Koos Jansen
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Koos Jansen
Posted on 31 Oct 2014 by

The Great Chinese Silver Market Debate

Bloomberg came out on October 28 with an article about Chinese silver hitting a premium of 17 % this month.

Have a look at Bloomberg’s chart on Chinese silver premiums.

Regular readers know I’m one of the few that reports on the pure price of silver in China being cheaper than in London, because all Chinese commodity exchanges quote silver including 17 % VAT. If we subtract 17 % from the quoted prices, the pure price of silver in China is currently trading at a 4 % discount to London, not at a premium like Bloomberg states. As we can see in my chart below the premium is negative.

Shanghai Gold Exchange silver premium

By the way, silver is still trading in backwardation on the Shanghai Futures Exchange (SHFE), since August 6. This has caused the discount to decline to 4 %.

SHFE silver backwardation October 29, 2014

Obviously Bloomberg and I have a disagreement on the Chinese silver market – comparable to my disagreement with the World Gold Council on the Chinese gold market. Though, the Silver Institute agrees with me on the Chinese silver market. In their report The Chinese Silver Market, published in 2012, they stated: 

As mentioned earlier in this report, since the liberalization of the Chinese silver market, all
silver transactions are subject to 17% VAT in China. In other words, local smelters need to pay 17% tax on silver contained in imported concentrates (typically based on international prices). However, as domestic prices (excluding tax) have been trading consistently lower than the international price, it is not surprising that local smelters tend to prefer low silver content in imported concentrates. It is worth stressing here that silver prices quoted on commodity exchanges in China have already included a 17% VAT.

What is remarkable is that Bloomberg reports on a very high silver premium in China mainland, yet, they link this to a scheme in which traders export ingots labelled as acoustic wire to profit from a tax rebate. Quote:

Silver in China has been the most expensive relative to London in about three years as exporters stepped up overseas shipments to qualify for a tax rebate, draining inventories of the metal.

…exporters boosting shipments by classifying ingot as acoustic wire, said Liu Xu, a precious-metals analyst at Capital Futures Co. in Beijing.

…“It’s an open secret in the local silver industry that a lot of exports have been thinly-veiled attempts to profit from tax rebates,” Liu said. “There isn’t that much demand overseas for acoustic wire for stereos. Yet a lot of shipments this year have been labeled as wire.”

What’s wrong with this story? Why would any foreigner import silver ingots from China when it’s 14 % more expensive than in London? Doesn’t make sense right?

This is my view: it could very well be silver ingots are exported as acoustic wire from China because the pure price of silver in China is cheaper than in London (not more expensive as Bloomberg states). However, to arbitrage the price difference, foreign importers would need to be able to pay the pure price of Chinese silver, excluding VAT.

It can go like this. The exporter buys silver ingots, for example, on the SHFE and is required to pay the pure price plus 17 % VAT. When he would export this as ingots there is no VAT rebate for him from the government, this law was passed in 2008, so he would have to charge his trading partner the price of silver plus 17 % VAT to balance the VAT he paid at the SHFE. If the foreign importer is charged with VAT from another country he can’t get restitution, he would pay for the pure price of silver imported plus 17 %.

The Chinese government implemented the aforementioned law to withhold silver ingots/bullion from leaving the country. Of course silver is exported in many other forms, like in solar panels or acoustic wire. The next quote is from the law passed in 2008 that ended VAT rebates on silver ingot export.

Translated by my friend LK, gold investor from Hong Kong:

Department of Treasury, State Dept of Taxation Notice on Adjustment on Export Rebates of Textiles and other Commodities.

Document Number: Taxation[2008]111.

Issuing Unit: Department of Treasury, State Dept of Taxation

Issuing date: 2008-07-30

To each province, Self-Administrative Region, Municipal, Planning cities (bureaus), State Administration of Taxation, Finance Bureau of Xinjiang Production and Construction Corps:

At the approval of the State Department, export rebates for certain commodity products are adjusted as follows:

1. Some textile, garment export rebate is raised from 11% to 13%; Export rebate for certain bamboo products is raised to 11%. For exact details please see Appendix 1. 

Export rebates for these products are cancelled: Pine kernels, certain agricultural chemicals, certain organic arsine chemicals, taxol and its products, rosin, silver, No. 0 zinc, certain paint products, certain battery products, carbon anode. For exact information please see Appendix 2.

Implementation Timing

The aforementioned export rebate changes take place on Aug 1, 2008. Applicability is determined by the date specified on the form “Export of Goods Customs Declaration (for Export Rebates)”.

