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Cablegate: Ruby Trade in China: Opaque at Best

VZCZCXRO2903
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #4631/01 3572306
ZNR UUUUU ZZH
P 222306Z DEC 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 1534
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHGO/AMEMBASSY RANGOON 4743
RUEHBK/AMEMBASSY BANGKOK 6551
RUEHHI/AMEMBASSY HANOI 3780

UNCLAS SECTION 01 OF 05 BEIJING 004631

STATE PASS TO USTR

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ETRD EFIN ECON EMIN PGOV PREL CN BM

SUBJECT: Ruby Trade in China: Opaque at Best

REF: A) STATE 127059

THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET
DISTRIBUTION. PLEASE HANDLE ACCORDINGLY.

1. (SBU) This is a preliminary response to REF A request for
information on the ruby trade in China.

SUMMARY: Burmese rubies apparently are entering China primarily via
"walk across" trade at the Burma-China border as well as through
other intermediaries, primarily Thailand. The ruby trade is lightly
regulated, if at all, by the Chinese government, documentation of
the authenticity of rubies sold in China is optional, and origin
testing for rubies is not widely used. Trade volume numbers are not
readily available. MOFCOM reluctance to speak to embassy on this
issue, as well as preliminary information gathered, suggests there
would be significant challenges to establishing a reliable and
verifiable chain of custody for rubies in China.END SUMMARY.

2. (SBU) In response to STATE 127059, AmEmbassy Beijing officers
interviewed, over the period of December 12 to December 19, local
ruby sellers, ranging from small vendors to high-end jewelry shops,
industry association representatives, PRC government officials, and
gem experts to gather information on the ruby trade detailed below.
ConGens Chengdu and Guangzhou also contributed substantially to this
report. Information from AmEmbassy Rangoon is also included to
provide supporting context.

Import Sources and Origin of Rubies
-----------------------------------

3. (SBU) Vice-Secretary-General of the Gems and Jewelry Trade
Association of China (GAC), Yu Xiaojin, and the Vice-Director of the
National Gemstone Testing Center of China (NGTC), Ke Jie, told
emboffs that most of the rubies imported into China come from
Thailand. Neither was willing to venture an estimate of total
import volumes of rubies, besides saying that the market for rubies
in China is "very small." In addition, ConGen Guangzhou reported
that a manager at the Guangdong Provincial Gem and Precious Metal
Testing Centre as well as the owners of two jewelry companies
operating in Guangzhou estimate that 90 percent of colored gems
imported into China are from Thailand. Again, the sources were not
able to put a number on ruby imports into China. Mr. Yu also noted
that that most of the rubies imported into China are not accompanied
by certificates of origin, so it is difficult to say conclusively
whether rubies are mined in Thailand, for example, or simply cut and
polished there.

4. (SBU) Emboffs' sampling of five small retail jewelry shops in
Beijing showed that rubies sold in the local market are tagged as
Burmese, Vietnamese, Thai, and Sri Lankan. Amembassy Rangoon notes
that gems and jade "walk" across the Burmese border into China and
Thailand, but says that there is no way to estimate how many move
annually in this way. Amembassy Rangoon also advises that there are
indications that usually lesser quality stones are walked across the
border, and high quality stones are seized inside Burma by the
Government of Burma and sold at official GOB auctions that take
place several times per year. (Note: Embassy Rangoon is clearly
better placed to comment on the other side of the trade, we share
this information here only to help put the Chinese information in
context. End note.) One local Beijing vendor even acknowledged that
the rubies in his store were purchased at a Burmese auction and
carried into China's Yunnan province by the shop owner without
passing through any customs unit or administrative body. According
to ConGen Chengdu, conditions along the Burma-China border are well
suited to foster high levels of unregulated trade between the two
countries.
5. (SBU) ConGen Guangzhou also highlights an October 2008 online
article from Mizzima News stating that, "Despite the US embargo,
Burma's military junta earlier this month held a gem exhibition in
Rangoon, which generated more than USD 172 million. The sale drew
2648 gem merchants from nearly a dozen countries, including China,
Thailand, Japan and Canada." In addition, Guangzhou congenoffs
recall seeing a Burmese Times article from October 2008 claiming
that of the 2,648 gem merchants at the gem exhibition, 2,200 were
Chinese.

