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.
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