In 2013, one-third of the world’s traded gold passed through Hong Kong. That year, the city imported 1,158 tonnes of bullion, overtaking India, the traditional top buyer. For all our love of the glittering metal, little of it stayed in our vaults. It mostly went straight to mainland China, where strict controls meant the bulk of its gold imports had to transit through here.

Little did we know that things would soon be turned upside down. In 2014, China relaxed restrictions, allowing more mainland banks to buy foreign gold without routing it through Hong Kong. Net gold flows to the mainland via the city fell to 863 in 2015, then to 245 tonnes in 2019, before reaching a nadir of 67 tonnes in 2020, according to a Hong Kong Legislative Council report.

Just as Hong Kong’s gilded days as the region’s premier gold hub seemed over, things flickered back to life. Bullion flowing into the city has surged since 2020, rebounding to 942 tonnes last year. Now, Hong Kong has set itself the goal of becoming an international gold trading centre, with plans to increase storage capacity tenfold, from 200 tonnes to 2,000 tonnes by 2028.

What has happened is a structural shift in Hong Kong’s role: from a simple gateway to a critical link in the nation’s push for financial security and the internationalisation of its currency.

China’s yuan strategy has changed fundamentally since 2014. It has moved away from pursuing full capital account convertibility and integration into Western-dominated systems. Instead, it has pivoted towards building an alternative cross-border payment system independent of the US dollar.

As the undisputed global trade superpower, China persuades others to settle their transactions in yuan, yet has no intention of relaxing its capital controls. But for others to hold the yuan as they do the US dollar or euro, foreign central banks must be confident the currency will hold its value and can be converted into tangible collateral. Enter gold and the offshore yuan market.

The People’s Bank of China ranks fifth globally in sovereign gold reserves, yet it has far more room to expand than other major central banks. Gold accounts for 65-75 per cent of the foreign exchange reserves of the US, Germany, France and Italy but makes up less than 10 per cent of China’s massive US$3.4 trillion reserves, which remain dominated by the US dollar and foreign currency bonds.

The US-led sanctions against Russia were a wake-up call for Beijing, and the urgency to build up gold holdings is now structural.

China has been the world’s No 1 gold producer since 2007, churning out about 380 tonnes a year, all of which it keeps. It is also becoming the largest importer, snapping up more than 1,000 tonnes so far this year. Its relatively opaque reporting makes it a guessing game how much physical gold the government has amassed, but Beijing is clearly hoarding for strategic reasons.

By steadily replacing US dollar assets with physical gold, China signals that a vast, neutral “hard asset” backs its national balance sheet. That strengthens foreign confidence, particularly among the non-Western Global South, in holding yuan-denominated debt or trade balances.

Historically, gold trading, pricing and physical clearing have been concentrated in London and New York. China is building its own centres, and Shanghai and Hong Kong could form the axis of this parallel Eastern infrastructure.

In 2014, it established the Shanghai Gold Exchange (SGE) international board, which focuses on physical transactions and sets its own standards, pricing and clearing protocols, distinct from those of the dominant London Bullion Market Association.

The London bullion market still commands more than 70 per cent of global daily trading volume, but the SGE’s share has risen to 16 per cent. Most importantly, the SGE dominates global physical gold trading, which involves physical delivery and vaulting.

Beijing has also introduced yuan-denominated gold contracts on the SGE and expanded offshore gold vaults in Hong Kong. This allows trading partners, particularly Brics nations and Middle Eastern oil exporters, to accept yuan for their commodities, immediately convert it into physical gold in Hong Kong and ship it home. This process, known as “gold convertibility”, makes accepting yuan far less risky for China’s partners.

In effect, China is building Shanghai as the gold pricing and clearing centre, and Hong Kong as the vaulting and delivery point for foreign clients. Our common law system, free flow of capital, safe and secure environment, and highly efficient professional services make the city an ideal place for countries to diversify their gold holdings away from London and New York.

Central banks from Belt and Road Initiative countries can vault their gold here and use it as collateral to raise yuan-denominated capital at a lower cost. Without full convertibility, the yuan serves mainly as a medium of exchange. Now, physical gold stored in Hong Kong can serve as a store of value. Linking the two completes the jigsaw, and no place can do it better than Hong Kong.

On September 23, the Hong Kong Exchanges and Clearing (HKEX) announced plans to launch a yuan-denominated gold futures contract early next year. This will allow Asian and Global South counterparties to price, trade and settle physical bullion directly in yuan, and it underpins the city’s ambition to become a global gold trading centre and aggressively expand its storage capacity.

Our future as an international financial centre in the coming decades depends on whether we can develop the offshore yuan and gold businesses for the nation. If we can be the bridge of gold for the Global South, Hong Kong’s position will be vault-secured.