Puerh Tea and Government Policy: The Building of a Tea Bubble

Hello Everyone! Here's the other awesome tea paper I had the great privilege to write as a final paper. This time about the effects of Chinese economic policies on puerh and in the creation of the infamous 2007 puerh bubble. I hope you enjoy it! I certainly enjoyed learning about the subject. Had a hard time staying in the word limit haha.

This paper is also dedicated to Smacha's 2011 Jingmai shu which has sadly finally been fully consumed. RIP sweet cake, you were so delicious and amazing.

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Puerh Tea and Government Policy: The Building of a Tea Bubble
By Miriam

The puerh market crash of 2007 was created by fatal flaws built into both the industry and the general economy by the national Chinese government policies starting in 1949 and later the local Yunnan government. Like all other true teas, puerh tea (also commonly spelled “puer” or “pu-erh”) comes from the plant Camellia sinensis. Specifically puerh uses the leaves of C. sinensis var. assamica, a variety of the tea plant with longer leaves than other varieties of C. sinensis and a preference for warmer climates. As the name implies, it is native to the Assam region of India, but also further east all along the Himalayan region and into the home of puerh; Yunnan, China. These leaves have been cultivated for use as tea for centuries by the local indigenous people and in more recent decades has been quite popular in Tibet, Hong Kong, and Taiwan in particular with gaining interest in Western countries such as the United States as well. What characterizes this type of tea is that after it is processed in a way similar to green teas it is then let to age and go through a microbial fermentation process. This can either be done naturally over the course of several years resulting in what is known as “aged raw/sheng puerh” or through an accelerated method that was developed in 1973 and results in what is known as “ripe/shou puerh.” Young, unaged sheng may also be consumed. There are other “post-fermented” teas within the category of “heicha” or “dark tea,” and the Yunnan region produces more kinds of teas than just puerh, but like Champagne wine or Darjeeling tea, tea called “puerh” can only come from Yunnan. The production method of puerh has lent itself to a fairly unique industry structure. Unlike other teas, puerh teas are much more similar to wine. They are known by their labels which tell the factory they were made at as well as the year they were pressed into cakes for aging, and often the grade of leaves used and the year that their recipe was developed as well. These unique qualities to puerh are critical to understanding how puerh tea developed a bubble and later suffered a crash in 2007.

Before the Communist Party of China took and Chairman Mao ascended to power in 1949, puerh tea was produced by private groups, usually family owned, called “Hao.” Puerh produced before the era of nationalization will often have “Hao” in their name such as the famous “Songpin Hao” or “Fuyuanchang Hao” puerh. According to Chan Kam Pong (2008, 12) in his book, A Glossary of Chinese Puerh Tea, after 1949 and into the 1950’s, all of the family owned puerh producers were nationalized under a state-owned enterprise called the China Tea Corporation. Furthermore, according to Pong (2008, 136) the China National Native Produce & Animal By-products Import and Export Corporation (CNNP) was also established in 1949 and the Yunnan branch controlled puerh production at several factories where it produced tea under the CNNP brand. This kind of nationalization took place in every industry in China as the economy switched to that of being entirely government planned. According to Jinghong Zhang (2014, 127) in her book, Puer Tea: Ancient Caravans and Urban Chic, during this time of nationalization puerh production in Yunnan suffered as the government prioritized growing food, even cutting down many old tea trees in order to switch to various crops. However production did still continue. The Chinese government exported a significant amount of puerh during this time to Hong Kong, Taiwan, and Tibet, largely for political reasons.

However, as with many of the state-owned enterprises, production was inefficient and costly with many factories operating in the red in order to meet state production demands. According to Gregory C. Chow (2005, 47) in his book, China’s Economic Transformation, in 1978 Deng Xiaoping rose to power in the Communist Party and began enacting a series of economic and political reforms. These reforms included first allowing state-owned enterprises to determine production amounts on their own to a certain extent, making them financially independent and letting them make profits, introducing a contract responsibility system where the state owned enterprises were allowed to keep surplus they generated after giving a certain amount to the state, reforming prices so that they began to respond to market forces, and finally restructuring state owned enterprises into shareholding companies. All of these reforms affected the puerh industry. Tea farmers started making more profits on their tea trees, villages started making more money on raw tea leaf production, factories started running in the black, and many were sold off and privatized throughout the 90’s and early 2000’s. CNNP is still a state-owned enterprise and still producing by licensing out the Zhongcha brand to the Kunming Factory. Zhongcha along with the Dayi brand produced at the Menghai Factory (which was privatized in 2004) are the two most famous factory produced brands of puerh tea. In the greater Chinese economy incomes rose, malnutrition declined, and standards of living increased for many people.

