China's Tea Boom & Bust

Tea has been one of China's main cash crops for the last decade. About 23,000 tons of Pu'er tea was produced in 2007. With the advantages of being a cholesterol reducer and its overall beneficial health effects, Pu’er tea became one of the greatest investment frenzies in China's economy since 1999, according to the New York Times.

During the boom, prices rose to record levels — allowing rural farmers to buy cars, build homes and send their children to school. Chinese citizens who put most of their savings into this "liquid gold" made millions of dollars during the boom era. Wholesalers started paying up to 30 percent more than they did the previous year — while production doubled to 100,000 tons from 2006 to 2007. We posted about the rise of Pu'er tea and its impact on tea workers last April, during the height of the boom in Fortune in the Tea Leaves. About 9 months later, it's a very different story.

By mid 2008, wealthy Chinese started to feel the pinch of the global economic crisis and the tea traders that used to buy up the cash crop in mass simply stopped coming. As the tea bubble popped, there was a devastating drop in prices. The going rate for Pu'er is now $3 a pound — a tenth of its peak price. More than a third of the 3,000 tea manufacturers and merchants have left the tea trade, according to the New York Times. The worst affected have been the farmers, many of whom have switched from tea to more lucrative crops like rice and corn.

Experts are comparing China's tea market to the U.S. housing bubble — where house prices rapidly increased to unsustainable levels, followed by a rapid decline in prices, which left many homeowners owing more on their mortgage than the market value of their homes.

Yet Chen Li, a former trader in the tea market believes that prices will eventually rebound and finds optimism in the mounds of unsold tea held by farmers and manufacturers. In an interview with the New York Times he says, "The best thing about Pu’er is that the longer you keep it, the more valuable it gets.” Yet if the "tea bubble" is anything like the housing bubble in the U.S., we may not see a rebound for a long time to come.

February 10, 2009 by Manasi Sharma