From humble beginnings in the jewellery trade, Hong Kong has grown to become a significant centre for diamond distribution. Its jewellers, supported by a solid manufacturing base in the mainland, are some of the most efficient operators in the world. Since World War II, Hong Kong has become increasingly prominent as a diamond centre, says Lawrence Ma Yung-yi, chairman of the Diamond Federation of Hong Kong, China. He is also executive director of the Lee Heng Diamond Group. 'After World War II, Hong Kong was in a unique position - it was a free port, there was no sales tax, and the banking industry was developed,' Mr Ma says. 'These qualities made Hong Kong ideal as a wholesale centre, and local companies often served as middlemen.' Hong Kong jewellery manufacturing, including polishing and casting, began in the 1980s. Previously, the main industry activity here was polishing. While experimentation with manufacturing proceeded, local companies began expanding north and establishing factories in the mainland. China has the second biggest market in terms of polishers (India leads in this aspect), with between 18,000 and 20,000 skilled artisans. This level of growth has been achieved in about 18 years, an indication of the industry's pace of growth. Other polishing centres are New York, Tel Aviv and Antwerp. India tends to attract lower-quality stones for polishing, but is moving into the higher end, employing advanced equipment and a cheap labour force. Israel is equated with high-cost labour, but its polishers are highly trained and innovative in the use of technology; cutters squeeze the largest yields from rough stones. Belgium remains the world's biggest trading centre. Most of the diamonds are re-exported, and only a small percentage is retained for polishing. Antwerp specialises in larger stones of one carat and above. Many believe New York has the most skilled polishers, working with valuable stones of two carats and above. Members of Hong Kong's Diamond Federation are classified in three categories: polishers and manufacturers; importers and wholesalers, and jewellers/retailers. The global industry sees the Hong Kong diamond categories as the key to Southeast Asian markets. Mr Ma says Hong Kong enjoys a good reputation; few diamonds are sold by letters of credit and most of the transactions are through open credit, of even up to 180 days. Diamonds are often imported into Hong Kong for local sale, setting and re-sale. Owners find it convenient to send the rough stones to the mainland for polishing, and bring them back to Hong Kong for sorting. Some local companies have established offices in China where diamonds can be sold after sorting. Mr Ma says Hong Kong's future role in the jewellery industry will be that of a distribution centre for diamonds cut, polished and sorted in the mainland. Already, about 70 per cent of rough stones imported into Hong Kong are destined for China. Mr Ma says the entire process is evolving - from mining to wholesale to manufacturing - and traditional patterns are collapsing. He predicts the biggest squeeze will be on the wholesaler who offers the least in value-addition. Polishers, manufacturers and distributors will remain strong as vertical integration increases. The establishment of the Shanghai Diamond Exchange in October 2000 does not unduly worry Mr Ma. He sees it as complementary to Hong Kong's exchange, pointing out that Shanghai has the densely populated Huadong area to service, while Hong Kong can cater to the Guangdong area. 'For the Chinese government, Shanghai is a testing ground for a working system without VAT taxes, and it should facilitate the development of a regulated diamond industry in the mainland.' The mainland market potential is enormous, and there has been tremendous growth, as much as 20 to 25 per cent per annum, especially in the big cities. 'The number of stores selling diamond jewellery is increasing, and the market is following the country's economic growth,' Mr Ma says. In general, 2000 was a good year for business, followed by a bad 2001. Mr Ma believes 2002 will show an improvement. An ethical issue that has dogged the diamond industry over the past years is 'conflict' diamonds. These are stones that come from war-torn countries Angola, Congo and Sierra Leone. Diamonds from these states are often laundered through neighbouring countries, then exported to cutting and export centres. Mr Ma believes conflict diamonds are no longer as big a concern as they once were, especially now that a ceasefire has been signed in Angola, ending years of bloody civil war. He added that the Hong Kong industry is supportive of the Kimberley Process, a certification scheme established by the World Diamond Council to track rough diamonds and ensure they are not imported from conflict regions. Despite a global economic downturn and the challenges of ethical considerations, the market for diamonds has remained relatively buoyant. The mystique and lure of these bits of glittering carbon continue to sustain the jewellery industry.