China urges caution as price speculation grips herb and tea markets
Investors push into tea and traditional Chinese medicine markets
Prices of some herbal plants have tripled in two years
Some tea brands have doubled in just a few months
Authorities warn against speculation, market manipulation
SHANGHAI/SINGAPORE, Aug 30 (Reuters) -With interest rates low and falling, stocks and property in the doldrums, speculators are pushing into obscure fringes of China's financial markets to find investment returns, sending herb and tea prices on a rollercoaster.
A flood of investment money has moved into tea and traditional Chinese medicine, prompting official warnings to the public not to get consumed by the fever of fast-rising prices and to speculators not to pump up markets.
Prices of some herbal plants have tripled over the past two years. Some brands of premium tea leaves, compressed and sold in the form of bricks, are selling for thousands of dollars having doubled in a matter of months.
The speculative frenzy comes at a time when the economy is struggling for growth as it grapples with deflationary pressures and weak consumer demand.
China's stock markets .CSI300, .SSEC are sluggish following three years of losses, while bond yields are near record lows, limiting returns for savers. New homes prices fell at their fastest pace in July in nine years, government data shows, extending a housing slump.
The weakness of China's traditional investment avenues has prompted speculators into murkier financial products in search of returns, two dealers in tea and medicinal plants said.
Speculative investments "have always been there. But they're more attractive in an economic downturn," said Liang Yuhuan, a tea dealer in southern city of Guangzhou.
IN HOT WATER
In the Chinese medicine market, the Kangmei Chinese Medicinal Material (China) total index hit a record high last month, up about 50% in three years.
Prices of certain herbal plants, such as Goldthread, white peony root and tree peony bark, have more than tripled in the past two years.
Tight supplies following floods were partly behind the rally, but a bigger factor was "manipulation by capital," said Xu Yucheng, a dealer in the eastern city of Bozhou, known as China's capital of traditional medicine.
The Bozhou Traditional Chinese Medicinal Material Association, an industry group, warned speculators in a statement last month not to "pump-up prices", prompting a modest correction. The Kangmei Index is down roughly 4% from its peak.
Also weighing on sentiment, China's State Administration for Market Regulation on Aug 9 published draft anti-monopoly guidelines for the pharmaceutical sector, including traditional Chinese medicine, raising the prospect of closer scrutiny of the market by authorities.
In the tea market, trading has been brisk in the premium Pu'er variety, which is considered by experts to improve in quality as it ages, and is traded and collected much like vintage wine.
Tea trading is more fragmented compared with the medicinal plant market. As some brands have rallied, others have fallen, tea dealers said.
Chinese state broadcaster CCTV reported in January that prices of Chang Shi Tea, a Pu'er brand from tea trading hub Guangzhou, shot up to 50,000 yuan ($7,023) per 2.5-kg brick, before plunging more than 80% overnight and burning investors.
Amid the gyrating prices, Fan Cha Holdings, which calls itself the Hermes of China's tea industry and has 500 shops across China, said this month in a statement on its official WeChat account that it had plunged into "grave crisis".
It did not explain publicly what had caused its crisis, but the announcement triggered a rush by people who had bought its products to ask for their money back.
Chairman Zheng Chaogen has suggested investors swap their tea or other claims for equity in the company, according to a company statement and video streaming via the official WeChat account. It also said it would sell assets and raise fresh capital.
Fan Cha did not respond to several requests for comment, including on what was behind the company's "grave crisis".
Several authorities have warned producers, without identifying any specifically, not to sell wealth management products.
The practice is rampant and involves "huge risks", the government of Liwan district, home to Guangzhou's wholesale tea market, said on July 25.
"Investors should be on high alert, and get rid of the whim to get rich overnight," it said.
One investor who bought Fan Cha teas said he initially made big profits, but after Fan Cha's statement he has had sleepless nights wondering if he will get his money back.
"The profit was so tempting that you couldn't resist it," said the investor, who declined to be identified because he said he felt ashamed by his actions.
($1=7.12 yuan)
Reporting by Samuel Shen in Shanghai and Tom Westbrook in Singapore; Editing by Neil Fullick
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