However not everything was so rosy. As people accumulated wealth, they needed somewhere to invest it. However according to Dominick Salvatore (2010, 17) in his article, China’s Financial Markets in the Global Context, China’s financial markets had severe limitations and were underdeveloped. At that time (and to large extent still today) every financial market was lacking in some massive way. Throughout the 90’s and into the 2000’s, when China was going through a period of extremely rapid growth, the lack of a financial market in which to put their money led people to try a variety of ways in order to build up capital investments. Many people and companies invested overseas, but many people also started taking notice of the Yunnanese puerh industry and decided that tea could make a great investment. According to Zhang (2014, 94-120) from around the late 90’s and especially in the very early 2000’s, the Yunnan provincial government strongly encouraged the production and consumption of puerh tea. They promoted the image of puerh as being an extremely cultured drink, Yunnan being the home of Shangri-la, puerh being extremely healthy, held many conferences and other events concerning puerh, and even funded recreations of old caravan routes to fuel a sense of exoticism and “earthiness.” One of the other things that the government and industry leaders also pushed was the special aspect of puerh that it is an aged tea that gets better with time like wine. This is true to an extent, but people took it to extremes and started thinking of puerh as a serious life savings investment. According to Zhang (2014, 100) by 2003 more traders were doing business in puerh than other kinds of tea and between 2002 and 2006 at auctions the prices of puerh skyrocketed to 168,000 RMB (which broke the previous auction record that was held by a Tieguanyin oolong) for 100g and eventually 220,000 RMB for 100g. Furthermore, in 2006 sales of puerh accounted for a third of all tea sales in the largest tea distribution market in China.

These kinds of extremely high prices created a massive increase in demand and in production. However recall that puerh isn’t typically consumed in the first few years of its’ life and is considered more valuable the older it gets. But here we have the price of young puerh skyrocketing and people purchasing massive quantities of it for storage. A huge glut of young puerh is building up. To further cause issues in supply, since tea companies can now make and keep profits, according to Zhang (2014, 112), without regards to quality control, brands like CNNP’s Zhongcha were licensing out their labels and allowing smaller factories to produce however much “Zhongcha” that they wanted despite them not being the same tea that their labels said they were. These fakes flooded the market and still exist in massive quantities today which is why books such as Pong’s A Glossary of Chinese Puerh Tea were written in order to help consumers distinguish between authentic teas that were still theoretically worthwhile purchases and fake teas that were likely worthless in quality. Further damaging the market were the massive markups in pricing. Brands charged massive distributing and licensing fees, distributors charged further markup fees on to smaller shops, and those shops passed on further markups to their customers.

Combined local and national government policies concerning both the tea industry directly and the greater financial markets led people who were unfamiliar with puerh to speculate heavily on future prices and treat the tea like a real financial investment. And so in June 2007, after a massive earthquake caused millions of RMB worth of damages in Puerh, Yunnan, but the price of puerh did not sharply rise but started to fall, people realized that the market had been flooded with puerh and the speculation bubble popped. The prices of puerh crashed, confusion reigned, and many factories and small family producers fell into ruin. It’s amazing to look at a two year difference in just the titles of foreign English articles talking about puerh. A May 2007 article in Geographical by Ross Duggleby is entitled "Puer gold: more akin to fine wine than your humble morning brew, Puer tea commands both slavish devotion and stratospheric prices". Two years later in a July 2009 issue of Specialty Coffee Retailer, an article by Dan Bolton reads, "Passionate about pu-erh: abundant quantities and reasonable prices combine with a fascinating story to make this prized tea a practical and profitable offering." From “gold” to “reasonable prices.” The story of the 2007 puerh tea market collapse is a fascinating illustration of the effects of China’s transformation from planned economy under Chairman Mao to a more liberalized one under Deng Xiaoping.

