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BFI Bullion
December 17, 2019

Update on Hong Kong and High-Security Storage

As some of our clients have been asking whether Hong Kong is still a safe storage location for their metals, we decided to outline our thoughts on the matter and share our outlook on the jurisdiction going forward. Overall, while we still maintain our storage location in Hong Kong, unless there are practical considerations (prompt access, physical closeness to the metals), we recommend considering a transfer to one of our other vaults at this point.

There’s still no clear end in sight for the protests in Hong Kong and the unrest has proven more persistent than widely expected. Against this backdrop, President Trump signed the Hong Kong Human Rights and Democracy Act into law on November 27th, 2019. This, of course, fueled the tensions once again in the China-US trade war.

As a result of the protests and the resulting disruptions, some of our clients have been wondering whether Hong Kong is still safe. In our view, it is still relatively safe. However, we do recommend contacting us to assess whether a transfer to another location may be suitable. While we do not recognize an imminent danger for the precious metals stored in Hong Kong, we do prefer to err on the side of caution, and we consider other jurisdictions more stable at this point.

Demand for gold in Hong Kong has been suppressed and we expect that situation to continue for some time. In the last quarter, Hong Kong’s gold jeweler consumption was down by 50% year-on-year. As gold and jewelry demand is primarily driven by tourists from mainland China, the risks and the travel disruptions to and from Hong Kong created by the protests caused the number of visitors to drop by 28% in the 2nd quarter of the year. In August and September, they fell even more, by 42% and 35% respectively.

When assessing the current situation, it is important to remember Hong Kong’s significance for China. Official numbers provided by the Chinese Ministry of Commerce show that the country received $62.9 billion in foreign direct investment via Hong Kong in the first eight months of 2019, which accounted for 70% of total inflows. It is the largest pool of RMB liquidity outside of Mainland China. Additionally, Chinese companies and investors have used Hong Kong as their gateway to global financial markets for decades. In 2018, for instance, Chinese companies raised US$ 64 billion with IPOs globally, more than half of which took place in Hong Kong.

It is also worth considering the impact of the Hong Kong Policy Act, which was enacted by the US in 1992. It gave the US the right to deal with Hong Kong separately from mainland China in terms of trade and economic control. The recently signed Hong Kong Human Rights and Democracy Act requires the US Secretary of State to issue an annual certification of Hong Kong’s autonomy to justify special treatment afforded by the US to Hong Kong.

This policy piece raises a few questions in the context of the trade tensions between China and the US. Clearly, international companies will be slower to invest and build their company’s future in and around Hong Kong. Additionally, given the overall slowdown in mainland China, combined with the aforementioned factors, Hong Kong may well slide into a recession in 2020.

Because of Hong Kong’s critical importance to mainland China, it is clear that the Chinese state will not give in easily to the protestors’ demands and it will not simply disengage and relinquish all control. However, we also do not expect China to act entirely irrationally. In other words, they understand that a heavy-handed approach could hurt the country’s ongoing efforts in the realm of global finance, for instance in introducing the Chinese Yuan as a widely accepted currency in global markets.

Our bottom-line conclusion: Unless special circumstances require safekeeping your wealth in Hong Kong, you should consider other options that afford higher levels of certainty. We’re happy to explore these alternatives together and help you make the right choice, based on your specific needs.

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