Chinese Tea & Herbs – A Viable Investment?
Every now and then, as you read news about investing, you will see people invest in something new that is not the norm – not the stock market, not property, not even crypotocurrency, which seems to be the norm these days.
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Today, for the 216th week of our #SundayTimesRecap learning series, we are going to explore this interesting article featured in yesterday’s Sunday Times Invest section, “When investors pour money into Chinese tea and herbs”, so as to broaden our perspective and understand whether this is a viable investment, or just another speculative deal:
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1. How did it happen? With low and falling interest rates, stocks and property in stagnation, speculators are pushing into obscure fringes of China’s financial markets to find investment returns.
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China’s stock markets are sluggish following three years of losses, while bond yields are near record lows, limiting returns for savers. New homes prices fell at their fastest pace in July in nine years, government data shows, extending a housing slump.
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The weakness of China’s traditional investment avenues has prompted speculators into murkier financial products in search of returns. A flood of investment money has moved into tea and traditional Chinese medicine herbs, prompting official warnings to the public not to get consumed by the fever of fast-rising prices and to speculators not to pump up markets.
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It is worth noting that speculative investments have always been there. But they are more attractive in an economic downturn.
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2. What were the returns? Prices of some herbal plants have tripled over the past two years. Some brands of premium tea leaves, compressed and sold in the form of bricks, are selling for thousands of dollars, having doubled in a matter of months. The speculative frenzy comes at a time when China’s economy is struggling for growth as it grapples with deflationary pressures and weak consumer demand.
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In the Chinese medicine market, the Kangmei Chinese Medicinal Material (China) total index hit a record high last month, up about 50% in three years.
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Prices of certain herbal plants, such as Goldthread, white peony root and tree peony bark, have more than tripled in the past two years.
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In the tea market, trading has been brisk in the premium pu’er variety, which is considered by experts to improve in quality as it ages, and is traded and collected much like vintage wine.
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According to tea dealers, tea trading is more fragmented compared with the medicinal plant market. As some brands have rallied, others have fallen, tea dealers said.
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Tight supplies following floods were partly behind the rally, but a bigger factor was “manipulation by capital”.
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3. Is this market regulated? The Bozhou Traditional Chinese Medicinal Material Association, an industry group, warned speculators in a statement last month not to “pump up prices”, prompting a modest correction. The Kangmei Index is down roughly 4% from its peak.
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Also weighing on sentiment, China’s State Administration for Market Regulation on 9th Aug 2024 published draft anti-monopoly guidelines for the pharmaceutical sector, including traditional Chinese medicine, raising the prospect of closer scrutiny of the market by the authorities.
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4. What are the risks? Chinese state broadcaster CCTV reported in January that prices of chang shi tea, a pu’er brand from tea trading hub Guangzhou, shot up to 50,000 yuan (S$9,200) per 2.5kg brick, before plunging more than 80% overnight and burning investors.
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Amid the gyrating prices, Fan Cha Holdings, which calls itself the Hermes of China’s tea industry and has 500 shops across the country, said in a statement on its official WeChat account that it had plunged into “grave crisis”.
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It did not explain publicly what had caused its crisis, but the announcement triggered a rush by people who had bought its products to ask for their money back.
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Chairman Zheng Chaogen has suggested investors swop their tea or other claims for equity in the company, according to a company statement and video streaming via the official WeChat account. It also said it would sell assets and raise fresh capital.
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Fan Cha did not respond to several requests for comment, including on what was behind the company’s “grave crisis”.
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Several of the country’s authorities have warned producers, without identifying any specifically, not to sell wealth management products.
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The practice is rampant and involves “huge risks”, the government of Liwan district, home to Guangzhou’s wholesale tea market, said. “Investors should be on high alert, and get rid of the whim to get rich overnight,” it said.
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Would you dare to take the risks to invest in such speculative products? Personally, I would prefer just drinking the tea and enjoying its taste, while sticking to the traditional route of growing wealth through the stock market.
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Share the same thoughts? Come join my teammates and I at our next webinar, “The Lifetime Income Streams”, on Monday 23rd Sep 2024 at 8pm.
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