Gold tax incentives are gone; why have old gold shops and other jewelers suffered sharp declines?

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China's new VAT regulations on gold have officially come into effect, with retail jewelers and non-exchange member companies bearing the brunt.

There was a sharp market reaction on Monday: Lao Feng Xiang's Hong Kong shares plunged over 9% intraday, Chow Tai Fook once fell 12%, and Chow Sang Sang also dropped at least 8%. Spot gold fell accordingly, dropping below the $4,000 mark to $3,970 per ounce.

The core logic is that after the implementation of the new regulations, companies producing non-investment gold (such as gold used in jewelry or electronics) can only deduct 6% VAT, lower than the previous 13%. Citigroup analyst Tiffany Feng and others pointed out that in the "worst-case scenario," retail costs will increase by about 7%, and the industry may raise prices overall to pass on the pressure. Morgan Stanley further analyzed that brands are very likely to pass on the cost to end consumers by raising retail prices, with the demand for by-weight gold jewelry being hit the hardest.

Adrian Ash, research director at BullionVault, said that although Chinese gold demand had played a limited role in this year's record bull market, as the world's largest gold consumer, changes in China's gold transaction taxes would dampen global gold market sentiment.

Main Points of the New Regulations: Significant Tightening of VAT Deductions

China's Ministry of Finance released new regulations on Saturday, effective November 1. Only member institutions or customers of the Shanghai Gold Exchange and the Shanghai Futures Exchange trading standard gold through the exchanges are exempt from VAT when the selling party is a member institution or customer. Non-member institutions and companies selling gold outside the exchanges must pay VAT as per existing regulations. This policy will last until the end of 2027.

Previously, most gold retailers could fully deduct input VAT when selling gold to consumers. However, after the new regulation, companies producing so-called non-investment gold (for example, gold used in jewelry or industrial products like electronics) can only deduct 6% VAT, down from the previous 13%.

Meanwhile, thousands of small businesses in Shenzhen’s Shuibei Market—the center of China's retail gold market—will be affected, as many transactions involve non-exchange gold. The new tax policy will encourage more purchases from exchange members and reduce off-book or invoice-free gold trading.

Significant Differences in Impact Among Jewelers: Lao Feng Xiang and Chow Tai Fook More Resilient, By-Weight Products Hit Hardest

Both Citigroup and Morgan Stanley believe that the new regulations directly raise business costs, which are expected to be passed on to end consumers through price hikes.

Morgan Stanley’s scenario analysis shows that under the assumption of an additional 7% tax cost, there are significant differences in the degree of impact faced by various jewelers.

Morgan Stanley’s analysis shows that companies with more exposure to lower-tier cities, low-margin products, and short inventory cycles will be more affected. Among jewelry brands, Lao Feng Xiang and Chow Tai Fook are in better positions—Lao Feng Xiang focuses more on the high-end market and enjoys higher profit margins, while Chow Tai Fook has larger inventory scale.

By-weight products will be affected more because consumers are more price-sensitive. In contrast, fixed-price gold jewelry is relatively less affected.

Morgan Stanley believes that brands will most likely pass this part of the cost to end consumers by raising retail prices, which will have a more significant impact on demand for mass-market products.

Gold bar sellers on Taobao e-commerce platform seem to have already priced in the additional tax, as most gold bars were selling for over 1,000 RMB ($141) per gram on Monday, while the benchmark price was about 900 RMB.

Gold Fundamentals Remain Supported

Despite the recent pullback, spot gold is still up more than 50% so far this year. Many of the fundamental drivers for gold’s rise are expected to persist, including central bank demand and continued investor interest in safe-haven assets.

Non-physical gold trading and investment gold-backed ETFs will remain tax-exempt. Institutions authorized by the central bank to issue commemorative gold coins are also exempt from the new regulations.

Song Jiangzhen, a senior researcher at the Southern Gold Market Research Institute in Guangdong, said the new system will strengthen the role of exchanges and the status of the Shanghai benchmark price, "fundamentally changing how people procure gold in China." The new regulations will also "improve the transparency of China's gold market, enabling the government to better track transaction volume and flows."

Song Jiangzhen said, "The scale of the impact still depends on how the policy is implemented." The policy adjustment will last until the end of 2027, and the market is still watching for the actual industry impact of the implementation details.

Risk Warning and DisclaimerThe market carries risk; investment needs caution. This article does not constitute personal investment advice and does not take into account individual users’ particular investment objectives, financial condition, or needs. Users should consider whether any opinion, viewpoint, or conclusion in this article is suitable for their specific circumstances. Investment based on this is at your own risk. ```