Appendix 2. List of goods no longer qualified for export rebates:

Screen Shot 2014-10-29 at 7.47.31 PM

If the exporter ships the ingots as acoustic wire he apparently receives a 17 % VAT rebate (the VAT of acoustic wire is paid back by the Chinese State Administration of Taxation to the exporter). In an article Bloomberg published October 30 they stated:

Outbound shipments of silver this year have at times been classified as acoustic wire as traders sought a 17 percent export rebate used to encourage domestic high-end manufacturing, Liu Xu, an analyst at Capital Futures Co., said Oct. 29.

There you have it, silver ingots don’t get a rebate when exported, acoustic wire does get a rebate. This is how the exporter can sell silver abroad for China’s cheaper pure price. So, the exporter found a way to arbitrage the price difference between Shanghai and London. If the difference is 4 %, both the exporter and the importer can have a piece of the pie. This scheme could perfectly cause high demand for silver in Shanghai and the concurrent backwardation on the SHFE. Bloomberg’s analysis, stating silver is trading at a premium in China, I think is incorrect – wouldn’t be the first time.

Exporting silver ingots as acoustic wire is another example of fraud and circumventing protectionism. Let’s hope governments will realize some day that capitalism can only thrive in free markets.

From the SHFE Rulebook:

Article 44

The contract price of a futures contract means the price including the value added tax, or the VAT, for the contract’s underlying standard grade of commodity delivered at the benchmark delivery warehouse.


Koos Jansen
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  • KoosJansen

    No comments?

  • KoosJansen

    I think unwitting errors. Can’t see any motive for an agenda here.

  • K Solomon

    If above is true, and that the 4% arbitrage has sufficient margins (for both Chinese exporter and foreign importer) after covering freight and handling costs, it would mean that silver is going from East to West, which is opposite of gold’s movements. Doesn’t this seem illogical that the Chinese would allow that, especially since silver has been a monetary coin/bullion in China’s history?

    • KoosJansen

      They don’t allow it. The Chinese government lifted the VAT rebate in 2008 on silver bullion export to keep the silver in the mainland. Labelling bullion as wire is fraud.

      • missiondweller

        I would imagine its only fraud if you’re not a high level party member in China. Interesting stuff. Thanks for posting.

    • Guest

      Does have a point, how do they make a profit on 4% arb when handling and shipping is excluded? I mean I use to be a director of a parts operation in Hong Kong and anything with this low profit margin would mean a money loosing proposition. I don’t see the economic benefit for the Chinese exporters, especially when they need to export the stuff as silver wire. Unless they are shipping minted coins and the bill of laden states them as wire then I see this making economic sense. Maybe I’m missing something.

    • AK

      Well, here is an interesting take as to why the Chinese export of Silver might make sense after all (see link below).
      Very interesting hypothesis. Is there something to it? Beats me, but something strange is afoot in the physical precious metals markets.

  • John Landis

    “The exporter buys silver ingots, for example, on the SHFE…”
    Exactly. For example.
    There are hundreds of places in China where these scheming exporters could take the silver out.
    Why should they take it out from the SHFE?

    “This scheme could perfectly cause high demand for silver in Shanghai and the concurrent backwardation on the SHFE.”
    Do you mean: “This scheme could perfectly EXPLAIN the high demand for silver in Shanghai and the concurrent backwardation on the SHFE” ?

    This is how people are reading you. Cfr.: “The next article I’m linking to explains
    partly why Shanghai is running out of silver at a breathtaking pace
    while prices are falling. (link to your article)

    My point is, this export-scheme could perfectly explain high demand for silver in
    Shangai and ect. only if there was a particular reason for these exporters to
    to go Shangai.
    What would be this reason? Again, there are hundreds of places in China where you can buy silver (I suppose. Maybe Im wrong).
    Is there any reason why exporters should go to the SHFE?

    Thanx for your work Koos

    • KoosJansen

      I’m not responsible for how others interpret my work.

      The biggest exchange for silver in China is, I think, The White Platinum & Silver Exchange http://en.ex-silver.com/ in Shanghai (spot).

      The fact that the SHFE warehouse was depleted probably means there was also high demand on other exchanges (think arbitrage).

      Shanghai exchanges are located at a harbor, though, for example the South Rare Precious Metals Exchange http://www.csrpme.com/index.asp is not, it has only vaults in Yingtan, Chenzhou and Hechi, Maybe Shanghai silver is in higher demand. I did not check it.


    Good piece , I was enlightened by the information – Does anyone know where my business would be able to get access to a fillable CBP 6059B version to complete ?

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