Hong Kong to get edge in Asia gold-hub push with clearing system

By launching a gold-clearing system in the next couple of months, Hong Kong is set to secure first-mover advantage in a push to become Asia’s preeminent hub for bullion trading.

The clearing mechanism, expected to debut by July, is an important step in building the liquidity needed to influence pricing in the region. It would also take Hong Kong further down the road to creating a gold-trading center than longtime rival Singapore, which has announced similar plans without committing publicly to a timeline.

“If Hong Kong and Singapore are in a race to build clearing, it looks like Hong Kong authorities are very eager to win,” said Adrian Ash, head of research at BullionVault, an online platform that allows users to trade and store precious metals.

In recent months, both cities have advanced plans to capitalize on strong demand and challenge London’s long-held dominance as the global center of bullion trade. Gold’s protracted rally might have stalled since the war began in the Middle East, but many banks remain bullish about the long-term prospects for a metal coveted by investors as an alternative store of wealth.

In Hong Kong, the infrastructure is already being laid for a significant expansion of trading, refining and storage. China’s biggest express-delivery firm, SF Holding Co., plans to open a vault near the city’s airport this year, while precious metals traders are commanding bigger pay packages as established banks compete for talent with fintech and securities firms.

The timing for launching a clearing system is good, as a seasonal lull in demand over the summer will leave ample room to accumulate stockpiles of the metal, Ash said. The government-owned mechanism will also be underpinned by the large volumes of gold that move in and out of Hong Kong due to demand from China, the world’s biggest consumer.

These flows are supported by an existing lineup of refiners that includes Heraeus Ltd. and Metalor Precious Metals Hong Kong Ltd., among others. Point Gold International Ltd., a major Chinese refiner, said it was investing $150 million to expand its offices in Hong Kong and add a facility that’s scheduled to begin production this year. Singapore, by contrast, has only a single refinery that produces bullion with the industry-standard London Good Delivery accreditation.

“Hong Kong has refineries, jewelry manufacturers, factories, mining companies,” said Bernard Sin, regional director for Greater China at MKS PAMP SA, a trader and refiner that has also recently expanded its operations in the city. “It’s a gateway to North Asia: mainland China, Japan, Korea,” he said.

For a clearing system to thrive, the involvement of the world’s major bullion banks is key — and both Hong Kong and Singapore have taken significant steps in this direction. JPMorgan Chase & Co, UBS Group AG and Citigroup Inc. are supporting plans in both cities, while local banks are also participating in their respective locations. In Hong Kong, Chinese lenders have either grown their bullion desks, or are in the process of adding to them.

Interest in gold also extends beyond established banks. HGNH International Futures Co. is setting up a precious metals trading team in Hong Kong, the company said, amid similar moves from other Chinese brokerages. Digital newcomers such as Matrixdock are also looking to hire in the region.

London’s role as a gold hub is underpinned by the large stocks of bullion that it holds, much of it owned by central banks around the world. Though Hong Kong and Singapore are far behind in this regard, both are aiming to attract more of this official-sector business. In its search for client nations, China has prioritized countries participating in the Belt and Road Initiative, with Hong Kong presenting itself as an offshore option able to move gold in and out of mainland China with relative ease.

“People have been talking about China challenging London’s dominance of wholesale bullion trading for well over a decade,” Ash said. “Clearing is a vital step towards building the bullion-banking services which the No. 1 mining and consumer nation still lacks.”

Hong Kong’s large and active equity market, as well as recent efforts to strengthen two-way financial flows with the mainland, also gives the special administrative region an edge when it comes to developing a gold futures market that will be essential for any financial center aspiring to genuine price-setting power. Futures are important because they enable market participants to hedge price risk, establish real-time benchmarks and attract speculative capital — all of which create additional liquidity.

Carving a niche

While clear parallels exist in their ambitions, Hong Kong and Singapore may eventually carve out distinct niches in their efforts to develop regional influence in the gold business.

“Singapore is likely to focus on storage, whereas Hong Kong will promote trading” and refining, supported by logistics, said Doris Bao, founder of China-based consultancy Gold Harvest Management and an industry veteran.

Singapore can store at least 2,200 tons of gold in two privately operated, high-security vaults, according to data from the operators. That includes 500 tons at The Reserve and at least 1,700 tons at Le Freeport, a repository sometimes known as Asia’s Fort Knox. Hong Kong has around 150 tons of storage at its airport, which is owned by the government, although the city’s commercial vault capacity is not publicly known.

In Singapore, existing capacity is filling up fast. Demand for gold storage at Le Freeport has “risen steadily” in recent years, driven by existing logistics providers and new players, said Lincoln Ng, the company’s chief executive officer. The basement vaulting space, typically the preferred location for bullion storage due to enhanced security and higher load-bearing capacity, is near “full utilization,” he said.

In recent months, Singapore has taken custody of some of the gold moved out of Dubai as a result of the Iran war. Official data show the city-state imported record amounts from the United Arab Emirates in March and April. Singapore is also a favored location for gold owners wary of Chinese influence in Hong Kong.

“Investors increasingly view Singapore as a preferred location for wealth storage,” Ng said, adding that the Southeast Asian city-state’s popularity is underpinned by political stability, a robust financial system and strong rule of law.

(By Yihui Xie)