Reuters Edge

Tea leaves point to Chinese asset price bubbles

BEIJING (Reuters) - A walk down Beijing’s Maliandao tea street speaks volumes about the forces driving up the prices of Chinese stocks and property -- and why the government should be worried about the dangers of asset price bubbles.

While most of the tea sold at hundreds of stalls is average jasmine or green tea, a speculative frenzy has sent prices of one of the rarer leaves to astronomical levels in the past couple of years.

Asked just how expensive puer tea -- a fermented variety from southwestern Yunnan province -- can get, some shopkeepers nervously dodge the question. Others ask if you’d like to invest.

“Last year everybody was talking about ‘crazy’ puer tea, saying the speculation had reached ridiculous levels -- a little like the stock market this May,” said Liu Manxia, who runs a shop at Maliandao.

Liu says that while betting on the tea has calmed down somewhat since then, the speculation has helped lift prices for the average puer she sells by around 20 percent since last year.

And anecdotal evidence suggests that some people are still willing to pay large sums for it: the official China Daily reported that a 100g (3.5 oz) brick of 60-year-old puer sold for 300,000 yuan ($39,400) in February, though state media say scandals over quality have hit prices over the past month.

Puer’s popularity has been driven largely by China’s new rich for whom it is one trapping of a well-off lifestyle, linking it inexorably to the value of other assets, said independent economist Andy Xie.

“You might not link the rising prices of some tea to the stock market. But when the stock market bubble bursts, you will see where the prices of puer tea go,” Xie wrote in a column in the influential Caijing magazine in May.

The tale of puer tea, though an unconventional store of value, is symptomatic of a larger, pressing issue facing Beijing.

“Savings rates are too high, and there are too few investment assets,” said Ben Simpfendorfer, a strategist with Royal Bank of Scotland in Hong Kong.


The signs of asset inflation are everywhere, from increases in property and stock prices to the skyrocketing premiums commanded by some paintings and antique ceramics. Even graves are getting out of reach for some: runaway speculation in tombs prompted a government crackdown in April.

Mainland auction houses have set a series of records in recent weeks, with one oil painting, “The Ancient City of Jiaohe” by Wu Guanzhong, going for 40.7 million yuan including commission in late May -- nearly three times the expected price.

To be sure, the forces behind such eye-popping numbers are not all about money seeking a higher return.

It is an open secret that some artists are getting friends to bid up the prices of their works to elevate their reputations, said Brian Wallace, director of Red Gate Gallery in Beijing.

Liu Gang with China Guardian Auctions Co. in Beijing said that while some of those bidding up art were doing it as an investment, many were just flocking to it as the latest fad.

“(A lot of people) have bought their big house, their car -- and now they need art works to hang in their homes,” Liu said. “Many of those who aren’t familiar with the market ask others whose works are the most expensive, and that’s what they buy.”

Psychological considerations aside, the end result is that prices are going up for a wide range of assets, some in leaps and bounds -- and that is worrying a government determined to keep the economy on a steady course of expansion.


Any serious bust in property or stocks could undermine financial stability; any spillover from asset inflation on goods prices would come onto the radar of a central bank aiming to keep consumer inflation within 3 percent this year.

“I think it is probably going to be the biggest challenge that they face over the next few years,” Simpfendorfer said of Beijing’s efforts to rein in asset prices.

For one, moves to stimulate capital outflows such as the Qualified Domestic Institutional Investor (QDII) scheme would have only a limited impact in the near term, he said.

“Until the yuan has appreciated to around 6.5 (against the dollar), it will be very tough to convince residents to invest abroad, and until that point you have all that trapped liquidity -- it has to go somewhere,” Simpfendorfer said.

For Wang Qing of Morgan Stanley in Hong Kong, the question comes down to the price of money being too low. “You have to raise interest rates, to at least help people appropriately calculate the cost, the risk, of investing,” Wang said.

Frank Gong, chief China economist with JPMorgan Securities in Hong Kong, called potential asset price bubbles the main risk to the economy -- necessitating both faster currency appreciation and greatly expanding channels for cash to flow out, like QDII.

“When you have so much gas in a hot air balloon, even if we are not in a bubble stage, we could be heading there very quickly,” Gong said. “The best way is to let the excess gas out.”

($1=7.61 Yuan)

Additional reporting by Zhou Xin