Chain of Custody - Report from ConGen Chengdu
---------------------------------------------

6. (SBU) ConGen Chengdu advises that shop workers in the free trade
zone on the Burma-China border near the Chinese town of Ruili say
that nearly all the precious stones from Burma sold there first go
to the Guangzhou area in the Chinese province of Guangdong for
processing and then come back to Ruili for sale. (Note: Processing

BEIJING 00004631 002 OF 005


refers to designing the setting for the gem and completing the piece
of jewelry. It does not include cutting and polishing of the stone.
End note.) Shop owners in Ruili say that many Chinese come to the
border to buy gemstone jewelry so they can feel more assured that
they are not getting fake gems. Even customers from Guangzhou
travel to Ruili to buy Burmese stones that just came back from
polishing in Guangzhou. ConGen Chengdu speculates that such buyers
-- who arrive by bus -- are tourists, as business owners and
industry insiders might know that the stones can be purchased in
Guangzhou and that the trip to Ruili is unnecessary. ( Note:
interviewees in Ruili did not specify a specific pattern for rubies,
but referred to all colored gemstones. End note.)

Chain of Custody - Report from ConGen Guangzhou
--------------------------------------------- --
7. (SBU) Like ConGen Chengdu, ConGen Guangzhou also reports that
many gems go to Guangzhou for processing. When asked by Congenoffs
about how colored gems arrived at Guangzhou processing centers, the
processing industry contacts said they were not sure, as the
shipping arrangements and customs clearances were usually handled by
the suppliers. The manager of the Guangdong Provincial Gem and
Precious Metal Testing Centre said rubies must be declared to
customs and duties must be paid in China. Mr. Li Chaoran, Executive
Vice Chair of the GZ Jewelry Association, told Congenoffs that
normally the rubies were carried by suitcase, but the buyers almost
never ask how the rubies are imported, in order perhaps to avoid
learning they are stolen gems. (Note: Mr. Li would not specify
where the rubies are arriving from via suitcase).

8. (SBU) Guangzhou industry contacts also report that even if the
gems are originally from Burma, they are shipped first to Bangkok
for cutting and polishing, then sent to Guangzhou for processing.
These sources also advise that most rubies are tagged in the place
they are polished and cut as originating there. Therefore, it is
difficult from here to verify that the estimated 90 percent of
rubies coming into China from Thailand are actually mined in
Thailand. (Comment: Some portion of Thai-tagged gems that enter the
Chinese market are likely Burmese. End comment.) Guangzhou contacts
said that technically there is no way to tell where rubies are from,
and in practice, suppliers in Thailand label origin only for a few
high-quality, large gems. These contacts say it is not worth it to
mark or certify the origins of the far more numerous, small gems.

9. (SBU) A ruby vendor in Guangzhou also added that there are many
hai uppies located in Guangzhou that are able to cut and polish
the rubies there. The vendor said that sellers in the Guangzhou
processing centers get many of their gems from Bangkok via Hong
Kong, which helps them avoid duties and taxes. The contact did not
elaborate on the customs requirements for importing rubies into
China.

Processing Centers Outside Guangzhou
------------------------------------

10. (SBU) ConGen Guangzhou reports that industry representatives in
the area say there are two other major processing centers in
Guangdong Province -- Shenzhen, which primarily serves the domestic
market, and Panyu, which primarily serves the international market.
These contacts said many of the gems processed in Shenzhen are
shipped to department stores in northern China.

11. (SBU) According to Mr. Yu at the GAC, another major processing
center is located in the Chinese Province of Guangxi. However,
industry reports Mr. Yu has seen indicate that rubies polished in
Guangxi come from Vietnam and Thailand and are of lesser quality
than those from Burma.

Certification of Authenticity and Proof of Origin
--------------------------------------------- ----

12. (SBU) When asked by emboffs to show certificates of origin for
rubies on display, one Beijing vendor claiming to sell only Burmese
rubies said he did not have certificates of origin for his
merchandise, but averred that the origin of the rubies could be
determined by examining the gems with the naked eye. He claimed
that those with the deep "pigeon's blood" red color or those rubies
that have a visible white colored star inside the gem are the
supposed marks of a natural Burmese ruby. (Note: According to
industry experts in Beijing, unless you are a gemologist, it is very
difficult to tell Burmese rubies and jade from that of other
countries. End note.) Mr. Yu from the GAC stated that most
customers in China do not ask about the origin of the rubies they
buy, so certificates of origin are not sought by ruby dealers. In
addition, a Taiwanese industry contact who owns a jewelry processing
factory in Fuzhou says that when his company buys rubies, he only

BEIJING 00004631 003 OF 005


looks at the quality and not the source of the gem. However, some
local vendors in Beijing agree that Burmese rubies are the best
quality.

