The rise of China’s middle-class is helping support demand for gold in the country. China, the largest producer of gold, is set to become the biggest consumer of the metal in 2012, with a significant proportion of luxury purchases in China veering towards gold accessories, bought by middle-class aspirational consumers.

By 2020, 25% of China’s population is expected to be middle-class, creating great consumption demand. Diamond studded luxury items and gold watches are seeing `blow-out like demand’ from wealthy shoppers in China, who are snapping up these expensive accessories to make a fashion statement, give as business gifts or just collect.

What also augurs well this year is that middle-class wealth is expected to spread to 600 million people in third-tier Chinese cities, with a sizeable percentage investing in gold or buying gold jewellery.

For a country whose gold production in the first four months of 2012 reached 109.6 tonnes, up 6.13% from the same period last year, passion for the yellow metal has scaled new heights.

Total retail sales of gold, silver and jewellery in China amounted to $2.82 billion in May, up 18.2% compared to the same period last year, according to the National Bureau of Statistics of China. Accumulative retail sales of the segment in the first five months of 2012 reached $14.6 billion, up 16.1% compared to the same period last year.

In May, the country’s overall retail sales of consumer goods including gold, silver and jewellery totalled $262 billion, up 13.8% year-on-year at nominal growth rates. The real growth rate was 11%, data showed.

The jewellery sector in China has become a hot spot fuelled by surging investment demand for gold and precious stones. Jewellery retailers registered a 42% increase in sales last year, driven by consumers’ taste for gold and gemstone-encrusted jewellery. Reports indicate that these jewellers are looking beyond traditional markets, eager to dig into the pockets of the newly rich middle-class in smaller cities.

For some time now, the country’s growing middle-class has been pursuing a quality of lifestyle that includes appreciation for exquisite fine jewellery. And, retail jewellery chains are expanding to smaller cities and districts to keep up with demand.

Laofengxiang, which had over 2,015 outlets nationwide by the end of 2011, heavily relied on franchises and distributors in its race to gain market share. The Shanghai based jewellery brand, raked in 21.1 billion yuan ($3.31 billion) in 2011, with a total profit of 911 million yuan, according to a recent statement filed at the Shanghai Stock Exchange.

Similarly, Chow Tai Fook, which holds a dominant market share in Greater China’s jewellery retail business, established a network of more than 1,500 jewellery and watch points of sale. The name is considered equivalent to Tiffany & Company or Cartier. The firm recently launched an initial public offering (IPO) in Hong Kong that raised $2 billion to fund future growth and expansion.

Emperor Watch and Jewellery is another high-end watch and jewellery retailer in the region. With 82 self-operated shops, it derives 82% of sales from Hong Kong, 11% from China and 7% from Macau. A recent report by CLSA, an independent brokerage and investment group, notes that the company is in a high growth phase, delivering a 41% net profit CAGR since 2007.

Though Piaget’s jewellery is among the most popular in China, and Bulgari has a huge presence in China as well with 20 boutiques on the mainland and several others in Hong Kong, the latter’s jewellery sales in the country jumped 76% in 2011. The luxe brand is to hold a retrospective exhibition to mark its 125th anniversary in Beijing later this month.

Several European and American luxury brands such as Cartier and Tiffany have established mature markets in first-tier Chinese cities, but domestic brands such as Laofengxiang and Laomiao, as well as Hong Kong-based Chow Sang Sang and Chow Tai Fook, dominate second-tier cities.

Smaller jewellery brands are also set to vie for market share in the third and fourth-tier cities, according to Liu Jianhua, deputy secretary of the Diamond Division of the Gems and Jewellery Trade Association of China.

He pointed out that China’s jewellery retail market has been upbeat over the past two years, with total retail sales surging 40% year on year from $39 million in 2010 to $60 million in 2011.

Another indication of the citizens’ passion for gold jewellery and gems is the Hong Kong Jewellery and Gem Fair set to open on June 21, which is 14% bigger in exhibition space this year. As the income of Chinese citizens continues to rise, analysts say a significant market will be created for gold.

Luxury brands cannot ignore the preferences of Chinese buyers any more, with several under pressure to open more retail outlets in China. For instance, currently, Hermes has 20 shops in China, fewer than half of the number of shops it has in Japan. Chanel has only eight boutiques in China. There are more than 50 in Japan.

The traditional desirability for gold has ensured that even Montblanc watches and writing instruments, that contain gold, have turned out to be best sellers in China.

According to CLSA, mainland Chinese consumers are the single biggest group of tax-free shoppers in the world. China’s wealthy “maintain their luxury goods budget at 23% to 25% of spending. It was the country’s rising middle class that largely drove a 46% hike in jewellery sales last year,” the CLSA Asia-Pacific Markets report, titled `Dipped in Gold 2012′ has points out.

The report notes that China’s economic slowdown will not greatly impact spending on luxury goods, demand for which is set to expand by 24% this year. By 2015, the country’s appetite for gold bars, coins and other gold-backed products will have risen to new heights. Since most middle class Chinese consumers consider themselves on their way to riches, luxury spending on gold is expected to help buoy demand for the precious metal.

iPad Version: Picture – An employee arranges gold jewellery in the counter as her arm is reflected in the mirror at a gold shop in Wuhan: REUTERS/Stringer China