China won’t be the ruination of the world pearl market.

So says He Nai Hua, general manager of China’s National Pearl, Diamond, Gem and Jewelry Import and Export Corp. His comment comes in reaction to growing concern about the huge quantity of freshwater and rising number of akoya pearls produced in China.

He conservatively estimates China produced 308 metric tons of pearls in 1994 – more than double Japanese estimates of Chinese output but 25% below some other estimates. (By contrast, Japan produces 15 metric tons of pearls annually.) Akoyas – the vast majority of them under 7mm – accounted for eight tons of China’s production.

China’s pearls are improving in quality and are a lower-cost alternative to Japanese pearls, says He. In the U.S., for example, some pearl dealers have absorbed much of a 25% increase in the yen/dollar exchange rate that affected Japanese akoya prices last year, then compensated with higher margins still available on Chinese freshwater pearls.

But two primary concerns remain. One is falling prices, which discourage dealers. “It’s very difficult to hold much inventory of Chinese pearls,” says Terry D’Elia of B. D’Elia and Sons, New York, N.Y., a leading importer. “The price keeps dropping, reducing the value of our inventory every time it happens.”

Oversupply is the second concern. As pearl cultivation success rates improve, Chinese akoya production is expected to rise 25% to 10 tons this year and to 20 tons within five years, says He. Oversupply could be a problem in the short term because production has increased far beyond the government’s ability to control it, says He.

But domestic demand eventually will claim most Chinese pearls, says He. “Our economy is growing quickly and many more people now have the means to buy jewelry products. Chinese consumers aren’t very knowledgeable about pearls right now. But if we mount a campaign to advertise and educate them, they will buy better quality pearls.”

Growth industry: Chinese freshwater pearl production got off to a slow start during the Cultural Revolution of the 1960s. But it took off in the next decade when technicians learned how to produce nuclei in mass numbers, leading to an explosion in the small “rice krispie” pearl market. Three years ago, technicians introduced semiround freshwater pearls suitable as low-cost substitutes for smaller akoyas.

Since then, the government has turned over full control of production and marketing to private farmers, enticing many newcomers and causing production to run wild.

The government tried to regain some control through export regulations. Pearl farmers were required to sell their export crops to the government at a set price and to pay a tax on exports that don’t go through official channels. But this resulted in rampant smuggling. Up to two-thirds of China’s pearl production suited for jewelry use is smuggled out of the country, usually to Hong Kong.

Now the government is developing a different approach: buying large shares in the bigger, better-organized freshwater and akoya farms. These ventures then are expected to acquire some of the smaller farms and receive exclusive market deals for all or a majority of their pearl production. Even if this doesn’t hold down production, says He, the market will do the job eventually. “If they overproduce and prices go down too far, a lot of farms will go bankrupt, causing production to fall to marketable levels.”

Quality concerns: Japanese akoya producers have accused the Chinese of undermining the market for their products with low-quality pearls. He admits there’s a problem, saying it’s no more possible for China to control pearl quality than pearl quantity. But he also accuses the Japanese of putting substandard pearls onto the market and blaming the Chinese for them.

“What we need is to cooperate in solving these problems,” he told dealers at the first Pearl Summit, held in Kobe, Japan, in October.

Quality was a hot topic at the summit. Dealers from the U.S. and Europe told the Japanese that poor-quality akoyas have begun to undermine consumer confidence in pearls. Hans Schoeffel, a top importer from Germany, described the quality decline as “very demoralizing” and called on Japan’s “immensely wealthy cartel” of exporters to solve the problem.

According to He, the only way to achieve a minimum quality standard is international cooperation. But there’s little evidence that such cooperation exists. Dealers of better-quality pearls say those who complain about low-quality pearls simply don’t want to pay the price for fine goods. Meanwhile, those who produce lower-quality pearls – including the Chinese – say Japanese dealers have abandoned the middle-class customers who built the market in favor of high prices and profits.