Hong Kong’s push to be a global gold trading hub has gained momentum amid the current gold frenzy and moves to open up more bullion storage facilities, as well as dedicated trading channels with the Chinese mainland for investors. Gaby Lin reports.

There’s no fever like gold fever, and pundits haven’t got a clue whether it will abate any time soon with spot gold prices skyrocketing to unprecedented highs.

The price of the precious metal broke through the $4,000-an-ounce mark for the first time early this month, as central banks and investors scrambled into vaults and exchanges worldwide in search of a safe haven amid geopolitical and economic uncertainties.

The London-based World Gold Council, which represents leading gold producers, saw physically backed gold exchange-traded funds (ETFs) around the globe record their largest-ever monthly inflow in September, with gold market trading volumes soaring 34 percent month-on-month, averaging $388 billion per day.

China’s domestic gold market has followed suit, with consumption of the metal reaching more than 505 tons in the first half of this year. Investors on the Chinese mainland — one of the world’s largest gold consumers and importers — were in a frantic rush for gold bars and coins as sales jumped nearly 24 percent year-on-year, outpacing those of jewelry for the first time, according to the China Gold Association.

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The frenzy has prodded Hong Kong to step up its bid to be a leading gold trading hub, serving as a gateway to international markets. In his fourth Policy Address, Hong Kong Chief Executive John Lee Ka-chiu laid out an ambitious set of initiatives to bolster the special administrative region’s gold trading infrastructure, pledging to further boost cross-boundary ties with the mainland.

As integration deepens, industry stakeholders say the SAR is poised to unlock new opportunities not only in facilitating transnational financial flows and luring global investment, but also in opening up fresh business avenues for investors and enterprises on the mainland and worldwide.

Trading channels

While investors and consumers in Hong Kong and on the mainland can access each other’s gold markets through a patchwork of existing channels, a dedicated, streamlined mutual-access pathway for cross-boundary gold trading is still lacking.

For bulk physical gold trading, two specialized channels launched in 2015 and 2017 by the Chinese Gold and Silver Exchange — the forerunner to the Hong Kong Gold Exchange (HKGX), which is the city’s sole exchange trading in physical gold and silver — are the main options for bullion buyers on both sides, including financial institutions, jewelry manufacturers, and refiners.

Mainland buyers can trade through certified intermediaries, with deliveries made at the Hong Kong exchange’s bonded warehouse in Qianhai, Shenzhen. Hong Kong purchasers, on the other hand, can trade on the Shanghai Gold Exchange (SGE) through the HKGX.

For paper gold products, the Stock Connect program — a mutual market access channel linking Hong Kong Exchanges and Clearing with the Shanghai and Shenzhen bourses — enables mainland and Hong Kong retail investors to buy and sell eligible gold-related stocks and ETFs listed on either side.

It has become even easier this year for Hong Kong and overseas investors seeking to enter the mainland gold market. In June, the SGE launched new gold contracts deliverable in Hong Kong on its international board, coinciding with the opening of its first offshore gold delivery vault in the SAR.

The milestone has sharply reduced transportation costs of deliveries, while allowing investors to settle transactions in offshore renminbi, significantly easing currency exchange curbs and minimizing exchange-rate risks.

Hong Kong Secretary for Financial Services and the Treasury Christopher Hui Ching-yu called the development a “key stride” in the internationalization of the country’s gold market, extending the global footprint of renminbi-denominated gold trading. Hong Kong’s role in the regional market has been further strengthened, he said.

Mainland investors, however, are still awaiting the unblocking of the southbound pipeline. The latest Policy Address spelled out Hong Kong’s aim to start a government-led central clearing system for gold transactions as part of preparations for more direct mutual market access with the mainland. The SGE will be invited to join the process.

HKGX Chairman Haywood Cheung Tak-hay believes the upcoming central clearing system will make it feasible for Hong Kong to introduce a dedicated channel, like the Stock Connect, for gold trading in the near future.

“Whether the channel operates in a closed-loop or open style, its establishment is crucial,” he said. “It represents the country’s recognition of Hong Kong’s gold trading market, and would elevate the city’s status as an international gold hub.”

As a free port, Hong Kong offers free foreign exchange flows along with an efficient rule of law, said Cheung. If the mainland gold market can open up further through mutual connectivity mechanisms with Hong Kong, he believes domestic and international institutional and retail investors would be willing to participate in gold trading in the SAR.

