The game changer in Hong Kong’s gold ambition? Shenzhen’s jewellery hub

Beijing's strategy to build a gold-backed monetary system aims to advance the international presence of the yuan. In this three-part series, Part 1 outlines China's progress as a leading gold producer, while Part 2 highlights Hong Kong's role as a crucial gold vaulting hub. The ambition to transform Hong Kong into a global gold trading center aligns with China's growing gold consumption and the desire to expand physical gold storage capacity to 2,000 tonnes by 2028.

This expansion would support the internationalization of the yuan and cater to central banks and institutions in the Belt and Road Initiative countries. However, for Hong Kong's gold ambitions to truly take off, it must integrate with Shenzhen, a key player in wholesale jewellery and fabrication.

Shenzhen's Shuibei market, initially an unknown 20 years ago, has now become Asia's largest jewellery wholesale hub, accounting for at least 50% of China's gold trading. The city's goal to make Shuibei a world-class gold wholesale and fabrication hub is reflected in its inclusion in the 15th five-year plan. The connection between Hong Kong and Shenzhen is vital, as Shuibei's jewellery manufacturers source a significant portion of their gold from Hong Kong, around 20-30%.

Hong Kong's plans to increase its physical gold storage and develop yuan-denominated gold financial products will be beneficial to Shenzhen's jewellery industry.

The jewellery manufacturing process in Shuibei involves gold leasing and hedging to mitigate the impact of daily gold price fluctuations. Hong Kong's gold leasing rates are consistently higher than the offshore rates, providing an interest-rate differential advantage. Hong Kong's recent launch of Delivery Connect, a direct and regulated pipeline for moving and settling physical gold between Hong Kong and the Shanghai Gold Exchange, will make it easier for Shuibei merchants to lease gold from Hong Kong and benefit from the onshore-offshore price premium.

This integration will create a comprehensive gold trading ecosystem that includes high finance, wholesale, manufacturing, retail, and onshore and offshore markets in both Hong Kong and Shenzhen, giving Hong Kong a competitive edge over other global gold trading centers.