Resources:

• Bolton, D. (2009, July). Passionate about pu-erh: abundant quantities and reasonable prices combine with a fascinating story to make this prized tea a practical and profitable offering. Specialty Coffee Retailer, 16(7), 20+. Retrieved from http://go.galegroup.com.proxy.lib.pdx.edu/ps/i.do?p=ITBC&sw=w&u=s1185784&v=2.1&it=r&id=GALE%7CA205032763&asid=5ca6061fca75ada56eef4562c64deaac
• Chan, K. (2008). A Glossary of Chinese Puerh Tea (First ed.). Taipei: Wushing Books Publication.
• Chow, G. (2005). China's Economic Transformation. Malden, Mass.: Blackwell.
• Duggleby, R. (2007, May). Puer gold: more akin to fine wine than your humble morning brew, Puer tea commands both slavish devotion and stratospheric prices. Ross Duggleby heads for the hills of China's Yunnan province to trace the origins of this unusual commodity. Geographical, 79(5), 42+. Retrieved from http://go.galegroup.com.proxy.lib.pdx.edu/ps/i.do?p=ITOF&sw=w&u=s1185784&v=2.1&it=r&id=GALE%7CA163261178&asid=58d0439c8b8b6c6523c6ec56fc5efd80
• Salvatore, D. (2010). China's Financial Markets in the Global Context. Chinese Economy, 43(6), 8-21.
• Zhang, J. (2014). Puer tea : Ancient caravans and urban chic (Culture, place, and nature). Seattle ; London: University of Washington Press.

From “The Empress of China” to Silicon Valley: How America’s Post Independence Pursuit of Tea Provided the Labor for the Transcontinental Railroad in California

Hello everyone! As I've mentioned before I'm an Economics major and as such I've been busy like a little squirrel hyped up on tea writing away at my final papers this week. Awesomely I managed to make both of my final papers this term relate to tea in some way and as such I'll be sharing the cool things I learned here with you. Today the paper I've just finished and sent off is one that draws a connection between early America's thirst for tea and the economic development of California. It was really fun to learn about and there were some absolutely fascinating historical things about the tea trade that I learned along the way. So without further ado, enjoy!

Also I should mention this paper was brought to you by most of my Smacha 2011 Jingmai shu. :'( It was delicious and really helpful. haha. I will miss it sorely after finishing my next paper sometime tomorrow...

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From “The Empress of China” to Silicon Valley: How America’s Post Independence Pursuit of Tea Provided the Labor for the Transcontinental Railroad in California
by Miriam

Introduction

This paper seeks to establish that America’s desire for Chinese tea starting before the
Revolutionary War paved the route for the supply of labor needed to complete the
Transcontinental Railroad in California. Tea firmly established itself as an institution in
American colonial life and thanks to that was able to withstand even it’s unpatriotic taint during
the time of the Revolution and after. Once the United States of America was formed and they
were allowed to trade with China without interference from the British they started running their
own tea trading routes and found them to be quite lucrative. The tea trade provided valuable
sources of capital wealth for early American entrepreneurs, allowing further domestic investment
and expansion to occur. Eventually this expansion hit the West Coast and subsequently the
territory that became California state. Currently California is one of the richest states. In terms of
pure GDP it is number one. If it were to secede and become Cascadia it would be the world’s 6th
largest economy.

But without the trade routes and treaties established by the American desire for tea,
California would not have had the labor necessary to complete the Transcontinental Railroad as
early as it did and for as cheaply. Thanks to California’s geology and pure distance from the
more populous East Coast it had an extremely hard time procuring an adequate supply of labor
for all of its industries. Had it not been able to take advantage of an exodus of Chinese labor in
the mid 1800’s the surrounding Western states would have had more time to grow their
economies and attract immigration and California’s development would have likely looked
markedly different than it does today. It was the American desire for tea which provided the
ultimate pathway for labor that California needed to complete the Transcontinental Railroad.

America’s Tea Habit Pre-Revolution

Everywhere that tea exists it exists as more than just a drink. Unlike soda and even coffee
in most cultures, tea has a myriad of different cultural and social layers. For illustration, as early
as the 16th century, tea in Japan held an important cultural status, socially elevating everyone
(especially those in the merchant class) who knew how to perform the careful preparation
ceremony and studied the associated Buddhist teachings and aesthetics. From India to Morocco
tea also holds social meaning beyond its mere consumption. The Europeans developed High Tea
and knowing how to hold such an event elevated the social status of women throughout the
Western world including in colonial American society. The enduring success of tea is not merely
because of the addictive properties of caffeine. It is also because of the way tea weaves itself into
societies as an institution that includes ritual, philosophy, aesthetics in both way of life and
physical objects, social status, and hospitality.

