A report in the Indian media published September 2, 2020, confirmed by a source at the Bharat Diamond Bourse in Mumbai, was enlightening. It concerned what was said to be “a large number of Indian diamond traders,” who had been arrested in mainland China for allegedly smuggling in polished diamonds. Their reason for doing so was to avoid paying a 6 percent import tax levied by the Chinese government on diamonds brought into the country.
The incidence of diamonds being smuggled from Hong Kong into mainland China to avoid paying the import tax is not news, and indeed has been business as usual for a great many years. The Southeast Asian city has served as the diamond trade’s most important import hub after New York for decades, and its primary function has been to serve as a channel to the greater Chinese market, as well as the other countries in the region.
A cursory glance at the data tells the story. From 2011 through 2019, annual polished diamond imports in Hong Kong, a city with a population of about 7.5 million individuals, never dipped below $15 billion. During the same time, imports of polished diamonds into mainland China, a country with a population of about 1.4 billion, through the Shanghai Diamond Exchange which is charged by the central government with administering all official imports and exports of diamonds, was at best one third that the Hong Kong total on any given year.
According to De Beers Insight report published at the end of 2019, consumer demand for diamonds in China in 2018 rose 3 percent in local currency and 5 percent by dollar value to stand at $10 billion. Needless to say, many if not most the goods sold did not enter the country through official channels.
The fact that a group of Indian traders had been accused of smuggling goods into mainland China was not thought-provoking in and of itself. What’s more interesting is the question whether the Chinese authorities are cracking down on goods being channeled into China though non-official channels, and whether this latest development indicates a further erosion in Hong Kong’s long-held status as a free-market outpost and a gateway to one of the world two largest jewelry markets.
THE DISMANTLING OF ONE COUNTRY, TWO SYSTEMS
The source of much of the concern is a harsh new security law imposed upon Hong Kong on June 30, 2020, by the authorities in Beijing, purportedly to prevent sedition, collusion with foreign powers and terrorism in the territory. The move came after continuing anti-government demonstrations since March 2019, which began as protest against a government’s move to allow the extradition of criminal cases from Hong Kong to the Chinese mainland.
Many in the city, and their opinion is shared by most Western governments, believe that the new security legislation represents a de facto dismantling of Hong Kong’s “one country, two systems” formula, which was meant to have kept the territory largely autonomous until at least 2047, supporting its role as one of the world’s major financial centers.
Two weeks after the security law was imposed, U.S. President Donald Trump signed an executive order to end the special status given to the former British colony. “Hong Kong will now be treated the same as mainland China,” Trump told a news conference at the White House. “No special privileges, no special economic treatment, and no export of sensitive technologies.”
Uncertainty about Hong Kong’s economic future comes as a result of a harsh new security law imposed by the authorities in Beijing, following anti-government demonstrations in the city that began in March 2019.
There is a great deal at stake. Hong Kong is the leading offshore center for both U.S. dollar and renminbi funding, with Chinese businesses using its capital markets to raise funds. Indeed, it is the only financial center in the People’s Republic of China that has no restrictions on the movement of capital, and, with the HK dollar more or less of pegged to the US dollar, there is almost no exchange rate risk.
Hong Kong’s centrality to the diamond trade is heightened by its playing host to several of the most important jewelry trade shows held each year.
UNCERTAINTY IN THE JEWELLERY COMMUNITY
Hong Kong is also a critically important diamond and jewelry trading center, with thousands of foreign and local companies operating offices in the city. Most of them are focused on the markets located on the other side of the bay in mainland China, but they clearly prefer operating within a free-trade environment that differs greatly from that existing across the border.
But it’s not only the relaxed customs, tax and regulatory regime that make Hong Kong an attractive place. The city’s long history as a cosmopolitan trading hub makes it a comfortable place for foreigners to live and do business, not to mention the lax entry requirements, compared to the more restrictive visa regime practiced on the Chinese mainland.
Add to that a number of major jewelry trade shows, including the recently renamed Jewellery & Gem World Hong Kong, the world’s largest jewelry trade, fair which usually takes place in September, but this year has been downsized and moved to November because of the COVID-19 epidemic.
Hong Kong is also the world’s second largest jewelry auction market after Geneva, overtaking New York, largely because of the rising dominance of Chinese buyers.
Will it continue to be the jewelry trading hub that it traditionally has been? Prophecies concerning the waning of Hong Kong’s influence and prominence have been around pretty much since it was established as a British colony in 1842. Two years before the Britain handed over sovereignty of the city to China in 1997, Fortune magazine published a long article entitled “The Death of Hong Kong.” Twenty-three years later the city and its financial community are obviously still standing.
But there is a mood of uncertainty in Hong Kong’s business community, and in particular among the many foreigners who treat the city as home. Some are considering whether another Asian business center, such as Singapore, may be the better alternative, and others believe a move into mainland China is the correct option, with Shanghai being the obvious city of choice.
Ultimately the city’s future as a financial will depend on what the Chinese government does, and, more importantly, what it chooses not to do. The decision about the future of Hong Kong will be made in Beijing.