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Predicting bubbles is tricky business. As I approach my decade mark in China, the real estate bubble here has been looming on the horizon for several years. Predictions of the bubble have been flying around for years and everyone wants to be the person who called the collapse. Predict a bubble correctly and you are a superstar, positioned for profit. James Chanos, the man who predicted an Enron collapse, was a respected bubble predictor. He called one of the largest corporate implosions in world history. He also predicted that the Chinese real estate bubble will collapse. The only problem with his prediction is that he made it in January of 2010. This point is not to discredit Mr.Chanos or to make a case for or against the Chinese property bubble, but rather to point out that predicting bubbles is not an easy task. The real estate market is infinitely more transparent than the puer tea market, and still you have an expert in the field making an incorrect prediction that is off by 4 years and counting. Rather than make an article which speculates on the possibility of a puer tea bubble, this article will be a list of some factors to consider, allowing the reader to draw their own conclusion.
Prior to 2008, Laobanzhang was not the Goliath of the puer tea world that it is today. An instrumental part of its rise to fame was Chenshenghao, a company which built a factory at the edge of Laobanzhang, set prices for purchasing fresh leaves, contracted out the villages yearly production from farmers, and drove up market demand for the tea. At the time most tea drinkers thought the prices were absurd. Fast forward to 2014 and the prices for real, old tree Laobanzhang are well over USD 1200 for a kilogram. What most people purchase and most companies produce ends up being heavily mixed and faked, but still the prices maintain. Also interesting to note, they even have a credit union and an ATM at the entrance to the village now. The more recent addition near many Bulang villages is a Yulin tea factory. After wandering around Menghai, one loses count of how many Yulin factories are scattered across the townships in Bulang. The prices dictated by the company inevitably set the prices for the villages and surrounding villages. If Yulin is willing to pay $50 for a kilogram of fresh leaves, why would a tea farmer sell a kilogram for $35? Large group companies like Yulin have massive vested interests in the puer tea market and their brand. They have contributed to purchasing infrastructure such as factories, training staff, and stockpiling product to sell. They are building a brand. After such large expenditures by group companies like these, one has to question at what point would they allow a market shift to happen. Would they be willing to let a region falter? Would they refrain from purchasing any material and let Laobanzhang fresh leaves be purchased for $25 per kilogram? (Roughly 4 kilograms of fresh Spring tea equates to 1 kilogram of maocha [dry tea]) After investing significant amounts of money into building the brand identity of these areas and their own tea brands, there is a strong argument that maintaining the market, even if the market demand has not caught up to their product, is their best long term move.
Mountain regions in Yunnan produce varying amounts of tea and varying amounts of good tea. In a hypothetical region, a Spring harvest might produce 1 ton of Spring gushu [old arbor] tea and 25 tons of Spring taidi [plantation, young tree] tea. In the event of a bubble, these two teas will behave very differently. The best comparison to make would be prime real estate in a city center and sprawling suburbs. In the event of a bubble, the best real estate locations maintain their value because they are a limited asset and have intrinsic value. Even in the face of the largest real estate bubble in history, a 5th Avenue apartment is costly. The overbuilt suburbs however do not fare so well. To my knowledge, nobody has ever made an exact comparison of how much small tree tea versus old tree puer tea is produced on the whole in Yunnan, but suffice it to say that not all puer tea is created equal and old tree tea is the minority by a very large margin. In the event of a puer tea bubble, different teas and regions will behave very differently. The best course of action is for a consumer to ask themselves what a tea is worth to them. In the event of a bubble they will not be too disappointed because they paid their fair price.
Around internet forums and tea tables there is a lot of back in my day talk. "Back in my day, a brick of puer tea cost 2 RMB and donuts rained from the sky, and unicorns and leprechauns roamed freely about the mountain forests. " The unicorns sounds great, but unfortunately for the rest of us, those days are over. Tea farmers need to eat. Tea sellers need to eat. Tea factory workers need to eat. Everyone needs to eat. The reason that puer used to be inexpensive was partly due to a lack of fame and partly due to rural workers having an extremely low income. With a rise in both the market demand of quality puer tea and the life quality of all of the many workers involved in the production process, it is no wonder the costs are rising. Getting a puer tea cake to the end consumer requires tea growers, tea pickers, tea processors, tea pressers, tea packagers, tea delivery people and sellers, just to name a few of the links in a complex chain. The cost of living in China has risen at an amazing pace in recent years. The merchants who came in to Yunnan from their developed economies to purchase tons of tea for a pittance experienced an imbalance of costs that will not be seen again in this lifetime. In the future, puer tea costs will continue to reflect the market value of the labor involved in making raw puer tea, which is a very time intensive process involving a lot of labor from several different parties. This cost may not be represented accurately in the market today, but in the event of a market crash, the cost will never be what it was in the day of the state owned factories.
