A friend recently gave me a bottle of red wine from the first harvest of his new vineyard in Shandong province – output so new that the bottle does not even have a label.  I admit I have not drunk it yet, so sorry ratings not available on its quality.

When I saw some news reports this week that China had become the world’s second largest wine producer I was concerned my friend might be caught in the classic China overinvestment trap. That’s when an idea catches hold and entrepreneurs run to invest until many times potential demand is quickly supplied. Probably true here.

But I was also a little surprised with the headline and so I looked at the source material from the OIV (International Wine Organization).  I found a rather different and more interesting story. (Some of the misunderstanding may have arisen because their slides are in French)

What the OIV points out is:

  • That while China has overtaken France to become the #2 country in acreage of vineyards, it is only #8 in wine production, with less than a quarter of France’s volume. South Africa and Australia both produced more wine than China in 2014. How would I explain this?
  • Many Chinese vineyards, like my friend’s, are brand new and producing nothing at all
  • Vineyards that are producing wine are doing so with very low volumes per hectare, reflecting unsophisticated management practices and some less than ideal growing conditions
  • Lots of grapes grown are not used for wine production. Production of raisins has been rising 20% plus annually
  • That China’s production of wine actually fell 5% in 2014. Perhaps a reflection of lack of demand for cheap low quality domestic wine in face of an increased supply of fair quality imported wine.  Or maybe weather was a factor? Most likely reason is that it was more economically attractive to produce raisins
  • That China’s wine consumption fell 7% last year, keeping China as the 5th largest wine consumer (at 7% of global consumption), ahead of the U.K. but behind Germany. I can see several reasons for this:
  • The overall economic slowdown (beer consumption has also suffered) leading consumers to pull back on discretionary spending
  • The ongoing anti-corruption campaign and its impact on banqueting
  • Many entrepreneurs have built massive wine stocks in recent years and are moving their spending into new areas.
  • Personal imports from Hong Kong (where duty on wine is 0%) may have grown even further.

So I hope my friend enjoys the emotional returns from his vineyard investment, as I fear the financial returns may be many years away.

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