Dahongpao, A New Chinese Tea Bubble?

WuYiShanHarvest
Wuyishan harvest inside the reserve

I started working on this post about a month ago when Zhuping spotted this on a Chinese site and it got picked up quickly by a commodities website. Here is the lead paragraph referring to a story that appeared on CCTV, the Chinese government’s TV network:

“Since the middle of last year, the report says, prices of certain types of Da Hong Pao have increased tenfold. According to one expert interviewed by CCTV, the wholesale price for mid-range varieties of the tea has risen from between 200 and 400 yuan to around 4,000 yuan per kilogram, with retail prices reaching 20,000 yuan or more. CCTV found one retail shop in the Fujian city of Xiamen that claimed to be selling one variety for 200,000 yuan, or roughly $30,000, per kilogram.”

I have been waiting to see if there was going to be more of a buzz about this in the press. There had not been any until the last couple of days when this showed up in a Sri Lankan site, and this in an article today about Chinese inflation on a site in Singapore. Word has been getting around and is becoming more legitimized as it gets echoed around by the press that is not checking out the story. This is how bubbles get started. We have been doing some checking into this in Wuyishan to see what was going on in the meantime.

So does this mean that there will be a new tea bubble, this time in Da Hong Pao? The tea speculators in Xiamen in Southern Fujian are probably hoping.  I can tell you that there was no significant change in the price of Wuyishan oolongs, although the tea this year is very good, and the production was delayed because of a cold winter, and then further hampered by torrential rains and flooding, but prices were not deeply affected as they were with some green teas. If you read the Chinese article (Google will be happy to give you a rough translation), it is suggested that there is a lot of DHP for sale that is fake. There are a lot of people that can’t tell the difference between DHP and other rock wulongs that have deeply roasted. There is always talk about the high price fetched by tea that is harvested from the original bushes, but that is not more than 100 grams of tea at best.

There is no doubt that most DHP that is sold is fake whether there is price manipulation in the market or not. Wuyi Mountain is a big tourist destination for Asians, Chinese, Korean, and Japanese especially. I can promise that there are very few of them that leave to go home without having purchased some “authentic” DHP. In the last year alone the number of retail shops has gone from 500 to over a thousand. It is not reasonable to believe that there is enough DHP to supply those shops, any more than there is enough Longjing produced in Hangzhou to supply the millions of tourists that visit there each year, nor is it reasonable to believe that the people operating those tea shops are local with an inside source into the real thing. My friend Bill Todd of Todd and Holland Tea in Chicago told me a few years ago that he had had dinner with the mayor, while visiting Wuyishan, who told him that he doubted whether or not he had ever had any real Da Hong Pao.

While I was visiting there in 2007 I met a couple of real estate developers from the north of China that had bought a factory. It is surprising to me how many real estate guys have bought into the tea business as a way to get into a more honorable business. There is a lot of cash floating around China these days, and people trying to make a quick buck. The word in Wuyishan now is that the first speculators trying to manipulate the market were from Beijing. It was quickly picked up by speculators in Xiamen in Southern Fujian where there was another explosion of DHP shops. In 2008 and 2009 there was a spike in Lapsang Souchong (not the smokey kind) fueled by Xiamen businessmen. That lost steam very quickly.

We all remember the puer bubble and the havoc that occurred as a result. There was a five year lead up to the puer bubble that reached its zenith in the spring of 2007. I had heard about some very high priced puer that was on the market in 2002 in Guangzhou, and I was hanging out with some puer producers in Kunming in 2003 when a poorly dressed man with a entourage of much better-dressed men asked my friends if he could buy all of their puer. They had many tonnes in a warehouse. They refused to sell, and informed me that he was a Hong Kong speculator trying to corner the market in puer. People were storing some of their cakes in safes in Guangzhou, and the buzz was building, but prices were still pretty stable.

Things didn’t really get moving until speculators moved out to the countryside to buy up maocha. The methodology being used parallels very closely what happened during the puer bubble. It works like this. Speculators buy maocha, the tea that has gone through the first minimal processing that can be done by farmers, and manipulate the price at the source. Of course the farmers start to ask for more and begin to hoard. The bulk of the real rock wulongs is already spoken for by the better, more respected producers that have long standing customers, and are not involved in the speculation. That is how we were able to get our tea at around the same price as last year.The speculators, either by buying, renting, or starting new factories, process the tea. In Samoa, now renamed Puer City, the number of factories went from 200 in 2005 to 1100 by the beginning of 2007. The production time is greatly reduced for the fake DHP to just a couple of days, while skilled production could take many weeks. The growing area has extended into Jianou and Pinghe counties where Shuixian is the cultivar most used. The characteristics of the tea are masked by the roasting, but are unmasked by the progressive infusions and the color of the brewed leaves.

If I were to make a prediction of the outcome, if the bubble does manage to grow over the next couple of years, the same thing will happen as happened with puer. There will be a lot of people losing money. I tend to think that it will be more of a spike than a bubble.  If you are going to buy Da Hong Pao, make sure you are buying from people that you trust and have a history with this tea. Just because the tea is fake, doesn’t mean necessarily that it won’t be good, but if you pay for DHP that is what you should get.

Austin

UPDATE: There is another article, this one from the Wall Street Journal. Thank Elliot Knapp at Miro Tea for spotting this one.