Tax and export quota policies continue to hinder trading in diamonds and silver at both the National Diamond Exchange and the National Silver Exchange, casting a shadow on the National Gold Exchange which is expected to open at the end of the year.

The National Diamond Exchange was launched amid fanfare in Shanghai last October.

Central and local governments established the exchange in the hope of boosting the domestic diamond trade and encouraging legal import and export of diamonds.

So far, there have been no deals done by domestic traders, according to Yang Zude, an official from the diamond administration.

Besides the two import cases that the media witnessed on the launch day of the exchange last year, there were very few export and import deals done. The two diamond processing zones in Lujiazui and Longhua also received few orders, according to Yang.

Tax burden

"The problem is still the old one - an excessively high tax rate discouraging dealers from home and abroad," Yang said.

China has erected a high bar for the diamond trade, with a tax rate of 33.9 per cent including tariffs, consumption tax and value-added tax.

Other countries impose no tariffs on diamond imports and no consumption tax. Instead, they levy an import charge that accounts for only 0.02 per cent of the deal.

Before the National Diamond Exchange was established, many interested diamond dealers and processors expressed worries about the future of the exchange in a public hearing on how the exchange should be managed.

"Besides the fact that the levying of taxation is a little bit delayed, I don't see any difference in taxation rates inside and outside the exchange," said one member of the country's diamond processing association. He warned at a public hearing in Lujiazui last year that the exchange might face difficulties attracting customers.

His was proved right. Business is lacking. The exchange, designed to be the first to allow foreign shareholders, did not attract enough member shareholders.

Public caution

If it is true that diamonds are just a consumption article and their temporary failure in attracting business has not affected the liberalization of China's currency market, then the difficulties that the National Silver Exchange is facing should spark caution among the public and regulators.

In June 2000, the National Silver Exchange, the forerunner of the National Gold Exchange, was officially opened at Huatong Nonferrous Metal Wholesale Market in Shanghai. Sales were hot in the first three to four months.

"People were excited by the liberalization of silver trading for the first time in China," said Zhang Tingting of Huatong's administration.

The market calmed down soon after that and the trading amount slid sharply, according to Zhang Changjie, general director of Huatong, in a speech early this year.

One reason for the sharp slide is tax - the high value-added taxation on every trade.

The authorities decided that silver manufacturers were to be charged 17 per cent of every transaction through the exchange.

The export quota system, under which only a limited number of companies have the right to export a limited quantity of silver every year, causes the extra silver to accumulate within the country and prices to drop.

Huatong is now applying to have the value-added tax reduced from 17 per cent to 13 per cent per transaction.

Solution needed

"The problems of the diamond exchange and silver exchange taught us a good lesson and made us think twice about rules relating to the management of the planned National Gold Exchange," said a precious-metal dealer who is involved in preparations for the gold exchange.

However, he said, he believe it is too early to say whether taxation rates for the planned National Gold Exchange will be reduced just because of what happened to the diamond or silver exchange.

Gold is one of the important hard currencies and the fluctuation of one country's gold reserve amounts or its prices will affect the economy greatly, he said.

"The taxation problem relating to the gold exchange will be more complicated," he said.

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