Silver Price Discrepancy Explained: China's Tax Structure Takes Center Stage

Silver is traded at a higher price in Shanghai than in London or New York, despite China being a net exporter of silver. In August, the Shanghai Gold Exchange benchmark closed at $75.16, a gap of $8.72 an ounce from the Western reference price.

The reason for this discrepancy lies in China's tax structure. Refineries importing base metal concentrate pay no import value-added tax on the silver content if the refined bullion is re-exported, but 13% is levied on the total value otherwise.

This tax structure has a peculiar effect: it keeps foreign bullion out of the domestic market and rewards sending domestically refined metal abroad. As a result, China's visible domestic pool of silver ended the year 44% smaller than it started.

India runs a similar play with different plumbing. In May, India raised bullion import duties from 6% to 15%, and four days later moved silver bars of 99% purity and above into the restricted category, requiring a licence.