one year.
 
Such a favorable development of the situation is theoretically possible, if India and China will at least maintain the rates of development in their economies. In 2007, at China’s GDP growth rate of 11% combined with a wise tax policy polished imports via the Shanghai Diamond Exchange already increased by more than 108%. So far, events are following favorable scenarios: according to the State Information Centre affiliated to the National Development and Reform Commission of the People’s Republic of China, the country’s GDP will increase by 11.5% in the first quarter of 2010 compared to one year ago, whereas consumer spending will go up by 17.8% on the average. However, on a backdrop of optimistic forecasts there are fresh warnings that the Chinese economy has already been seriously overheated.
 
In 2009, China’s export fell by 16% and the Chinese regulator made up these losses stimulating internal demand first of all by means of cheap credits (which reached $1.4 trillion in 2009, almost twice as in 2008). According to the Arbat Capital Analyst Group, by the end of 2009 money supply in China reached $8.8 trillion. China’s GDP is $4.3 trillion, which means that the monetization level in the Chinese economy is 205% and this is 3.5 times higher than in the United States, so the threat of a hyperinflation is quite real. Besides, the yuan is strongly tied to the dollar at an artificially low level forcing to additionally increase money supply in order to preserve the underestimated rate of yuan against the currencies of China’s major trade partners. Owing to the superfluous crediting the total liabilities of all economic entities in China has grown, according to McKinsey, up to 160% (in India - up to 130%). The avalanche of soft loans reduces the reliability of China’s bank system - according to the UBS analysts, the amount of bad debts in China can reach $400 billion in the nearest 3-5 years.
 
One more problem is that the Chinese stock market is protected from global players and has no chance to estimate companies’ capitalization adequately: the difference in the cost of same companies quoted at Hong Kong and Shanghai stock exchanges can reach 90%. This distorts the picture of the Chinese economy essentially and does not allow suggesting its unbiased outlooks.
 
There is also a serious misbalance between the interrelated markets. Thus, in 2008-2009 there was almost a 200-percent rise in the Chinese park of cars, but at the same time the consumption of gasoline practically did not increase. Administrative restrictions on moving capitals lead to large-scale speculative games with raw materials and commodity assets which bring about price growth disconnected from final consumption. Rough and polished diamonds imported by Chinese dealers under extremely favorable tax conditions may easily become a “victim” of such gambling and fuel further bubbles never reaching their end users.
 
As compared to China, India is weathering out the crisis in a better way, though its growth rates are less impressive. This is because the Indian economy has initially been more oriented towards the home market: before the crisis the country’s private internal consumption amounted to 57% of India’s GDP (in China it was no more than 35%). In 2008, China’s export was 35% of the country’s GDP, while in India it was 24%. Such an economic pattern allows India to use much more modest amounts of state stimulation (this year it will make 3% of its GDP, while in China 6%) and not to overstrain its bank system. It is possible to say that “bubbles” first of all generated by superfluous crediting and very distinct in China are not so obvious in India. In spite of this, last January the Reserve Bank of India increased the level of reservation for Indian banks by 75 basis points, from 5% to 5.75% per annum, and also posted a higher estimate for inflation rates in the current fiscal year raising it from 6.5 % to 8.5%. This decision has been appraised by experts as a serious step towards increasing the cost of credits with the purpose to avoid overheating the economy.
 
If China will manage to timely extinguish the signs of overheated economy Chindia’s consumer potential will be successfully realized and the condition of the diamond pipeline will be harmonized. The culture of diamond consumption in India exists for a long time, while in China it is quickly and successfully developing, and there are a number of specific social and demographic features which create new opportunities. In particular, the gender misbalance in today's China is extremely high: in some provinces for every 130 born boys there happen only 100 born girls. Such a shortage of brides certainly will require a more serious and responsible approach to courtship, engagement and marriage. And, accordingly, the eternal symbol of love receives additional chances.
 
In the field of diamond cutting there is already an ongoing competition between China and India which most likely will amplify in time. It is not excluded, that in the near future Chinese and Indian diamantaires will undertake most serious efforts to organize direct supplies of rough diamonds from Africa and Russia which will bring essential changes to the pattern of the world diamond market. And still the main mission of Chindia today consists in making up for the falling polished demand in the traditional centers of consumption. There is just no one else around to tackle this problem.

Sergey Goryainov, Rough&Polished