The authentic Chinese tea experience
Shopping Cart - A$0.00

You have no items in your shopping cart.

Select Your Currency
Swipe to the left

The 2007 Pu erh Tea Market Crash: The Boom And Bust Revisited

May 16, 2017 2 comments

For China’s Pu erh tea market, the Spring of 2007 was more like a cold hard winter with unexpected blizzards. After an acute rise, Pu erh price dropped shockingly fast, followed by a long recession. The Pu erh craze that lasted a few years came to an abrupt end.

Now 10 years later, most of us have forgotten or not experienced what happened back then. Let’s take a look back at this chaotic period of time.


The Pu erh Market Crash of Spring 2007

Guangzhou’s Fangcun wholesale tea market was by far the biggest tea market in China. The majority of the pu erh tea trading was done there by 2007. From 2006 to Spring 2007, traders witnessed the drastic change of pu erh tea price.

We used to need 3 buckets of water to make tea for customers to taste, but suddenly it was less than half of a bucket. A tea trader in Pu'er city

The Boom

For example, the price of a “Dayi 7542” cake went up from 4,000 Yuan (580 USD today) per wholesale carton (15 kg) in 2006 to more than 8,000 Yuan, soon reached 12,000, then 18,000. The price was even raised 3 times a day. The peak was at 22,000 Yuan (3200 USD today), which is almost 5 times more than the original price.

The unprecedented market circumstances brought in high returns for tea traders, and many of them became millionaires. Their expensive new cars replaced bicycles and motorcycles, all parked outside of the tea market.

“At least ten million people in China were involved in the Pu erh craze.” said one insider we interviewed. Some people even sold their houses to invest in aged tea cakes. “We all believed that you simply won’t lose money. The price is going up non-stop.” But a suddenly a turn occurred.

The Bust

Since April 2007, at least 70% of the tea traders of the Fangcun tea market were in deep trouble. Price of the same label Dayi 7542 label dropped down to 8,000 Yuan per carton from it’s 22.000 peak.

At ‘Tea Source Square’ in Pu erh city, owners of the tea shops complained that business has been very slow. “We used to need 3 buckets of water to make tea for customers to taste, but suddenly it was less than half of a bucket,” one merchant remembered.

“It was scary,” said one tea trader from Zhuhai, “it all happened too fast, so much just changed within a mere 3 days! One day it was 22,000 Yuan per piece, the second morning it went down to 15,000, then 12000 in the afternoon. When I woke up on the third day, the price already fell to 9,500 Yuan.”

Why Pu erh?

How did the Pu erh market flourish so fast and how did it suddenly collapse? The 2007 crash wasn't in fact the first. There were two waves of surging popularity of Pu erh cakes before. One was in Hong Kong after 1950; the other was in Taiwan after 1995. In 1999, the Pu erh market in Taiwan crashed. The speculators from Hong Kong and Taiwan shifted their focus to Mainland China. But why Pu erh?

1. It’s Unique and Scarce

Pu erh is made of sun-dried large-leaf tea leaves that are only produced within a certain area of Yunnan province. The final product is often compressed in different shapes, of which the round disc shapes ('cakes') are the most popular. The unique terroir of the hilly lands along the Langcang river gives Pu erh its own charm, especially the Pu erh that is made of leaves from old wild trees.

Unlike black tea and green tea, it’s a tea type from China that’s particularly hard to copy in other provinces or anywhere in the world. You needed the unique environmental and soil conditions of Yunnan to produce a real Pu erh.

This created the perception of uniqueness and most important: scarcity.

2. Long-Term Storage, Improving Taste

Instead of fighting a war on rot, aging tea is a tactical response. Given that tea had to be transported on food in the past, people couldn't beat nature, so they joined it by simply let microbes on pu erh tea to have their own way. Like with cheese, cheese, beer, wine and whiskey, tea can also develop flavours that are deeper and more complex than fresh versions.

Unlike other teas, Pu erh is known for its aged aroma that develops over time. Tea lovers tend to love the aroma of aged cakes more relative to newer ones. The cakes don't go bad and as they're compressed, they require not much space to store.

As time passes, some cakes will become more rare and are thus highly sought after by collectors, increasing the price. Some tea lovers can't be bothered with storing tea for years until they love the taste. These people are naturally willing to pay more for an well aged tea for direct consumption.

3. Cultural Value, Historical Relevance

Pu erh also has a historical and cultural relevance. It was the tea that was being transported on the ancient Tea Horse Trade route, and it was a tribute tea during the Qing dynasty. This created this nostalgic and exclusive image that other teas couldn't enjoy.

4. Low Production Cost

Pu erh was cheap relative to other tea types before the hype. It’s was a hidden gem at the border area of China. The manufacturers, traders and consumers of the aged tea couldn't imagined the peak prices that materialised in 2007. Back in the early 2000s, you could get 10 kilos of Pu erh for the price of just one kilo of oolong.