13. (SBU) Despite not having certificates on hand to prove origin,
many Chinese ruby dealers obtain a "certificate of authenticity"
issued in China for the gems they sell in their shops. These
domestically-issued certificates state that the gem is authentic,
give the color and size of the gem, and list serial numbers to
identify each gem. The origin of the stone is not listed on the
domestic certificates of authenticity. According to Mr. Yu, 70
percent of these domestic certificates are issued by the NGTC, which
falls under the authority of the Chinese Ministry of Land and
Resources (MLR), but is under direct supervision of the PRC
Administration of Quality, Supervision, Inspection, and Quarantine
(AQSIQ). (Note: MLR and AQSIQ are bureaucratically separate
entities. End note.)

14. (SBU) Another laboratory that is widely used in China is the
National Jewelry Quality Supervision and Inspection Center.
Vice-Director of the NGTC, Ke Jie, told us there are less than 100
labs in China that can offer legitimate authentication certificates
for colored gems, and all of these labs are supposed to be monitored
by the AQSIQ. However, when ConGen Guangzhou spoke to the manager of
the Guangdong Provincial Gem and Precious Metal Testing Centre, he
stated that his lab is "affiliated" with the government. According
to this contact, each province has its own testing centers that are
not government-owned, which he described as "service providers, or
trustees, that provide objectivity for the testing process." Asked
if his lab was regulated by AQSIQ, he said it was affiliated with
Guangdong Technical Supervision Bureau of Guangdong Provincial
Government. He added that the testing market is competitive and
vendors and suppliers can choose different testing centers.

15. (SBU) The domestically-produced certificates generally cost RMB
50, according to Vice-Director Ke, and the revenue generated from
the cost of certification supports the operating expenses of the
labs, "much like nonprofits in the U.S." Ke said domestic
certificates are not required in order to sell rubies in China, but
she believes it is better for business to obtain these certificates,
as customers generally ask about them.

16. (SBU) In Beijing, every vendor Emboffs visited produced a
domestic certificate of authenticity for each of their rubies on
display, but each vendor showed a certificate from a different
Chinese institution, and one of the five vendors had a certificate
issued by the NGTC. Vice-Director Ke estimates that 70 percent of
the gems the NGTC certifies per year are diamonds, 20 percent are
jade, and the remaining 10 percent are colored gems. She would not
estimate how many rubies the NGTC certifies each year. Ke noted
that the NGTC does not typically perform gem origin testing, but can
do it in special circumstances when the gem in question is
potentially of great value.

17. (SBU) In addition to the above described domestic certificates,
some higher-end Beijing stores have international certificates
ostensibly issued by GemResearch SwissLab (GRS). These certificates
allegedly verify the authenticity of their rubies. (Note: The
closest GRS lab is located in Thailand. End note.) The GRS
certificates Emboffs saw in local high-end stores did not show
origin. However, the Geological Museum of China in Beijing does have
GRS certificates showing the probable origin of some of the stones
on display. Vice Secretary-General Yu, who also works at the
Geological Museum of China, confirmed that when he asks for a GRS
certificate for a museum stone, he requests GRS include the probable
origin of the gem on the certificate, for which GRS laboratories
test. He went on to add that most Chinese ruby dealers request that
the origin information not be included on GRS certificates, although
it does not cost any additional amount to include this information.
(Comment: In the case of rubies, we would speculate this is done to
allow dealers to misrepresent gems as the more highly-valued
"Burmese rubies." End comment.)

PRC Government Involvement
--------------------------

18. (SBU) Aside from the testing centers' affiliation with
government agencies, it is difficult to obtain information about
Chinese government involvement with the ruby industry. For example,
when asked about reporting rubies to Customs, some vendors in
Beijing said their stores do not need to register the rubies with
Customs when the rubies are imported. Some avoided the question
entirely. Contacts in the industry indicated that the market for
rubies in China is so small that the government simply does not care
about regulating it. Mr. Yu from the GAC speculated that 95 percent

BEIJING 00004631 004 OF 005


of the jewelry market in China is jade and jadeite, and that rubies
only make up approximately 3 percent of the remaining 5 percent of
the overall market.

19. (SBU) Ms. Dang Yingjie, Director of Bilateral Relations for
China's General Administration of Customs, told Embassy Customs
Officer that China's Free Trade Agreement with ASEAN requires that
importers pay a 5 percent tariff for rubies coming into China. As
of January 1, 2009, however, this tariff will be eliminated.
According to the law, all gems should be declared at the place of
entry into China, with the duty payable online or in cash. Ms. Dang
said that the revenue from this duty goes to the PRC central
government, but gave no further information about what specific
agencies receive the funds. Ms. Dang Yingjie stated that the
Chinese government does not tax anything beyond the 5 percent (soon
to expire) stipulated by the ASEAN FTA.

