The jewellery industry in China has become an unintended channel for moving large sums of money out of Mainland China. Exploiting gaps in regulation and the untraceable nature of gold, Shenzhen-based jewellery companies are facilitating these transactions on behalf of their clients.
This practice not only highlights a systemic issue but also underscores the complicity of industry stakeholders who profit from such activities.
The Process: Jewellery as a Financial Gateway
Shenzhen Jewellery Companies as Key Players
The process starts with jewellery companies in Shenzhen, which handle high-value transactions, often exceeding $5 million in a single deal. These companies take orders and arrange for jewellery to be transported to Hong Kong using private security firms. Many of these firms have export limits of $50 million or more, enabling them to move large quantities of gold out of Mainland China seamlessly.
Delivery to Hong Kong and Secondary Melting
Once the jewellery reaches Hong Kong, it is delivered to jewellery factories, where it is melted down into secondary scrap gold. This step removes any traceability of the original transaction, converting the jewellery into raw material that can easily re-enter the global market.
Fund Transfers
After the jewellery is processed, the Shenzhen companies, often working with Hong Kong-based trading firms, deposit the equivalent value in USD—minus a haircut of around 5%—into offshore accounts nominated by their clients. This allows the funds to flow out of Mainland China without triggering regulatory alarms.
Unregulated Transactions
These transactions are often untracked due to the use of private arrangements and loopholes in international commodity regulations. This lack of oversight allows Shenzhen jewellery companies and their Hong Kong counterparts to operate with impunity.
Licensed Companies Enabling the Practice
Licensed companies in Hong Kong and Singapore have also entered this ecosystem, offering structured services to facilitate these large-scale transactions. Operating under the guise of legitimate commodity trading or wealth management services, they provide a legal framework for moving funds.
By leveraging their licenses and established reputations, they ensure smooth and secure transactions while charging a premium. This legitimization further obscures the process, making it difficult for authorities to detect and address these activities.
Why This Loophole Exists
Lack of Tracking
Gold transactions, particularly those involving secondary scrap, are notoriously difficult to track. The gold melting process in Hong Kong effectively erases any evidence of the gold’s origin, making it impossible to trace back to Mainland China.
High Transaction Volumes
With deals frequently exceeding $5 million, the volumes involved make this an attractive mechanism for transferring wealth. The sheer scale of these transactions underscores the profitability of this loophole for all parties involved.
Industry Complicity
Shenzhen jewellery companies and Hong Kong factories knowingly participate in these activities, turning a blind eye to the regulatory risks. Their focus on profit margins and transaction volumes overrides concerns about legality or ethics.
How This Can Be Curbed
Stronger Audits for Export Limits
Authorities in China and Hong Kong should impose stricter audits and reporting requirements on jewellery companies and security firms involved in high-value exports.
Traceability of Gold
Mandating traceability for all gold transactions, including secondary scrap gold, could help close the gap. This could involve blockchain-based tracking systems or serial number requirements.
Regulation of Licensed Companies
Licensed companies in Hong Kong and Singapore offering these services should be required to disclose detailed information on large transactions, including the source of funds and recipients.
Cross-Border Collaboration
Governments in Mainland China, Hong Kong, and Singapore need to enhance data-sharing mechanisms to monitor and flag suspicious activity.
Increased Scrutiny on Jewellery Factories
Hong Kong jewellery factories melting down gold should be subject to more frequent inspections and required to maintain records of the source and disposition of all materials.
The Industry’s Role and Turning a Blind Eye
The complicity of jewellery companies, security firms, and factories in these practices cannot be overstated. For these players, high transaction volumes and significant profit margins outweigh any perceived risks. Until regulators impose meaningful consequences, the industry will likely continue to facilitate such activities, profiting from a system that operates in the grey area of international trade and finance.
Final Thoughts
The use of Shenzhen jewellery companies and Hong Kong factories to circumvent China’s capital controls underscores the ingenuity of those seeking to move money offshore. While the scale and sophistication of these transactions make them difficult to regulate, understanding the mechanics is a critical first step. It’s time for industry leaders and regulators to work together to close these loopholes and ensure greater accountability within the jewellery sector.
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