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11.27.2011

Time for a Margin Call on your Wine?

I wrote last week about the great slurping sound that can be heard from China these days when it comes to wine. The explosion in the wine auction market there has been making news for some time.

One of my readers who lives in Hong Kong had some very interesting perspective on the matter, which I am copying from his comment on that previous post:

Here is the reality in China from someone who lives in Hong Kong and watches all this development. The biggest reality is that hardly anyone is drinking this stuff. It is being gifted.

The problem with that is that Lafite and Penfolds Bin 620 are today's Rolex watches and next year will be Piaget. The Chinese will take years to understand or even want to understand Burgundy. They just want instantly recognized symbols, which mean DRC will be the darling of the next few years.

To infer China is a huge market is true, but 99% of wine sold is in the under RMB40 category at retail. All these wonderful war stories about luxury wines are simply a reflection of the huge desire of people in China with money seeking the next, next thing to show off about. Much of this is corrupt money or money made for the outrageously hyped property and stock markets in China. All this is starting to implode, so what will be next?

Reality will set in, as it quickly did when the Bordeaux trade expected a huge surge in interest from this supposed educated wine drinking audience to the 2010 en-primeur. The so-called Chinese buyer stayed away in droves. After all why buy something you can hardly pronounce and your friends you want to entertain (or pay off) can hardly recognize. If this seems weird ask why Duhart Milon is so successful in China. It ain't the wine, it's the label, which looks like Lafite. It probably will take years before serious wine drinkers in China know their Chateaux from their Clos. One only has to look at auction markets to see that Lafite is off the boil in China/Hong Kong. DRC is now hot - that easy pronunciation and label recognition again!

There are huge volumes of wine sitting in Hong Kong storage, not being drunk, just being traded or gifted. The truth, don't panic, the next big thing will be luxury yachts, chalets in Aspen or some other nebulous branded line. Friends of mine are selling otherwise unsaleable 19th century art to these people. Why? Because you can hang it on the wall and brag about the price you paid, hang the quality!


I thought about these comments this morning when I saw the story that my friend Elin McCoy filed for Bloomberg today referring to the offers she saw recently at the Hong Kong International Wine and Spirit Fair. In short, there were bankers on hand, willing to loan you the money to buy fine wines at auction, provided you purchased wines from a list of (presumably) blue chip producers.

The idea that someone would be willing to loan you up to $641,840 to finance your investment in auction-grade Bordeaux frankly boggles the mind.

The finest wines have long been considered investment assets, and several funds and indices have been established to both allow people to purchase shares in wine, and track their performance just like any other stock.

But now you can also apparently purchase on margin, though it's not clear what kind of collateral you have to offer up to get such a loan. One can only imagine that while these bankers maybe crazy enough to pursue a bubble, they're not stupid. Presumably they will actually want you to guarantee that you can pay back the loan if the market for First Growths tanks in a few years because investors have moved on to Burgundy, or Aspen condos.

McCoy's piece included another jaw-dropper of a fact as well: in 2011 China was the single largest importer of Bordeaux in the world, accounting for 10% of that regions wine exports.

Not that you needed any further evidence of a bubble, but did you hear that Chinese basketball superstar Yao Ming is getting into the wine business?

Crazy days indeed. Now who's going to lend me money so I can short-sell some wine?

Read the full story.

Comments (5)

Anonymous wrote:
11.28.11 at 2:19 PM

Château Haut-Brion, Romanée-Conti Dominate At Christie’s Wine Auctions In Hong Kong
http://www.jingdaily.com/en/luxury/chateau-haut-brion-romanee-conti-dominate-at-christies-wine-auctions-in-hong-kong/

Barry wrote:
11.28.11 at 2:26 PM

Well Said.
I recently heard a friend's parent is actually trying to launch a trading platform for wine... I mean seriously ? future is not enough and now you want to trade future in a secondary market ?

I think the root causes for the madness in China , not just wine , but tea, art works (including both good ones and those lame contemporary works that simply succumb to western politic power play) are fairly obvious to anyone who knows today's China well. It is a very depressing topic..for people with Chinese heritage.

As a comparison, I truly respect those Westerners who are serious and enthusiatic about tea. There is no pretentious. Drink it only if you love it.

Anonymous wrote:
11.29.11 at 3:46 AM

Interesting thoughts from someone in Hong Kong - does make you think about whether the current market for top Bordeaux and Burgundy is sustainable.

In contrary to the above however, Robert Parker said this recently:

‘Competition for the world's greatest wines will increase exponentially: The most limited production wines will become even more expensive and more difficult to obtain. The burgeoning interest in fine wine in Asia, South America, Central and Eastern Europe and Russia will make things even worse. There will be bidding wars at auctions for the few cases of highly praised, limited production wines. No matter how high prices appear today for wines from the most hallowed vineyards, they represent only a fraction of what these wines will fetch in a decade. Americans may scream bloody murder when looking at the future prices for the 2003 first growth Bordeaux (an average of $4,000 a case), but if my instincts are correct, 10 years from now a great vintage of these first growths will cost over $10,000 a case...at the minimum. It is simple: The quantity of these great wines is finite, and the demand for them will become at least 10 times greater.’

Certainly adds some fuel to the debate.

Jim Seder wrote:
12.02.11 at 4:54 PM

Over the last year and a half, we’ve interviewed a number of vintners in Rhone, Tuscany and Piedmont, curious as to their take on the China “tulip craze” for high end Bordeaux and now Burgundy. Our takeaway is that while it’s a curiosity factor for them, they have no illusions that several hundred million adults are about to become brainwashed and morph into avid wine geeks. This process is a LONG and SLOW marathon……….not a sprint. In time, and with more wine education (could there be a Chinese Robert Parker looming somewhere), the more affordable wines will find their way into the population at large and with that, palates will develop.

Meanwhile, the crazed competition for storied wines makes for great tabloid reading.

BobC wrote:
12.04.11 at 8:54 PM

Another dimension of this, apparently, is a growing trend of Chinese buying up French Vineyards - probably for the same reasons stated in the Margin Call article. See http://www.thelocal.fr/1931/20111202/#

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