Diamond traders in Hong Kong say up to US$40 million worth of gems destined for mainland jewellery factories were seized during the raids on January 8. But Indian diamond merchants say the men would have been carrying the correct documents and that it was unclear whether any laws were broken.

Relatives of the men, who have addresses in the Shenzhen area, have only been told that they are being held under anti-smuggling laws.

The Indian media's coverage of the incident has drawn links between the case and the recent arrest of three Chinese engineers after the collapse of a power station chimney that killed about 40 workers in September last year in Korba, 960 kilometres southeast of New Delhi.

But India's consul general to Hong Kong, L.D. Ralte, dismissed the link. He said the Shenzhen arrests could be related to tax and duty payments or 'something far deeper'. He said the consulate was monitoring the situation and the men had been visited by Indian embassy officials based on the mainland.

Two gem traders based in Hong Kong said the arrests have triggered fear and anxiety among the Indian diamond dealers in the city, who they say number about 200 and come from Gujarat.

'These guys who have been nabbed are reputable and in long-lasting businesses,' one of the traders said. 'They are not die-hard smugglers. They want to be in China for the long term.'

Both declined to be named, citing legal and political sensitivities.

'These are not blood diamonds, but come from reliable origins and are cut in Gujarat,' the trader said. 'It will have adverse consequences for the jewellery manufacturing industry in southern China henceforth as there is a huge demand for gems.'

One of the traders said mainland factories wanted to deal with people bringing diamonds from Hong Kong to avoid paying a 4 per cent duty for re-exporting the stones. Jewellers have to pay an 18 per cent tax.

'I would rather do it legitimately and see that taxes are paid and brought in line in terms of import duties and avoid the hassle. So this is why there is utter shock and dismay. We are reputable business people; it's appalling for the families.'

The arrests come after a tough year for diamond traders as spending on luxury goods fell worldwide. Reports in India say about 50 per cent of the country's diamond exports to China are carried out illegally via Hong Kong. Much of the smuggling is done by couriers who cross the border to Shenzhen, the report said.

Another Hong Kong-based gem merchant said cross-border gem trading and jewellery manufacturing had been irreparably damaged following the arrests of the men, who are in their mid-20s and late 30s.

'The diamond business in Hong Kong is almost at a standstill, even among Chinese traders. In mainland China most of the traders are keeping very quiet for the moment. It's very serious. Families have loved ones inside and don't know when they will be charged or tried. The Indian community is not at fault here.'

The traders added that the men being held were doing business with factories owned by people with links to the Shanghai Diamond Exchange Centre. A Hong Kong law firm with offices in Shenzhen has been contacted and the men have been provided with vegetarian meals from a nearby Indian restaurant.

Crackdown

Fifty people were arrested in raids in Shenzhen on January 8. Thirty-three of them were foreign nationals

The number of Indian men still being detained after those raids: 21

The gems that were seized were destined for jewellery factories on the mainland. According to diamond traders in Hong Kong, the value of the gems seized was up to, in US dollars: $40m

There have been reports of a number of diamond smugglers passing through Hong Kong. Reports say the proportion of Indian diamond exports to China that are carried out illegally via Hong Kong is: 50%