China's new gold value-added tax (VAT) rules have officially taken effect, with retail jewelers and non-exchange member companies bearing the brunt. The market reacted sharply on Monday, with LAOPU GOLD's Hong Kong shares plunging over 9% intraday, Chow Tai Fook dropping as much as 12%, and Chow Sang Sang declining at least 8%. Spot gold prices also fell, briefly dipping below the $4,000 mark to $3,970 per ounce.

The core issue lies in the fact that under the new rules, companies producing non-investment gold (such as jewelry or industrial-use gold) can only claim a 6% VAT deduction, down from the previous 13%. Citi analysts, including Tiffany Feng, noted that in a "worst-case scenario," retailers' costs could rise by about 7%, potentially leading to industry-wide price hikes to pass on the burden. Morgan Stanley further analyzed that brands are likely to shift the additional costs to end consumers through higher retail prices, with demand for weight-based gold jewelry being hit the hardest.

Adrian Ash, research director at BullionVault, stated that while China's gold demand has played a limited role in this year's record bull run, as the world's largest gold consumer, changes in China's gold tax policies will dampen global market sentiment.

**Key Changes: Tightened VAT Deductions** China's Ministry of Finance announced new regulations on Saturday, effective November 1, exempting VAT only for member units or clients of the Shanghai Gold Exchange and Shanghai Futures Exchange when trading standard gold. Non-member companies or those selling gold outside exchanges must pay VAT under current rules. The policy will remain in place until the end of 2027.

Previously, most gold retailers could fully deduct input VAT when selling gold to consumers. However, under the new rules, producers of non-investment gold (e.g., for jewelry or industrial use) can only claim a 6% VAT deduction, down from 13%.

Meanwhile, thousands of small businesses in Shenzhen's Shuibei market—China's retail gold hub—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 trading.

**Varying Impact Across Jewelers: LAOPU GOLD and Chow Tai Fook More Resilient, Weight-Based Products Hit Hardest** Both Citi and Morgan Stanley agree that the new rules directly increase costs for businesses, which are expected to be passed on to consumers via price hikes.

Morgan Stanley's scenario analysis shows significant differences in the impact on various jewelers under the assumption of an additional 7% tax burden.

The bank's analysis indicates that companies with exposure to lower-tier cities, low-margin products, and short inventory cycles will be more affected. Among jewelry brands, LAOPU GOLD and Chow Tai Fook are in a stronger position—LAOPU GOLD focuses on the high-end market with higher margins, while Chow Tai Fook benefits from larger inventory reserves.

Demand for weight-based gold products will be more affected due to consumers' price sensitivity. In contrast, fixed-price gold jewelry will see relatively less impact.

Morgan Stanley believes brands will likely pass the additional costs to consumers through higher retail prices, which will have a more pronounced demand shock on mass-market products.

Gold bar sellers on Taobao’s e-commerce platform appear to have already factored in the extra tax, with most bars priced above 1,000 yuan ($141) per gram on Monday, compared to a benchmark price of around 900 yuan.

**Gold Fundamentals Remain Supportive** Despite the recent pullback, spot gold has still surged over 50% year-to-date. Many fundamental drivers of the rally—including central bank demand and investor appetite for safe-haven assets—are expected to persist.

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

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 Shanghai’s benchmark price, "fundamentally changing how gold is sourced in China." The rules will also "enhance transparency in China’s gold market, allowing the government to better track trading volumes and flows."

Song added, "The scale of the impact still depends on implementation." The policy adjustment will remain in effect until the end of 2027, and the market is still assessing the actual extent of the industry’s exposure to enforcement details.