Lawmaker Robert Lee Wai-wang, who represents the financial services sector in the Legislative Council, told China Daily that Hong Kong’s plan to enhance its gold trading market is expected to make it easier for retail investors to participate in gold investments through ETFs and tokenized products.

Citing the Stock Connect, he predicts that more connect programs will follow, allowing mainland investors to make more direct gold and gold-related investments, and eligibility requirements may be lowered over time. However, in designing new mechanisms, several factors ought to be considered. “These developments must also consider investor protection, capital flowing through proper and compliant channels, as well as the long-term healthy and sustainable development of the gold industry.”

Hui had said earlier Hong Kong would prioritize over-the-counter (OTC) transactions — direct deals conducted outside formal exchanges — and build a credible gold trading ecosystem with the proposed clearing process. He expects some internationally standardized gold contracts to be cleared in Hong Kong first, adding that after the local market is set up, discussions with mainland regulators to explore greater integration would begin.

OTC transactions currently dominate international gold markets due to their advantages in efficiently reflecting market prices and offering flexible trading options. Gold trading volumes on the HKGX exceed HK$100 billion ($12.87 billion) per day at present, while OTC transactions in the city are estimated to be at least five times higher, according to Cheung.

Infrastructure boost

To further consolidate interconnections with the mainland, Hong Kong intends to build more gold storage facilities with a total storage capacity exceeding 2,000 tons within three years. Its designated precious metals warehouse, located in the restricted area of Hong Kong International Airport, can hold about 200 tons at present. “Having larger vaults is critical for gold delivery transactions,” Cheung said, noting that with more physical gold stored in Hong Kong, institutions may be willing to issue more related investment vehicles.

Larger storage capacity is also Hong Kong’s bargaining chip in luring more gold merchants to the city. The government is persuading traders to establish or expand refineries locally, and studying the feasibility of processing supplied materials on the mainland to produce refined gold, which would then be exported to the SAR for trading and delivery.

Some institutions have already shown interest in developing refineries, a government source familiar with the matter said. The authorities will help them choose sites. Potential locations will include industrial hubs like Hong Kong Science and Technology Park and the Northern Metropolis.

Shenzhen is a major center of the nation’s gold industry and is home to more than 500 gold jewelry manufacturers. Several mainland gold traders told China Daily they welcome the SAR government’s initiatives.

Huang Wenchan, general manager of Shenzhen Cuilu Jewelry Manufacturing Co Ltd, said the gold industry on both sides has been exploring collaboration opportunities, particularly in setting up additional refineries and facilities, given the close proximity of the two cities. “Hong Kong, as a free trade port, is capable of bringing global industry players together. It’s an ideal venue for gold trading,” she said.

However, some mainland companies are still worried about operating costs. “Costs in Hong Kong are comparatively high, whether it’s manpower or land,” said Lionel Chau, assistant to the chief executive officer and director of supply chain at Batar Group — a Shenzhen-based gold enterprise with an office in the SAR.

“If the SAR government could designate a centralized site for refinery construction, similar to an industrial park, I think it would be a feasible solution and easier for the government to manage,” he said.

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Hong Kong already has several precious metal refineries for enterprises, including Germany’s Heraeus Group — one of the world’s leading suppliers of precious metals.

James Emmett, chief executive officer of MKS PAMP — a Swiss company specializing in precious metal industrial and trading services — has said the company is reviewing the plan to build a refinery in the Guangdong-Hong Kong-Macao Greater Bay Area, as well as a storage facility in Hong Kong.

Wang Lixin, the World Gold Council’s regional chief executive officer for China, said Hong Kong’s market has significant potential as the city possesses “unique advantages that are difficult to replicate elsewhere”, highlighting its independent and secure environment for gold storage.

He said developing Hong Kong’s gold business amid the current global economic climate hinges on the city’s geographical and political location. If the SAR can capitalize on these advantages, and actively expand its industry footprint, the opportunities ahead are immense.

Cheung is optimistic that Hong Kong could become a relatively mature international gold trading market within one to two years.

“We already have a good foundation. What’s needed are supportive policies and an interconnection channel.”

Contact the writer at gabylin@chinadailyhk.com