The bubble bursts for Pu'er tea
By Olivia Chung

HONG KONG - Because of "excessive liquidity", or too much cash in circulation and in people's hands, not only stocks and housing but some unusual commodities can easily become items for speculation in today's China.

Pu'er tea, a fully fermented variety made from sun-dried leaves, has taken a roller-coaster ride since the beginning of this year. 

Pu'er tea is reputed to help people lose weight. Some people believe it can even prevent and cure cancer.

Many kinds of Chinese tea are best for consumption when they are fresh. Pu'er tea is different. The longer is it properly stored, the better its quality and taste (and supposedly its curative properties). Hence the price of older Pu'er is higher than the fresh ones. Such features make Pu'er a potential item for speculation.

The popularity in Pu'er tea has been on the rise in China since 2004, and the prices grew steadily until last year, with annual increases of 30%.

"Since the beginning of this year, the price of Pu'er has soared, reaching its peak in May at 20 times higher than last year's price. In terms of returns, Pu'er is a better investment than stocks or gold, isn't it?" a tea collector in Guangzhou said.

"In the first four months of this year, the price of Pu'er rose three- to fourfold. That included fresh Pu'er that was marketed only last October; its price grew by 80%, to 1,600 yuan per kilogram from 900 yuan," the man said. "So although the prices of the Pu'er tea dropped suddenly early this month, many still believe it's only a matter of time before interest in the tea becomes stronger again."

Wu Xirui, secretary general of the Chinese Tea Circulation Association, said the soaring prices of Pu'er tea, with a focus on such brands as Dayi, Haihe and Xiaguan, are a result of rampant speculation.

"The main speculators are dealers from Guangzhou and Beijing. Neither are tea production areas but they have large tea wholesale markets," he said.

Huang Jianzhang, secretary general of the tea culture research committee of the Guangdong Culture Study Group, said the average price of Pu'er soared to 800 yuan (US$105) per kilogram now from 8 yuan in 2004, as tea producers and merchants have bought up large stocks and are hoarding them, giving a false impression of a shortage to push up the prices.

"Some speculators inflate prices by placing dummy bids and organizing promotional events like the selection of a 'tea king' to bang the drum for the potential high value of Pu'er tea. Immediately after real buyers arrive, the sellers will sell out," he said. "Just like the market manipulators on the stock market, tea speculators 'stir-fry' the tea by buying and selling it in a very short period."

Industry experts also attributed the skyrocketing price to excessive liquidity, one of the key factors that have supported a bull run in China's stock and housing markets.

When people have too much money with too few few investment channels and are feeling the pressure of rising living costs, people hope to make quick profits by speculating on Pu'er.

Meanwhile, the skyrocketing price has caused people chasing short-term profits to produce more and more Pu'er, most of which is of low quality.

In Yunnan province, the major producer of Pu'er tea, more than 3,000 enterprises are producing the tea, but only 59 have quality safety certificates issued by the government. Some small individually owned enterprises producing low-quality tea sell fake brands.

The Pu'er craze is cause for concern in the tea industry. Wang Qing, vice chairman of the Chinese Tea Circulation Association, said a bubble has formed in the Pu'er market. The tea industry will formulate a code of self-discipline for the industry to guide the market by the end of this month, he said.

Meanwhile, the soaring prices benefit the tea industrial chain, in which farmers can make a gross profit of 20%, tea factories can make 15% and dealers 100-200%, said Xi Zixiang, vice chairman of International Pu'er Tea Association.

But he said tea shops might be the biggest potential victims of the rampant speculation.

"Tea shops are like small investors who usually face the biggest investment risks in the speculative boom since their customers are tea drinkers, most of whom are price-sensitive, and there are a variety of choices for them to choose," he said.

What goes up must come down, and this truism applies to tea. The Pu'er market saw its price drop 10-50% this month.

A shop owner named Gao on Boyuan Road in Guangzhou complained that after her shop bought a carton of Pu'er tea for 3,000 yuan last month, its price dropped by several hundred yuan in slightly more than 30 days.

Among the victims was a middle-aged man surnamed Zhang, who spent 400,000 yuan on Pu'er tea early last month. "The price went up a bit after a brief fall in mid-May. Then the prices kept going down. Now the stock is worth only 288,000 yuan," he said.

"Never, ever believe any of the so-called insiders. One has to equip himself with knowledge about the tea before making an investment. Otherwise, someone like me is forced to be a collector," he said.

In this tea-market mini-crash, the hardest-hit area is Guangzhou, where speculation on Pu'er tea outstripped stocks and property in the past four months.

A senior manager surnamed Chen at a Guangzhou tea-trading company said there is a price but no buyers in the Pu'er tea market now.

"The crash was caused by tea shops that began buying up large stocks estimated to reach more than 100,000 tonnes and hoarding them. That put part of them out in the market due to cash-flow problems," she said.

"Besides, the stock market has recouped the losses during the sharp correction starting late May after the central government tripled the tax on shares transactions. Thus liquidity is flowing back into the stock market, so the price of Pu'er started to fall," she said.

Others said some dealers who have faced the increasing costs put their stocks back on the market to protest the unreasonable price rise.

Olivia Chung is a senior Asia Times Online reporter.

(Copyright 2007 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)