Pu erh was not yet popular in Mainland China at that time. Tea traders (speculators) from Hong Kong and Taiwan recruited many people to purchase aged Pu erh from tea factories and tea shops in the cities and villages of Yunnan. The price was surprisingly low, especially in the remote villages. For the first couple of years, the purchasing price was no more than 10 Yuan per kilo, which is less than 1.50 USD today. The people on the job got paid 1 Yuan for each tea cake purchased. In the next paragraph will discuss more how these traders controlled the market and managed to ramp up the prices in the retail market.

All of these are good reasons why the speculators chose to buy and trade Pu erh.

Tea Traders & Market Control

Pu erh tea traders made a careful plan for purchasing and distributing the teas. These where companies that moved tea at unimaginable scale. Some say they purchased at least 70% of all the pu erh produced by the factories.

Control of the Industry

Buying up aged Pu erh stored wasn’t enough. The speculators were aiming for the long run. Eventually business men from Hong Kong, Taiwan and Guangdong started to get involved in the acquisition and reorganisation of tea factories in Yunnan.

Famous tea hills were assigned to different groups of traders for the collection of tea leaves. For instance, tea leaves from Yiwu hill were mainly collected by Taiwanese traders. Cakes made from tea leaves from famous mountains fetched a better price.

Commercialisation

Having secured, big traders started to successfully promote Pu erh in 2005. From its health benefits to its cultural significance, all aspects of Pu erh were advertised on all types of media: TV programs, books, magazines, speeches, and websites.

Since 1993, Yunnan’s city of Simao held the “Pu erh Festival” event once every two years. When traders started to promote Pu erh, this Festival become on of the biggest commercial events in China.

Academically, the sellers sponsored research institutions to investigate the health benefits. They also carefully managed its relations with local authorities to get their support on developing the industry.

As a result the Pu erh industry’s status changed from an "important industry" to a fundamental "pillar industry", and then latest upgraded to highest status of "first pillar industry”. It became so important that the name of the city, Simao, was officially changed to Pu erh in 2007.

Price Fixing

In order to raise the prices and maximise profit, many methods, including unethical ones, were used.

Tea traders paid the tea factories a certain money to be distributors. There was a secret agreement between them: tier 1 distributor earned 4,000 Yuan profit per piece, tier 2 distributor earned 10,000 Yuan per piece. This way, a piece of Pu erh with a factory price of 5,000 Yuan would cost 19,000 Yuan when it reached the market.

Auctions

For high-end teas, auctions was the preferred method to go. In 2004, 3 grams of rare Pu erh from Qing dynasty was sold for 12,000 Yuan or 4,000 Yuan per gram. At Shenzhen Tea Exposition 2007, a high-end tea cake labeled “Jingxiu Chazu” (499g) was sold for 400,000 Yuan, this set a new record for fresh tea.

Yet, some auctions were arranged. Fake bidders participated. They didn’t want the tea; they were just there to raise the prices.

Like a stock market, many people set foot in the Pu erh market because they saw that the rapid rise of prices. Pu erh was regarded as a instrument to store value like gold. Some even considered it as an antique, that would become more and more valuable.

During 2006 and the start of 2007, many individual investors flooded the Pu erh market. As they didn’t want to miss the boat, everyone was stocking Pu erh. During such a market bull, no one could see a market crash coming.

From Restricting Supply to Oversupply

The quantity of the tea and the timing of distribution were strictly controlled for maximum profit and to make sure that the prices increased gradually. The distributors made a false scene of scarcity of the product by only selling a small amount of the tea at first. They waited until the price went up high, and then quietly released a big amount of the tea.

But in 2007, more people started to produce tea and many trading companies started to get involved in pu erh. As a consequence, a great deal of Pu erh went into the market. The prices finally started to go down, resulting in investors panic. The price didn’t skyrocket further as they believed and suddenly the product wasn’t rare anymore.

They started to get rid of their tea at lower prices, but no one wanted the hot potatoes at this point. Speculators already sold out their inventory two months before the market collapse. As the bubble burst, the Pu erh market crashed, and the late entrants went down with it.

Conclusion

Like with commodities, stock markets and other financial products, the prices of pu erh tea can be volatile at some times. Unlike other agricultural products, the boom and bust of the pu erh tea market in 2007 wasn’t so much determined by failed harvest or the traditional Pu erh price factors. It was simply a craze that reached a certain tipping point that everyone felt the need to store some cakes.

Will such a market boom and bust repeat itself? No one knows. At least, we know that the market isn’t as much controlled today by a few large trading companies. This encourages more competition and thus lower prices. Traders are also have less power today due to the eCommerce boom, allowing farmers to sell their tea direct to the end consumer. Thus, cutting out layers of middle men.

At Teasenz, we hope that Pu erh will stay affordable for as long as possible. Our goal is to introduce this wonderful tea worldwide. While it’s highly popular in China, most of the people outside of China has yet to discover.

Alex May 17, 2017 at 2:36 AM
I'm not sure but seems you put 2017 instead of 2007 in some sentences.
Teasenz May 17, 2017 at 3:57 AM
Thanks Alex, we've updated the article and corrected the wrong year!