China: Asian gold prices fall after change to gold VAT system

London market recovers to $4,000 per ounce

Chinese authorities announce "retailers will not be allowed to offset VAT on gold"

China ended a tax rebate system for gold, sending international gold prices down more than 1% in Asian trading on the 3rd (local time), but prices rebounded 0.2% in London, recovering to $4,012 per ounce and reclaiming the $4,000 level.

On the 1st, China's Ministry of Finance announced it would not allow retailers to offset value-added tax when selling gold purchased on the Shanghai Gold Exchange and the Shanghai Futures Exchange. The news sent domestic gold prices and jewelry-related stocks tumbling.

The rule applies to both investment products such as high-purity gold bars and coins approved by the People's Bank of China and non-investment gold transactions including jewelry and industrial materials.

Also, the VAT exemption scope for companies producing non-investment gold, such as jewelry and industrial gold used in electronic products, was reduced from the previous 13% to 6%.

This is intended to increase government tax revenue and is likely to raise the cost of buying gold domestically, somewhat dampening demand.

On the Hong Kong stock market, jewelry stocks such as Chow Tai Fook Jewellery Group, Chow Sang Sang Holdings and Lao Feng Xiang plunged 8%~12% or more. Citigroup analysts said the tax overhaul is likely to lead the entire jewelry industry to raise prices to alleviate cost pressures.

Adrian Ash, research director at BullionVault, said, "Tax changes in China, the largest consumer of gold, will affect global gold investment sentiment." He added that the rebound in London after weakness in Asian markets that day shows that the bullish mood remains intact.

As of 8:27 a.m. London time, spot gold traded at about $4,012 per ounce. Platinum rose as much as 2.2%, and silver and palladium also edged up slightly.

Gold hit an all-time high thanks to a wave of personal buying in October, but then turned lower as some profit-taking and seasonal buying related to Indian festivals eased. Demand as a safe-haven asset also eased as the U.S. and China entered a trade truce.

Despite the price drop, it is still up more than 50% since the start of the year. Fundamental factors that had driven the rise in gold prices, including central bank buying, U.S. interest rate cuts and safe-haven demand, are expected to remain in place.

Guest reporter Jeong-a Kim kja@hankyung.com