20. (SBU) Exploration of the PRC General Administration of Customs
website, www.customs.gov.cn, revealed that no import statistics for
jewelry is available, and jewelry is not on the list of Major
Commodities Imported into China. However, 2006, 2007 and 2008
export statistics available on the website show that the list of
Major Commodities Exported out of China has a category called
"Precious Metals and Jewelry." It shows that the aggregate export
amount for this category in November 2006 was 678,264 kilograms,
which was an 8.2 percent increase from November 2005. In November
2007, the aggregate export amount of "Precious Metals and Jewelry"
was 714,865 kilograms, an increase of 5.4 percent from November
2006. As of November 2008, 599,698 kilograms was exported, which
the website estimates is a drop of 16.1 percent from November 2007.
Export countries are not listed on the website. This category does
not break out diamonds, high-value pearls, or any other gems.

21. (SBU) Rubies are not listed on AQSIQ's "Catalogue of Commodities
Subject to Inspection and Quarantine," but diamonds and high-value
pearls are.

MOFCOM Initial Response Unfavorable
-----------------------------------

22. (SBU) On November 4, Emboffs faxed a summary of the 2008 Block
Burmese JADE Act to Mr. Du Shuang at MOFCOM's U.S. Desk. Embassy
also sought comments on the act from Mr. Wang Xu, Director of the
U.S. Desk. MOFCOM did not respond to several follow-up phone calls
and emails. On December 17, a local Economic Specialist in the
Economic Section finally reached Mr. Wang on the phone. Mr. Wang
advised he had already forwarded the JADE Act information to the
"appropriate MOFCOM offices," in particular to MOFCOM's WTO
Department. He noted that the WTO department at MOFCOM believed the
JADE Act was WTO non-compliant. Embassy will follow up further with
MOFCOM.

Export Markets
--------------

23. (SBU) According to Mr. Yu at the GAC, rubies finished in China
tend to stay in the Chinese market. He notes that Thailand has a
much bigger export market because their polishing, cutting, and
processing are more advanced. When asked to describe their
clientele, one small Beijing ruby vendor said that mostly Americans
look for Burmese rubies in China in order to take the rubies to the
U.S. and sell them at a much higher price. In addition, according
to ConGen Guangzhou industry contacts, U.S. and European companies
are the two biggest customers at the Panyu processing center.

Challenges to Establishing Chain of Custody for Rubies
--------------------------------------------- ---------

24. (SBU) Emboffs also met with the Director of the Division of
Rules of Origin at the PRC General Administration of Quality,
Supervision, Inspection, and Quarantine (AQSIQ), Kang Yuyan, to
learn more about how China implements the Kimberley Process
Certification Scheme (KCPS). AQSIQ implements KCPS in China. Most
of the work is done by 26 local China Inspection and Quarantine
Offices, or "CIQs," located throughout the country, which do on-site
inspections of shipments of rough diamonds. Kang said each
inspection includes a thorough review of the documentation filed by
the exporting country and verification that the package of rough
stones matches in detail an accompanying KP certificate. CIQs do
not have instruments to check the origin of stones, nor is it
required to do this in order to issue a PRC Release Note for the
package of rough diamonds. China does issue official Certificates
of Origin, but does so by inspecting the shipment for tampering and
the documents accompanying the shipment. Ms. Kang noted that since
China only trades rough diamonds with countries that participate in

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the Kimberley Process, the documents from the exporting countries
can be trusted. (Note: If the CIQs, responsible for the enforcement
of the Kimberley Process in China, do not have instruments or
expertise to test the origins of rough diamonds, it is likely that
even if it wanted to, the Chinese government would not be able to
implement origin testing of gems at customs sites. The NGTC,
however, does have the limited ability to perform origin tests. End
note.)

25. (SBU) When asked about the possibilities to establish a paper
trail for rubies entering and leaving China, Ms. Kang responded that
the Kimberley Process was very costly to implement in China. The
importers and exporters of rough diamonds pay administrative fees
for the applications and certificates, but she said the Chinese
government shoulders a majority of the costs associated with the
process.

26. (SBU) Ms. Kang also pointed out that there is no international
structure to facilitate Chinese regulation of the ruby trade. She
averred that it would probably require a UN resolution or a similar
mandate to build a Kimberley Process-like structure to effectively
regulate the ruby trade.

RANDT

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