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Investing.com -- Deutsche Bank told investors in a note Tuesday that it expects only a modest effect on China’s gold demand from a new value-added tax reform, even as jewellery sellers face higher costs.
“Regarding the revision to China VAT rules, this would raise costs by 7% for gold jewellery sellers,” analyst Michael Hsueh wrote, citing Bloomberg data.
However, Hsueh believes “the impact to China gold import demand will likely be modest,” supported by several offsetting factors.
First, he noted that the government implemented the change after a decline in gold prices “roughly equivalent to the increase in costs for jewellers,” which could “neutralise the impact for consumers, assuming that jewellers pass on the entire cost increase.”
Deutsche Bank also pointed to the inelastic nature of Chinese gold demand. “China investment demand through ETFs was seen to rise following the Golden Week holiday,” the analyst highlighted, adding that imports rose 6% in September “despite a 9% rise in the gold price.”
Other mitigating factors are said to include the exemption of investment products such as gold bars, which “will continue to be eligible for a 6% offset of the 13% VAT,” and the likelihood that “jewellers could attempt to temporarily absorb the cost into their margins to gain a competitive edge.”
“In sum total, we think the impact of the VAT rule change is not likely to be large or sustained for China gold jewellery demand,” Deutsche Bank said, concluding that the pace of gold imports into China is unlikely to be meaningfully affected.