Bloomberg News

Chinese Bank Loans to Wine Investors Say ‘Drink Now, Pay Later’

November 29, 2011

Nov. 28 (Bloomberg) -- At the 4th Hong Kong International Wine & Spirit Fair, a smiling Wing Lung Bank employee hands me a colorful flyer about its new “Wine Financing Service.”

Can’t afford a case of investment-grade Bordeaux? This Hong Kong-based bank will lend you as much as HK$5 million ($641,840) to buy, as long you select from its list of 50 top names. The response, says assistant general manager William Tang, has been overwhelming.

Investing in wine is a big topic at this year’s fair, Asia’s largest, held earlier this month at the city’s Convention and Exhibition Centre. The bank’s booth is one of three dozen in a new “Wine Investment Zone.”

Many affluent Chinese, worried about rising inflation, a roller-coaster stock market, and restrictions on real- estate investment, are looking to alternative assets. Wine, a status symbol for new millionaires, is a hot choice.

At one booth Doug Rumsam, managing director of Bordeaux Index’s Hong Kong office, says he has just spoken to two women from a Guangdong fund-management company interested in diversifying into wine. Peter Lunzer of U.K.- based Lunzer Wine Investments says he’s hiring a Mandarin speaker to entice mainland clients.

Price gains of top Bordeaux and Burgundy labels at auction help drive interest. They inspired Wing Lung Bank’s plan, which covers as much as 50 percent of the purchase value at a current interest rate of as much as 6.25 percent, just below the 6.29 percent yield for Italy’s five-year bond sale on Nov. 14. The bank gets the wine if you don’t pay.

Fine Wine Decline

Will prices rise enough during the next few years to cover interest, storage costs and a profit? No one seems concerned about possible price declines. The Liv-Ex Fine Wine 50 Index, which tracks prices of Bordeaux first growths, has slumped about 18 percent since June.

“The fate of wine investment is tied to changing tastes in China,” says Liv-Ex Director James Miles. Prices of brands like Lafite soared as they became must-haves for Chinese buyers, then dipped as mainland collectors embraced Burgundy label Domaine de la Romanee Conti. The company’s Fine Wine 500 index, which tracks a broader range of vintages, including Burgundies, rose 13.2 percent in the past year, though it’s slipped 6.1 percent in the three months ended October.

One problem for China’s investors, he says, has been difficulty in selling their wine. Two local ventures may help.

One is the Hong Kong Wine Exchange, launched in October, a trading platform that allows member-collectors to buy and sell globally through the company’s network of wine storage partners.

Parker Grade

The other is the just-opened Shanghai International Wine Exchange, organized by the local government to be a bridge between investors and suppliers. I met its enthusiastic president, Li Wenfeng, last June at Bordeaux’s VinExpo. Members must have at least 5 million yuan in assets to be able to buy approved stocks.

What’s investment grade? “Anything with a high Robert Parker score,” Li said.

The Shanghai exchange promises to filter out counterfeits and check documentation on provenance.

Since eliminating taxes on wine in February 2008, Hong Kong has become Asia’s wine hub, with auction totals surpassing London and New York. The city positions itself as the gateway to China’s rapidly growing market. In 2011, the mainland was the number one importer of Bordeaux by volume, buying 10 percent of all the French region’s exports.

The gap between sophisticated wine collectors in Hong Kong and China’s newbies is narrowing, according to wine merchant Stephen Wickens, whose eponymous Hong Kong company has clients in both places. “Mainland Chinese collectors now know the importance of storage conditions and provenance. Three years ago, it was just about price.”

Storage Tracking

So far, the country has nothing like Hong Kong’s wine- storage certification program, an effort to ensure proper conditions to protect wines for investment.

On the fair’s last day, I squeeze into a packed consumer forum on auctions and wine investment. For two hours, 160 people on uncomfortable chairs listen to speakers and scribble notes. Many wear earphones transmitting simultaneous translation in Mandarin.

One speaker briefly discusses China’s first wine fund, called Dinghong, meaning “In Red.” Also known as the DeRouge fund, it’s raising a first tranche of 200 million yuan, with an eventual goal of 1 billion yuan. Co-founder Ling Zhijun, a money manager at Pacific Asset Management in Shanghai, predicts an annual return of 15 percent for the 5-year fund.

Philippe Larche, director of Bordeaux negociant Vintex, the fund’s major wine supplier, said in an e-mail that he’ll begin buying early next year, choosing a wide selection beyond first-growth Bordeaux. During the past 12 months, as prices for first growths declined, those for some second growths, like Gruaud Larose, went up.

Cellar-Bound

The fund will spend 40 percent on futures, starting with 2010. A big portion of the wines will go in investors’ cellars.

To eliminate collector confusion, Simon Tam, head of wine in China for Christie’s International in Hong Kong, is establishing an official Mandarin name for each Bordeaux chateau, approved by the estate. Many are now identified by nicknames. Chateau Beychevelle is known as “Dragon Boat,” after the sailboat on its label.

My nickname for the Chinese wine investment market? Duchang. It means “casino.”

(Elin McCoy writes on wine and spirits for Bloomberg News. The opinions expressed are her own.)

--Editors: Adam Majendie, Daniel Billy.

To contact the writer of this story: Elin McCoy at elinmccoy@gmail.com

To contact the editor responsible for this story: Manuela Hoelterhoff in New York at mhoelterhoff@bloomberg.net.


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