The Chinese Ministry of Finance announced a new regulation last Saturday, November 1, to cancel the long-standing gold tax rebate benefits for some retailers. As a result, the price of gold dropped below $4000 per ounce on Monday, November 3. The policy change from Beijing is expected to curb domestic demand for gold in China.
According to Bloomberg, on Monday, the spot gold price briefly fell by 1% before recovering most of its losses, while Chinese jewelry stocks plummeted significantly. Beijing declared last Saturday that certain retailers would no longer be allowed to deduct value-added tax when selling gold purchased from the Shanghai Gold Exchange and the Shanghai Futures Exchange, whether the gold is sold directly or after processing.
As of 10:31 AM Beijing time, the spot gold price dropped by 0.1% to $3,997.40 per ounce, following a 2.7% decline in the previous week. The Bloomberg Dollar Spot Index remained relatively stable.
Fueled by retail buying frenzy, gold prices surged to historic highs in October but experienced a significant decline in the final two weeks of the month. Despite this correction, gold prices have still risen over 50% this year, driven by various fundamental factors such as central bank policies and demand for safe-haven assets, which are expected to continue.
Adrian Ash, research director at BullionVault, the world’s largest online service for investing in gold, silver, platinum, and palladium, stated, “While Chinese gold demand has played a minor role in this record-breaking bull market this year, the change in China’s tax policy will impact global market sentiment. This news may bring joy to traders and investors hoping for a larger pullback after last month’s surge.”
Concerning jewelry stocks, Chow Tai Fook Jewellery Group Limited in Hong Kong saw a 12% decline in its stock price, while Chow Sang Sang Holdings International Limited and Lao Feng Xiang Co., Ltd. experienced drops of over 8% and 9%, respectively.
For years, Beijing’s exemption of value-added tax on gold has helped maintain the competitiveness of domestic gold prices by allowing retailers to offset taxes when selling gold purchased from the Shanghai Gold Exchange. With the cancellation of this policy, retailers may now face a narrowing profit margin, either absorbing additional costs themselves or passing them on to consumers.
Analysts from Citigroup, including Tiffany Feng, stated in a report that the change in tax policy “is likely to lead to industry-wide price increases to offset cost pressures.”
On the other hand, Chinese consumers have long been interested in gold as both a hedge asset and a cultural investment vehicle.
The imposition of value-added tax on gold by the Chinese government may temporarily suppress domestic demand, especially for price-sensitive buyers. However, in the long run, the attractiveness of gold as a store of value is expected to remain strong.