Why did LAOPU GOLD and other jewelers plummet after the elimination of gold tax incentives?

The new value-added tax regulations for China Gold officially took effect, with retail jewelers and non-exchange member companies being the first to bear the brunt.

On Monday, the market reacted sharply, with LAOPU GOLD's Hong Kong stock price dropping by more than 9% at one point, Chow Tai Fook falling by 12%, and Chow Sang Sang also declining by at least 8%. Spot gold prices fell in response, briefly dropping below the $4,000 mark to $3,970 per ounce.

The core logic is that after the new regulations are implemented, companies producing non-investment gold (such as gold for jewelry and electronic products) can only deduct 6% of the value-added tax, down from the previous 13%. Citigroup analysts Tiffany Feng and others pointed out that in the "worst-case scenario," retailers' costs will increase by about 7%, and the industry may raise prices overall to pass on the pressure. Morgan Stanley further analyzed that brand owners are likely to pass on costs to end consumers by raising retail prices, with demand for weight-based gold jewelry being the most impacted.

Adrian Ash, head of research at BullionVault, stated that although China's gold demand has had limited impact during this year's record bull market, changes in gold trading taxes in China, as the world's largest gold consumer, will dampen global gold market sentiment.

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

The Ministry of Finance of China released new regulations on Saturday, stating that starting from November 1, only member units or clients of the Shanghai Gold Exchange and the Shanghai Futures Exchange can trade standard gold through the exchange, and the selling member units or clients will be exempt from value-added tax. Non-member units and enterprises that do not sell through the exchange must pay value-added tax according to current regulations. This policy will remain in effect until the end of 2027.

Previously, most gold retailers could fully deduct the value-added tax on inputs when selling gold to consumers. However, after the new regulations are implemented, companies producing so-called non-investment gold (for industrial uses such as jewelry or electronic products) can only deduct 6% of the value-added tax, down from the previous 13%.

At the same time, thousands of small businesses in the Shenzhen 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, reducing off-book or invoice-free gold transactions.

Significant Differences in Impact on Different Jewelers: LAOPU GOLD and Chow Tai Fook Show Greater Resilience, Weight-Based Products Most Affected

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

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

Morgan Stanley's analysis indicates that companies with exposure in high and low-tier cities, low-margin products, and low inventory cycles are more affected. Among jewelry brands, LAOPU GOLD and Chow Tai Fook are in a more favorable position—LAOPU GOLD focuses more on the high-end market and has higher profit margins, while Chow Tai Fook has a larger inventory scale. **

The demand for weight-based products is more significantly affected, as consumers are more sensitive to prices. In contrast, fixed-price gold jewelry is relatively less impacted.

Morgan Stanley believes that brand owners are likely to pass on this portion of the cost to end consumers by raising retail prices, which will have a more pronounced impact on demand for mass-market products.

Gold bar sellers on the Taobao e-commerce platform seem to have already incorporated the additional taxes into their pricing, with most gold bars priced above RMB 1,000 (USD 141) per gram on Monday, while the benchmark price is around RMB 900.

The fundamentals of gold still provide support

Despite recent pullbacks, spot gold has risen over 50% year-to-date. Many fundamental factors driving gold prices are expected to persist, including central bank demand and investors seeking safe-haven assets, which will continue to support gold.

Gold trading without physical delivery and gold-backed ETFs will remain tax-exempt. Institutions authorized by the central bank to issue commemorative coins are also exempt from the new regulations.

Song Jiangzhen, a senior researcher at the Guangdong Southern Gold Market Research Institute, stated that the new system will strengthen the role of exchanges and the status of the Shanghai benchmark price, "fundamentally changing the way people procure gold in China." The new regulations will also "increase the transparency of the Chinese gold market, allowing the government to better track transaction volumes and flows."

Song Jiangzhen noted, "The scale of the impact still depends on the implementation." This policy adjustment will last until the end of 2027, and the market is still observing the actual impact of specific execution details on the industry