(Yicai) Nov. 3 -- Shares of listed Chinese jewelry brands dropped after China canceled a policy that allowed retailers to offset a value-added tax on gold.

Chow Tai Fook Jewellery Group [HKG: 1929] was trading down 8.7 percent at HKD13.90 (USD1.79) as of 3.30 p.m. in Hong Kong today. Laopu Gold [HKG: 6181] plunged 8.2 percent to HKD628.50 (USD80.87), Chow Sang Sang [HKG: 0116] sank 6.5 percent to HKD13.03, and Lao Feng Xiang [SHA: 600612] fell 3.4 percent to CNY46.58 (USD6.55).

From Nov. 1, Chinese gold retailers will no longer be able to offset the VAT when selling gold they had purchased from the Shanghai Gold Exchange and Shanghai Futures Exchange, according to an official announcement on Oct. 29. This new arrangement will be valid until the end of 2027.

“The new policy allows non-investment gold to be eligible for a 6 percent VAT deduction, so the actual VAT is 7 percent,” Song Jiangzhen, director of the market research center at the Guangdong South Gold Market Research Institute, told Yicai. “Before, the whole 13 percent VAT could be deducted.”

Moreover, China’s Ministry of Finance, General Administration of Customs, and State Taxation Administration jointly announced the cancellation of tax incentives for diamonds on Oct. 17. As a result, diamond imports are subject to a 13 percent VAT from Nov. 1.

Even though the impact of these two new policies has not yet materialized, the effects on the supply chain are foreseeable. “The business-to-business segment, which includes material suppliers, wholesalers, and jewelry stores, will be the most impacted,” Song predicted.

Despite the new policies, prices of gold and diamond products at Chow Tai Fook and Laopu Gold stores did not increase this month.

In the fiscal year ended Sept. 30, Chow Tai Food raised retail prices of gold products by 44 percent and hiked them again by 12 percent to 18 percent at the end of last month. Meanwhile, Laopu Gold had increased its prices three times in the past year, with the latest markup on Oct. 26.

A staffer from a Laopu Gold store in South China told Yicai that many customers stopped by to try some pieces of jewelry and inquire about prices, but most did not make any purchase.

Investment-grade gold, such as gold bars or exchange-standard gold, should still enjoy the tax breaks, Song said, adding that consumers can directly purchase gold bars from banks and then have them custom-processed.

Editor: Futura Costaglione