China Diamond Exchange Faces Multifaceted Challenge

The idea came from an Israeli billionaire. He had found refuge in Shanghai during World War II and wanted to give something back. His vision was to link the world’s fastest-growing diamond market to the biggest suppliers by building a global exchange for the gem in the city that had saved his life.

Shoul Eisenberg died before the project could take off. The Shanghai Diamond Exchange--which was supposed to be the first trading center in China operated as a joint venture with foreigners--opened in October without either the dreamer or his dollars. And now it will take more than an emotional bond to attract dealers who lust after the Chinese market but don’t want to pay the high taxes that selling precious stones here entails.

A visit to the exchange center, on the sixth floor of China’s tallest building,the Jin Mao Tower, says it all. There are spectacular views of the waterfront city along with spanking new office furniture, some still wrapped in plastic. There are signs for such services as customs, foreign exchange and appraisal, even banks, insurance companies and a security escort service. But no customers.

Officials explain that about 40 dealers, mostly domestic, have registered as members of the exchange. But that is far below the number needed to fill the three floors of vacant space or to turn Shanghai into one of the world’s leading diamond centers. Despite some low-key beating of the gong to mark the opening of the exchange by the Shanghai mayor, real trading is on hold, and no one knows for how long.

Industry people blame the lackluster response on China’s prohibitive tariff system. At more than 33%--including the basic tariff, a consumption tax and a value-added tax--the rate on sales of diamonds is the highest in the world.

“Our hardware is very nice, but the most important thing for us is to find a tariff system that meets international standards,” said Du Gongpu, secretary-general of the new exchange.

When and how that will happen is anyone’s guess. Even China’s coming membership in the World Trade Organization is unlikely to dramatically reduce the current fees because most of them are mandated by domestic policy.

For now, the exchange promises to slash taxes for trading partners who import diamonds for processing in China and then export them. But the same inflated fees apply if they try to sell the stones on the domestic market. That, however, defeats the purpose for potential participants who have their sights set on China’s burgeoning customer base.

Diamond sales in China soared 300% between 1993 and 1996--the fastest growth rate anywhere. At about $1 billion in 1997, this nation is the eighth-largest diamond market in the world. If Hong Kong and Taiwan are included in the picture, the ranking leaps to No. 3, after the United States and Japan.

This is especially impressive because gold has always been the luxury accessory of choice in China. But the nouveaux riches and even the not-so-rich have gravitated to the more expensive diamond in the last few years. Many observers credit the trend to popular De Beers ads that trumpet the sparkler as the new symbol of eternal love.

“Gold is so tacky. Everybody I know wants diamonds,” said Fu Yun, a 23-year-old nurse who just bought a rock worth about a third of a carat to wear during her wedding at the end of the month.

Most Chinese diamond lovers don’t really understand or follow the traditional Western ring etiquette. They rarely use solitaires as engagement rings, and they don’t pair the latter with wedding bands after marriage. But an attention-grabbing status symbol diamonds are, no matter how they are worn.

Research by De Beers, which mines and markets the majority of the world’s diamonds, shows that Shanghai is China’s diamond capital. Last year, the city bought $400 million worth. An estimated 21% of families in the city own some kind of diamond jewelry, the highest percentage in the country.

Nationwide, the growth rate in diamond sales has settled down to about 3% a year, but it is still significant considering the real number of buyers.

That’s what impressed Eisenberg, the late tycoon. A Munich-born Jew who fled from Germany to Shanghai while in his late teens, he built a business empire in the decades after World War II that spanned the globe. It included Israel Corp., Israel Chemicals and a partnership in the Israeli merchant marine fleet, Zim. In China, it was heavily invested in areas including the power sector and telecommunications.

In the early 1990s, Eisenberg was told that perhaps 5% of the Chinese population could afford diamonds. He was not impressed. Then he got a heads-up from Pan Guang, dean of the Center for Jewish Studies at the Shanghai Academy of Social Sciences.

“I asked him, ‘Do you know how many people live in China?’ ” Pan recalled. “When he heard 1.2 billion, he said, ‘Now, that’s huge.’ ”

According to a recent survey, an estimated 130 million urban Chinese women want to own diamonds. If 10% of them spent about $300 each, sales would total $3.9 billion.

After his conversation with Pan, Eisenberg immediately began plotting the Shanghai exchange. But in 1997, he died of a heart attack while attending a meeting in Beijing. The master plan had lost its godfather.

Yet despite a bitter family feud over his will and the eventual redistribution of his assets, the Eisenberg Group of Cos., now headed by his son, Erwin, remained committed to China and the exchange, according to company officials.

“Young Mr. Eisenberg saw it as a legacy of his late father,” Arie Ofri, senior advisor to Erwin Eisenberg, said by phone from his office in Tel Aviv. “Mr. Eisenberg Sr. felt a debt of gratitude to Shanghai and to China. Emotionally, he saw it as a second home. The exchange is another link in a very long history between the Eisenberg family and Shanghai.”

All the same, negotiations broke down last year. Although he preferred not to go into detail, Ofri said the Chinese side changed the terms of its partnership and diminished the active and equal role the Eisenbergs expected to play.

The way officials at the exchange explain it, the young Eisenberg did not exactly inherit his father’s way of doing business. According to the Chinese, he didn’t think that the timing was right, and they didn’t want to wait.

“Of course, we are disappointed because it was Mr. Eisenberg’s dying wish,” said Du, the exchange’s secretary-general. “We won’t forget old friends. But we also need to make new friends.”

But making new friends is the problem now that the main power broker has left the scene. A lot of foreign dealers who might have jumped on the bandwagon are adopting a wait-and-see policy. The disincentive of the steep tariff was only one of the many kinks the Eisenbergs had wanted to work out before deeming the exchange ready to open.

The Chinese continue to say they are holding the door open for their old friend. A few Hong Kong companies are reportedly the current minority partners.

An international presence was considered particularly necessary in this case because China is not a net producer of diamonds. Nearly 90% of what’s on the market is imported. Smuggling is a major problem--and the primary means of bypassing the severe tariff system.

“Without our efforts, this project would not be in the stage it is in,” Ofri said. “If they want us back based on the original understanding, I’m not sure we would say no.”