Vineyards Pop Corks on Chinese Wine Investors

Wine-tasting party conversations among investors in China are increasingly sounding like sour grapes.

Some well-heeled wine investors have been anxiously debating whether a price bubble for investment-grade wine is getting ready to burst. Others complain that counterfeiters who palm off fake bottles of rare vintages and smugglers who sneak French burgundy into the country are ruining the legitimate spot market for expensive cases of wine.

Meanwhile, bearish investment advisers are warning clients about risks of trading perishable commodities for which there is no exit mechanism. And speculators are finding less room to maneuver following last year’s steep price cuts for French wine futures called “en primeur.”

Just a few years ago, when wine investing was relatively new in China, none of these issues mattered much. Investors ranging from fine wine connoisseurs to speculators to the curious snapped up European products of the vine come what may. Their enthusiasm quickly drove up prices.

Today, price trends have reversed. Many who bought cases of rare French burgundies in 2009, for example, are now being forced to sell at a loss or hang to hopes that prices will rebound.

No one knows the total monetary value or scope of Chinese investment demand for wine, but global industry experts generally agree that Chinese buyers significantly pushed up prices over the past four years.

En primeur prices for the French wine Chateau Lafite, for example, increased eight times between 2006 and 2010. Spot market prices for bottles jumped substantially as well. Some Chinese investors bought an entire year’s output from middle-of-the-road French vineyards.

Meanwhile, demand from China put pressure on some of the very best wineries. Some took price-control action designed to counteract speculation. Vineyards in the Bordeaux region, for example, set prices for 2011 en primeur of at 40 to 50 percent below 2010 levels.

The vineyards’ moves had the desired effect: Investment-grade wine prices fell substantially, and over the past year the en primeur downturn has gradually spread to other areas of the market.

Some Chinese who invested in high-priced en primeur wines can expect to recover their investments in the future by gradually selling inventory, said Xie Wei, who owns a wine storage company in Hangzhou. But those without sales channels are likely to lose money.

Prices of Lafite, the most popular investment wine for Chinese, saw some of the steepest declines. The value of a single bottle of en primeur Carruades de Lafite, a brand sold to more Chinese than any other group of national investors, declined to 900 yuan from a peak of 1,600 yuan just a year before.

Unorthodox Investors

Chinese investors who added wine to portfolios in recent years generally followed advisers who recommended buying “well-known wineries ... on rising but not falling prices.”

In so doing, though, Chinese investors were labeled rule-breakers by longtime market players, including many who tend to play the game conservatively.

“Chinese people have money,” said the China region director for a Bordeaux winery. “But to be honest, Chinese people don’t have a good reputation in many production areas in Bordeaux.”

“Chinese investors have been into wine for only a few years,” Michel Negrier, export director for the French vineyard owner Lafite Group, told Caixin. “They need a learning process, and a process of returning to rationality.”

The decline for the latest en primeur prices may have been the wake-up call that some said the Chinese investors needed.

The adjustment certainly affected Beijing’s wealthy wine investors, said Qu Hui, sales director at the Beijing Annual Wine Club. Qu says she knows of a young Chinese woman and recent college graduate who, by working with small vineyards in France, arranged sales of about 48,000 bottles of wine to Chinese investors.

Although many investors had expected Bordeaux wine prices to fall moderately, given grape harvests, they were stunned when prices fell up to 50 percent for Lafite en primeur as well as other wines from other vineyards popular among Chinese such as Latour, Margaux, Mouton, and Haut-Brion.

Established wine investors, meanwhile, generally saw nothing unusual about the price swings. En primeur wine investing can turn a profit one year but earn nothing the next, depending on demand, said Zhang Yanzhi, chief China representative for Establissments Jean-Pierre Moueix, the parent of the French vineyard Chateau Petrus.

“Chinese people only buy en primeur wines when prices are rising and not when they’re falling,” Zhang said. “Most of them are speculators.”

“Chinese practices have disrupted the centuries-old rules of the game in Europe,” Zhang said.

Especially stung by the price plunge were 2009 and 2010 en primeur investors who suddenly found themselves stuck with high-priced bottles and, Zhang stressed, no exit channel.

Qu said most of her wealthy customers drink what they buy, and en primeur wines represent a small portion of the combined portfolios among club members.

Speculators who used to take advantage the fact that Chinese investors formerly knew little if anything about trading platforms such as the London International Vintners Exchange can no longer count on making money, said Wang Jiaqi, marketing director at the Shanghai Wine Trading Center. En primeur prices are now more easily accessible to distributors and Chinese investors, for example, he said.

Moreover, wine values have fallen due to the slumping European economy. En primeur prices used to be lower than bottled wine prices, but now they are about the same.

Industry insiders say the investment market is also negatively affected by counterfeiting and smuggling. Phony bottles of rare wine explains media reports of Chateau Lafite Rothschild and Carruades de Lafite consumption levels in China exceeding production of these brands.

Qu told his club members “bring us bottles and ask whether they are real or fake. The bottles and cases look exactly like the real stuff, so there’s no way to tell whether they are authentic without tasting the wine.”

Lafite in May launched a microblog in China through which the vineyard has been trying to combat counterfeiters.

Another challenge facing Lafite is that its wine is being smuggled into China by customs-dodgers, said Chen Dan, a lawyer and the company’s legal representative in China, who works for the Unitalen Law Office in Beijing. Chinese law offers the vineyard little protection, she said, adding wine in bottles snuck into China is often poor quality due to improper shipping and handling.

Lafite in April set a price of 420 euros per bottle for en primeur Chateau Lafite Rothschild, down 30 percent from the previous year. The Latour vineyard, meanwhile, stopped en primeur sales.

Bold but unorthodox Chinese investors surprised French vineyard owners by buying a full year’s production.

Many vineyards have stopped accepting orders from China, where too many investors are merely interested in making money quickly and some bargain in bad faith.

A state-owned trading company in 2010 that bought 10 million euros worth of en primeur wine from a French vineyard later refused to pay for delivery, said an executive from a Bordeaux winery. In another case, a group of Wenzhou investors broke a 300 million yuan contract.

Chinese investors are still targeting wine futures and the spot market. Some have expanded into buying whole wine companies or vineyards, which can cost more than 40 million yuan. Reports say a food conglomerate called Shanghai Bright Food (Group) Co. Ltd. recently bought a stake in a French wine distributor.

Qu Yunxu and Jin Qing are Caixin staff reporters.

Business, Society
Wine, Investment, Speculation