Tea, the second most consumed beverage in the world after water, is derived from the
dried and processed leaves of the Camellia sinensis plant. There are many different kinds of tea
that are all derived from this plant such as green, oolong, white, black, and dark tea, with further
subcategories within each of these general types. While different varieties of the Camellia
sinensis plant may be best suited to one type of tea or another, ultimately it is the processing
techniques by which these teas are differentiated. The plant is native throughout most of Asia
and has a consumption history that is recorded back thousands of years. The institution of tea as
a social symbol was first popularized in ancient China where it was widely consumed by
members of all classes and offered as tribute to the Emperor throughout several different
dynasties. It was through China that tea was subsequently introduced to Europeans by means of
Portuguese missionaries and traders in the 16th century. However it was not until 1610 that tea is
brought to Europe by Dutch traders to Amsterdam.

At this time the tea trade between China and Europe was dominated by the Dutch East
India Company (VOC). According to Yong Liu (2006, 2) in The Dutch East India Company's
Tea Trade with China, 1757-1781, it wasn’t until the 18th century that tea trickled out of being
limited to upper class society and the institution of tea permeated throughout all classes in
Europe and around 1710 the English East India Company (EIC) established regular trade with
China and became a serious competitor with VOC. Shortly afterwards tea started reaching the
American colonies and according to Jonathan Goldstein (1974, 48) in his accepted PhD
dissertation, The China Trade from Philadelphia, 1682-1846: A Study of Interregional
Commerce and Cultural Interaction, its consumption was widespread throughout the colonies as
early as 1721. However because of Navigation Acts of 1651, the colonists were not allowed to
establish trade directly with China themselves. They had to rely upon the EIC to bring tea from
Canton to London where the American merchants could purchase it to bring back to their
colonies. The VOC also sold tea to Americans through the West Indies, but this tea was illegally
smuggled and considered of lesser quality as it was obtained through a different trade route than
the exact one used by the EIC. The smuggled tea also was not recorded, but the British records
show that between 1750 and 1774 around 200,000 pounds of tea was shipped to the American
colonists per year. Over the half a century since tea had reached America, it had ingrained itself
as an institution quite significantly within American culture. Even after the Boston Tea Party and
the Revolutionary War tea consumption may have decreased, but it was far from eliminated.

America Starts Trading with China Post-Revolution

Now free from British rule, the newfound United States of America was at liberty to
pursue its own trade interests in China instead of having to go through either the EIC or the
VOC. In 1873 “The Empress of China” was built in Baltimore and commissioned to sail to
Canton from New York to trade a cargo of mostly furs and ginseng for Chinese tea and other
goods. According to Goldstein (1974, 63), the ship sailed on February 22nd, 1784 and returned
to New York with its bounty of tea, silk, and chinaware in May of 1785. This voyage was said to
have made a profit of 25% for its financier Robert Morris. Such profits were extremely
encouraging and steadily the number of ships making the journey increased every year. Between
1804 and 1846 it is recorded that as many as 30-40 ships per year were making trips between
China and the United States of America. The tea trade was a significant source of wealth for
early American businessman and fostered a thriving industry at many ports around the country.
Many of the United State’s first millionaires gained their fortunes through the tea trade such as
John Jacob Astor. According to Anna Youngman (1908, 352) in her paper The Fortune of John
Jacob Astor between 1804 and 1817 an average of 5.3 million pounds of tea were imported per
year into the United States of America.

