China's impact on the luxury French wine market has been enormous. The French fine wine index (Liv-100 index) is up by roughly 37% from a year ago, 24% year-to-date, and its upward momentum remains strong.On the high-speed train from Shenzhen back to Guangzhou, I sat in first class across from a couple of guys who had evidently just come back from Hong Kong. They were talking animatedly about the bottles of Bordeaux they had bought there, which they were taking out of their bags and showing one another.
There is little doubt that Chinese buyers, not Wall Street traders, are the force behind this positive trajectory for French fine wine. Bordeaux wine producers are all talking about China and Chinese buyers seem to dominate the en premieur for the 2009 vintage available from next year. In fact Chinese mainland buyers are increasingly pricing out buyers from Japan, Taiwan and Hong Kong in the quest for 'first growth' wines.
So the question is, why so much demand from China?
Like Japan in the 1980s, an important factor seems to be the need to lubricate business relationships. This phenomenon plays out across the world during rapid economic development. Successful economic development may require a little intoxication - when one sinks a lot of money into an under-developed economy, it needs courage.
The business drinking culture has been changing in China. Like elsewhere, liquor consumption (like baijiu) has been declining out of health concerns. So the need for alcohol in business entertainment has produced a unique Chinese phenomenon: massive demand for Chateau Lafite wine. Lafite is one of the five first growth wines from Bordeaux. France classified Bordeaux wines into first to fifth growth in 1855 for its World Expo. At that time four chateaux - Lafite, Latour, Haut Brion, and Margaux - were classified as first growth. In 1975 Mouton also qualified. The chateaux in some of the Bordeaux areas like Pomerol and St. Emilion do not participate in this classification system and have started their own, with some of their wines even more expensive than the five first growth wines. Nevertheless, the first growth label travels well, especially to a new market like China.
Among the first growth wines, Lafite has taken on a life of its own, rising much quicker than the fine wine market as a whole, and other first growth wines in particular. For example, 2000 vintage Lafite has appreciated by about 550% in pound sterling since 2005, compared to 180% for the market as a whole. The most comparable wine to Lafite is Latour, and the price of its same vintage has risen roughly in line with the overall market. The price differentials between Lafite and other vintages of first growth wines are not as dramatic as for the 2000 vintage, but they are still large. Something special has happened to Lafite these past few years. That something is China.
Essentially, Lafite has become the unofficial Chinese wine for business entertainment. There are theories as to why, the most popular being that the Chinese translation is easy to say and sounds nice. I am not sure this is the best explanation. Drinking at business events in China is not really sophisticated; it is more about getting tipsy quickly. Guests are expected to be impressed by the price of expensive wine, and not the taste.
Indeed, the Lafite price is now so high that it has led to a large counterfeit industry. Some analysts estimate that 70% of the Lafite consumed in China is fake. I have personally experienced this on a few occasions, although the people who served me fake Lafite were unaware of its questionable provenance because they paid the same high price fetched by the genuine article. I could tell that the fake was good wine too, probably a good second growth poured into a Lafite bottle. Forgers have targeted the legendary 1982 vintage in particular. Many wealthy Chinese have bought large stocks of 1982 Lafite and the odds are most of it is fake. There are so few bottles of the real vintage left that it is highly unlikely to find several cases of the real thing.
A market is efficient when informed consumers make rational choices. An efficient market motivates producers to improve quality and control costs and this cycle leads to great brands that last.
The French wine market was like that, but I am afraid that Chinese demand is decreasing the market efficiency and may bring down great brands over time. When winemakers see prices resulting from propaganda, not quality, they will focus on marketing and decrease their investment in improving quality. It would be a tragedy if Chinese demand, by bringing easy money, brings down a French legacy that has lasted for five centuries.
Now I wonder if whether any of the bottles they were carrying were fake.