2012-03-06

Chinese Maotai bubble bursts!



For the past three years, China's credit bubble and stimulus fueled growth fueled demand for luxury goods. The stocks of luxury goods makers, including popular brands such as baijiu distiller Maotai (600519.SS) and gaming stocks such as SJM Holdings (0880.HK) have done very well even though the Chinese markets peaked in August 2009. There is a serious effort by the government to crack down on Maotai purchases (and wasteful spending in general) and the entire luxury goods sector could see similar fallout. As one example of the waste, one district governor drank 1200 bottles (see 茅台酒公款招待调查:区政府一年喝掉1200瓶), which at a value of 2000 yuan or about $300 a pop, amounts to some serious change.

Whether this is also an indication of the rest of the Chinese economy is hard to say since the government can be effective with very targeted measures. Either the government can claim credit for a successful crackdown or the economy is in much worse shape than people expect. And woe to the Chinese who started investing in bottles of Maotai!

How can the price of Maotai fall? 茅台怎么降价了?

The price of Maotai typically falls slightly after Spring Festival and this year supplies remain tight, which should only cause a small drop in prices. Instead, prices at supermarkets have plunged 15-30% in the past few weeks as sellers look to unload inventory. The next strong season for liquor is the Mid-Autumn Festival, usually in September, and supermarkets aren't waiting around to move inventory. Normally prices dip a little, but stay high until rising again in September. This is the first time prices have come down sharply for Maotai—and it isn't the only brand suffering. See: 茅台、五粮液等高端酒价下跌 (Maotai, Wuliangye and other high-end liquors tumble in price)

This article from February 7 discusses the large accumulated inventory of Maotai speculators that was keeping prices from rising too much at Spring Festival. (炒家囤积茅台春节集中抛货 节后酒水消费现滞) Now the dam has burst and Maotai is headed the way of the Beanie Babies bubble that accompanied the Nasdaq bubble.
Beanie Babies began to emerge as popular collectibles in late 1995, and became a hot toy.[4] Ty systematically retired various designs, and many people assumed that all "retired" designs would rise in value the way that early retirees had. The craze lasted through 1999 and slowly declined after the Ty company's announcement that they would no longer be making Beanie Babies and made a bear called "The End".
Typical behavior during positive social mood, which often generates credit bubbles that finance an investment craze.

I am bearish in general at this time and you cannot underestimate the power of a Chinese government crackdown, at least in the short-run, but even with those caveats this looks like a bad sign for the Chinese economy and coincident with the housing slowdown. I think it's a strong enough signal that we should see follow-on bad news in Q2, but if the economy continues along its "soft-landing" path, then I'd say it was the crackdown that killed this one specific market.

Below is a chart of Maotai A-shares. It has a long way to fall......

Update: I just came across this article, another exclamation point on the bubble: China Sprouts Moutai Stores
Kweichow Moutai Distillery Co, which own China's best known liquor brand, this year plans to open 130 outlets across the country, a person working in the industry told the EO.

The company, which currently has only 30 stores under its own brand, will produce an extra 1,800 tons of the famous white spirit to stock the extra shelves.
A long way indeed.


For more Maotai coverage see: Bubbles everywhere in China

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