Opium Wars and the Opening of China

At the start of this trade, America was still limited to how they could trade with China in
the same way that the EIC and the VOC were. According to Cecelia Alderton (1947, 20) in her
paper, Early International Trade Relations of China, China had an extremely strict exclusionary
policy in place and would only allow foreigners to conduct business at the port of Canton as of
1762. Prior to that the Portuguese had Canton access since the 17th century, but the Dutch were
limited to Formosa and other farther ports. When the Americans were finally allowed by
independence to trade directly with China, they too had to go through Canton. Furthermore,
foreigners were not allowed to trade freely with various Chinese merchants, but instead were
required to go through a cohort of Chinese businessmen known as the “Cohong.” These
businessmen controlled every aspect of trade and if there was anything breaking of the rules that
they found then they could cease trade with that country. This wasn’t too big of an issue aside
from the fact that China considered itself extremely self-sufficient and foreigners found they had
a hard time coming up with goods that the Chinese wanted to consume. At the start of its trade
with China America was in a fairly good position due to a large natural resource of Appalachian
Ginseng which was highly prized by the Chinese for its medicinal value in Chinese Traditional
Medicine. The Chinese also greatly valued American seal skins, but beyond that they did not
have much care for most American produced goods.

The British, Dutch, and Portuguese had been running into this problem with the Chinese
for even longer. It was creating a massive trade imbalance that the British were very keen to
correct in any way that they could. The good that they eventually all began to rely upon to gain
access to the Chinese market was opium, grown in Bengal and other places in India, South
Eastern Asia, and around the Mediterranean. According to Charles E. Stelle (1940, 426) in his
paper, American Trade in Opium to China, Prior to 1820, the EIC was the primary producer of
opium in India and would sell it off at the Portuguese settlement on Macau because it was illegal
contraband that was prohibited by the Cohong in Canton. When the Cohong would find Opium
they would destroy it. Americans did not participate in the opium trade initially after opening
trade with China, but around 1800 they finally started joining in using Turkish opium.
Finally in 1839 the British started the first Opium War with China in order to gain greater
access to more Chinese ports and therefore further access to the tea trade. They won the war in
1842 and China was forced to accept the one-sided treaty by which they had to open up trade
with Britain and the US in several more ports. China was also forced to allow more access by
Westerners inside of China too. Contact with the Chinese had broken through the Cohong and
significantly moved beyond Canton. Traders and missionaries alike flooded into China
connecting the Chinese people with Westerners.

California’s Labor Supply Problem and Chinese Immigration

Domestically many things had been changing in the US between 1784 and 1842.
Westward expansion had pushed settlements as far as the West Coast, although territory was still
in dispute with the British, Mexico still owned California, and the farthest west established state
was Missouri. Oregon territory was defined by 1846 and by 1850 California had become part of
the USA and gained its statehood. In 1859 Oregon was granted statehood and Washington
waited until 1889 to join itself. According to George F. Seward (1970 [1881], 17) in his book,
Chinese Immigration: Its Social and Economical Aspects, these surrounding states and territories
were gaining economically on California despite its bountiful natural resources and expansive
land available.

The problem with California’s development in the decade after her initiation into
statehood was twofold. First, California was a Pacific state. Most of the population of the rest of
the United States was still on the East Coast. Second, it was geologically isolated by the Sierra
Nevada in particular. Unlike Oregon or Washington there were no easy rivers that could allow
convenient transportation of goods and labor into California. Labor on farms and in other
endeavors was extremely expensive in California owing to the extreme lack of labor and
difficulty in procuring it. It is largely argued by Seward and others in his writing that California
was in desperate need of a railroad that would pass through the Sierra Nevada mountains in order
to develop economically. They were in need of a Transcontinental Railroad.

Managers reported trying hard to recruit white labor from the East Coast and Europe, but
to little avail and with much difficulty with those who did arrive. Seward’s (1970) book contains
many instances of testimonial that the white laborers were often lazy and drunkards and
inefficient when they did work. They also cost more in wages and required housing which
further added costs on top of construction. Progress on cutting through the Sierra Nevada
mountains stalled and farms were less productive than they could have been while they went
without enough labor supply.

This is where the forcing open of China because of a demand for tea connects to the
economic development of California. At the same time as this is going on, the first few Chinese
people start coming over from China starting slowly from 1842. At first it is just a few people,
but in 1848 the California Gold Rush starts and word gets along back to China that there is a
fortune to be made in California. This information was likely spread by missionaries who wanted
Chinese people to come back to the United States in the pursuit of Christianity. However it was
also driven by famines that were ravaging the Chinese countryside around the end of the first
Opium War as well. According to Seward (1970, 6) by around 1880 there was suddenly around
an estimated 100,000 Chinese people (the overwhelming vast majority being men) in the United
States, with the vast majority of them staying and working in California.

