Happily in the red
Updated: 2012-01-13 08:39
By Xiao Xiangyi (China Daily)
Chinese people seek investment opportunities in a wine-tasting event in France last year. [Provided to China Daily]
Wine-based investments are becoming an alternative for Chinese investors
Many Chinese investors, faced with rising inflation and a volatile stock market in a slowing economy, are increasingly in the red. Though some might indeed be experiencing losses with financial products, which in the recent past included investments in antiques, diamonds, stocks and fine art, what a growing number of investors and consumers in China are becoming more passionate about is investing in wine, particular reds such as Bordeaux and Burgundy.
In recent years, as China pushes for more consumer spending and its wealthy increasingly fall in love with status symbols, hot alternatives to the stock and real estate markets have been wine investment funds and wine exchanges, which reportedly offer a buffer against the nation's rising inflation. A growing market for wine, China surpassed Germany to become the top Bordeaux importer in volume last year.
The wine-based investments essentially funnel money into financing wineries and in return expose Chinese consumers to a greater amount of wines.
The nation's first wine investment fund, called the Dinghong Fund, was launched in August. According to Decanter.com, Vintex & Les Vignobles Grgoire, which will manage the fund's wine buying, said it plans to raise 1 billion yuan ($156 million, 124 million euros) over a five-year period and will invest in Bordeaux and Burgundy wines.
As China creates more opportunities for investments into luxury products, many Chinese consumers are buying.
"The best-known brand among Chinese, 2008 Lafite Rothschild, for instance, has hit an astounding increase of 194 percent (in price) during the past three years. The huge investment benefit has greatly surprised and lured Chinese investors, though many don't quite understand the wine culture," says Yu Min, president of Haozun Future Wine, a consulting company in China for wine investors and collectors.
Yu Li, personal banking manager of China Merchants Bank, says the Chinese wine-based investment market is booming. At the fine wine auctions of Sotheby's and Christie's Hong Kong last year, more than 50 percent of the attendees were from the Chinese mainland, says Yu, who adds that owners of the eight prestigious Bordeaux chateaus have visited China recently.
"This was unimaginable five years ago. They come to China for nothing but to sell more wines," he says.
The wine market in China reached 125 million cases (12 normal sized bottles of 750 milliliters per case) in 2010, growing 34.4 percent with projections of nearly 250 million cases by 2016, according to the International Wine and Spirit Research's (IWSR) China Wine Market Report 2011. The IWSR is a provider of data on wines and spirits.
Hong Kong in particular has become the wine hub of China. The Hong Kong Wine Exchange was launched in October as a trading platform to buy and sell globally through the company's network of wine storage partners. Taxes on wine in Hong Kong were eliminated in 2008.
One of the major factors in the growing wine market is increasing demand from China where consumers' tastes have grown more sophisticated.
Yu Min, a member of London's Liv-ex: The Fine Wine Exchange, started a wine investment consultancy business in 2008 by providing advice for individual investors on the Chinese mainland. He says that since last year, more companies and organizations with larger investment scales have looked to Yu's expertise. He says his goal is to manage an investment portfolio worth 20 billion yuan in five years.
"Chinese are apt to invest in wine futures that is bought before wines are bottled and released to the market. Chinese particularly like the wines that are considerably cheaper and highly limited in quantities," Yu says.
But wine-based investment products are not automatic cash cows and there are risks that vintages will degrade or drop in ratings of quality before and after they are bottled. Yu says he and his team make investment plans according to the client's risk preferences.
"We usually tell our clients it will be fine if the annual rate of return keeps at 15 percent," he says.
The Chinese wine market is also confronted, Yu says, with two other major challenges. One is a lack of transparent information in China. Many people are not accurately informed of changes in pricing information on a timely basis.
The value for wine-based investment basically relies on stable prices, rarity of the fine wine and a transparent pricing system, Yu Li says. Whether the investment is successful depends on whether the wine is authentic and the price reasonable.
There are three categories of investors: those who invest for the purposes of trading, those who are adding to their wine collection and those who want asset allocation. Most investors belong to the third category and may also invest in gold or in real estate. Currently most buyers of wine-investment products are high-end customers with a great interest in wine. Yu Li says a return on wine-based investment is currently not that considerable, but points out that many customers are not in the market just to make a buck. They are wine lovers and collectors.
As the market for wines grows in China, the nation's banks have jumped on the bandwagon. As early as 2008, major banks in China, such as the Industrial and Commercial Bank of China, Bank of China and China Merchants Bank, have created wine-based financial products.
The products usually introduce customers to domestic wineries as investment targets. China Merchants Bank, for example, introduced its wine futures in famed Chinese winery Chateau Junding, owned by China National Cereals, Oils and Foodstuffs Corp, in 2009.
Through wine futures, investors can purchase wines early while a vintage is still in a barrel and before it is bottled.
"The products are highly accepted by customers, because many people love to get acquainted with the value of wine investment in this way," Yu Li says.
China Merchants Bank is planning to cooperate with wineries around the world later this year.
"Obviously the chateaus that achieve Premier Cru (first growth) status in the Bordeaux (Wine Official) Classification of 1855 are more valuable," he says.
Another consequence of the growing wine market has been the growth of wine trading exchanges, such as the Shanghai Wine Exchange, the first online exchange center in Asia that was established last July.
Every day, around 6 million yuan to 7 million yuan changes hands. Gu Guang, founder of the exchange, says current growth rates suggest that the exchange volume may reach in the tens of billions in yuan in three years.
The Shanghai International Wine Exchange, established Dec 18, 2011, is the only high-end wine exchange that is supported by the Shanghai government. Both fine wine and Chinese liquor are exchanged on the market.
Li Wenfeng, president of the Shanghai International Wine Exchange, says the exchange has direct cooperation with wineries and liquor producers to guarantee quality, authenticity and affordable prices.
"The potential of Chinese wine investment market is beyond imagination. And the Chinese market will sooner or later become the exchange center, helping price fine wine around the world," Li says.
"The appearance of e-commerce platforms like these online exchange centers serves as a good settlement for the problem of wine circulation. It at least shows that China is keeping up with Western paces," Yu Min says.
The Chinese' zeal for wine has greatly encouraged and benefited wine producers and retailers. Castel Freres Winery, the top wine producer in France and in Europe, has experienced dramatic growth in the Chinese market.
Castel sold 5.5 million bottles of wine in 2008 in China, 12 million bottles in 2009, 20 million bottles in 2010 and 30 million bottles in 2011, says Xavier Pignel-Dupont, chief representative of the France Castel Winery Shanghai office and general manager of the branch in China.
"Since 2010, China is our first export market. Before China, it was the UK. Due to the economic crisis in the Europe plus the tremendous increase of the wine market in China, the situation remains the same in 2011."
He believes Chinese investors will gradually switch into wine drinkers and lovers from being simply bankers for profit.