Chinese jewellers to bear the brunt of gold tax change
The changes will spur more member buying and curb off-book gold trades, pushing volumes to the bourse
[SINGAPORE] Chinese jewellers and smaller firms in the gold sector look set to be hardest hit by tax changes announced over the weekend that got rid of long-standing incentives for some retailers of the metal.
It is still not completely certain what the new regulations will entail in practice, but it is clear that jewellers and companies that are not members of the Shanghai Gold Exchange and the Shanghai Futures Exchange, will bear the brunt of the impact.
That was reflected in stock-market action on Monday (Nov 3). Chow Tai Fook Jewellery Group shares plunged as much as 12 per cent in Hong Kong, while Chow Sang Sang Holdings International and Laopu Gold were down by at least 8 per cent.
Until the new rules took effect on Saturday, most Chinese gold retailers had been able to fully deduct value-added tax (VAT) on their inputs when selling to consumers. However, under the new policy, companies producing so-called non-investment gold, such as for jewelry or industrial applications like electronics, can offset only 6 per cent of the VAT, down from 13 per cent previously.
That effectively adds around 7 per cent to retailers’ costs in the “worst case scenario,” Citigroup analysts including Tiffany Feng said in a note. “It’s likely to see the entire industry raise prices to pass through the cost pressure,” they said.
Chow Tai Fook, one of the biggest jewellers, said it will “adjust the prices” of some products and “proactively manage the impact of increased costs in gold procurement and production,” according to a written response by a company spokesperson, adding they expect customers to adjust to the price changes over time.
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For sales of investment products such as gold bars or ingots, the tax incentives stay in place for members of the SGE and SHFE, when they sell metal that’s directly bought from the exchange. These include major banks, refineries and fabricators who are big enough to participate in trading.
Non-member firms will be subject to the same policy as for companies selling non-investment products.
Thousands of small businesses in Shenzhen’s Shuibei market, the epicentre of China’s retail market, where many transactions involve non-exchange gold, will be affected.
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The tax changes will encourage more buying from exchange members, reducing off-book or invoice-free gold transactions and, instead, route even more of it through the bourse.
The new regime will strengthen the role of the exchanges and the Shanghai benchmark price, and “fundamentally change how people procure gold in China,” said Song Jiangzhen, a researcher at the Guangdong Southern Gold Market Academy.
It will also “improve transparency in China’s gold market, allowing the government to better track trading volumes and flows,” he said.
Gold trading without physical delivery and investing in bullion-backed exchange-traded funds will remain tax-free. Institutions approved by the central bank to issue commemorative gold coins are also exempted from the new rules.
Sellers of gold bars on the Taobao e-commerce platform appear to have factored in the additional tax, with most going for more than 1,000 yuan (S$182.94) per gram on Monday, compared to benchmark prices of around 900 yuan.
However, “the scale of the impacts still depend on the implementation,” Song said. BLOOMBERG
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