When surveyed as recorded in Seward’s (1970) book, most Chinese laborers said that
they came to be able to make a prosperous life for themselves temporarily and send money back
to their families in China. However for those Chinese men who came for the California Gold
Rush, the Foreigner’s Miner’s Tax that was introduced by the California state legislature in 1852
caused significant financial burdens on many of them and led to many returning to China still
destitute. However for those who arrived later or stayed after 1855 when the California Gold
Rush ended there was plenty of work to be had in building the Transcontinental Railroad in
1865. According to multiple testimonies in Sewar’s (1970) book, construction managers were at
first quite reluctant to hire the Chinese laborers and tried extremely hard to recruit white labor
despite the large population of Chinese labor available. However when they had too hard of a
time finding white labor they started out slowly with Chinese labor. The Chinese labor proved
extremely efficient. They would work for less money than their white counterparts, they did not
require the company to provide housing, and they were just as strong and hardworking and
productive as the best white workers. This won them a great deal of praise from those who hired
them but also a lot of resentment and racism from the white population of California leading to
the 1888 Chinese Exclusion Act. Luckily for California however the Transcontinental Railroad
was completed in 1869. According to Benjamin Thomas Jenkins (2016, 25) in his accepted PhD
dissertation, The Octopus’s Garden: Railroads, Citrus Agriculture, and the Emergence of
Southern California, the Chinese laborers were also greatly instrumental in the development of
the California citrus industry which is still a massive industry there today. Furthermore, the
completion of the railroad finally allowed for easy transportation of both goods from other states
and the exportation of Californian products to the rest of the United States of America. Now that
the Sierra Nevada had been surpassed thanks to the labor of the thousands of Chinese immigrants
California could achieve its’ economic potential.

Conclusion

This paper has sought to establish that it was early America’s desire for the obtainment of
their own tea route that eventually led to the establishment of the trade routes through which
California gained the immigration labor it needed in order to complete the Transcontinental
Railroad. Throughout history tea has been a remarkable economic giant. The reason for this goes
far beyond caffeine's addictive properties. It is only by means of the institutional aspects of tea
that it has been able to spread across the entire globe, become the second most consumed drink,
cause several wars, and created the international trade routes which has lead to huge mass
immigration movements. Without the desire for tea, there would likely have been no reason for
America to open up independant tea trading routes to China on its own after Independence.
Without its continued tea drinking and therefore subsequent contribution to the Opium Wars,
China would not have had an established trading relationship with America or opened up to
Westerners. And if China had not opened up then California may not have been able to find the
labor it needed to complete the Transcontinental railroad as quickly or cheaply as it did while the
states surrounding it grew economically at faster rates since they were more easily accessible.
All of the economic progress that California has made today would have had to been done much
more slowly and through alternative routes. The ethnic makeup of California would not be what
it is today either. Even on the East Coast without the tea trade there would have been less capital
available to the early United States for domestic investment and economic development. There
are no comparable commodities in the world which were so desired or geographically and
politically isolated.

References:

• Alderton, C. (1947). Early International Trade Relations of China. The Social Studies, 38(1), 18-23. doi:10.1080/00220973.1937.11017215
• Goldstein, J. (1973). The China trade from Philadelphia 1682-1846, a study of interregional commerce and cultural interaction (Unpublished doctoral dissertation). University of Pennsylvania. Retrieved December 6, 2016, from ProQuest.
• Jenkins, B. T. (2016). The Octopus’s Garden: Railroads, Citrus Agriculture, and the Emergence of Southern California (Unpublished doctoral dissertation). University of California Riverside. Retrieved December 6, 2016, from ProQuest.
• Seward, G. F. (1970 [1881]). Chinese immigration: Its social and economical aspects. New York: Arno Press.
• Stelle, C. C. (1940). American Trade in Opium to China, Prior to 1820. Pacific Historical Review, 9(4), 425-444. doi:10.2307/3632952
• Yiu, Y. (2006). The Dutch East India Company's Tea Trade with China, 1757-1781. Retrieved December 6, 2016, from http://site.ebrary.com/lib/portlandstate/detail.action?docID=10234938
• Youngman, A. (1908). The Fortune of John Jacob Astor. Journal of Political Economy, 16(6), 345-368. doi:10.1086/251443