(Yicai) Nov. 5 -- China’s recent overhaul of its tax policy on gold is set to lift on-exchange trading, industry insiders told Yicai, as the resulting higher cost of gold jewelry and certain investment-grade bullion is expected to drive investors to more cost-efficient gold exchange-traded funds.

Under the new policy, which came into effect on Nov. 1, retailers will no longer be able to offset value-added tax when selling gold they have purchased from the Shanghai Gold Exchange and Shanghai Futures Exchange. But gold traded without physical delivery, such as ETFs and virtual gold offered by banks, remain VAT-exempt.

The change adds 7 percent to retail gold jewelry prices, according to a report by China Asset Management. Gold processors and retailers may face higher costs, which could be passed on to consumers, the report said. It will also affect the demand for gold bars as an investment, Citic Securities said, as buyers will face price reductions from buyback channels when selling.

“The new policy actually encourages over-the-counter traders to move to on-exchange trading at a faster pace,” said Zhou Junzhi, chief macro analyst at Citic Securities.

Gold has soared this year amid global economic and financial uncertainty, driven in large part by purchases by central banks and inflows into gold ETFs. Global demand hit 3,717 tons in the first three quarters, up 45 tons from a year ago, according to the World Gold Council. Third-quarter demand, including OTC, reached 1,313 tons or USD146 billion, a new quarterly high. 

Gold ETFs and similar products made up 17 percent of worldwide demand in the first three quarters -- climbing 644 tons year on year and averaging 200 tons a quarter -- to become the largest source of gold demand growth this year, China Asset Management said. 

By contrast, China’s total gold ETF holdings stood at 194 tons at quarter-end, accounting for just 5.1 percent of the global total, leaving huge room for growth, the CAM report noted. 

Commodity-based gold ETFs linked to SGE Gold 9999 and the Shanghai Gold Spot Price have swelled to nearly CNY210 billion (USD29.5 billion) this year as subscriptions and net asset values have risen in the Chinese market, according to data from financial information provider Wind.

Editor: Tom Litting