Why Chinese Investors Buy Napa Wineries

U.S. winemakers seek share of massive Chinese market while investors search for financial security here

by Paul Franson
sloan estate
Goldin Financial Holdings of Hong Kong paid $40 million for Sloan Estate in 2011.
Napa Valley, Calif.—Few topics are hotter in the industry than the Chinese market for U.S. wines, but less has been reported about a concurrent trend—Chinese nationals are avidly buying vineyards and wineries in Napa Valley. In a reversal of historic fortune, 19th century immigrants came to California in search of gold. Today, wealthy Chinese nationals have begun to invest in the Golden State for safety.

Sean Maher of Maher Advisors addressed both China’s thirst for wine and its growing acquisition of wine properties during the sixth annual seminar Best Practices for Owning and Operating a Winery in Napa. The two-day seminar conducted by The Seminar Group covered many topics of interest to winery owners and managers, grapegrowers and advisors to the industry.

Maher pointed out that China potentially could become the largest wine-consuming market in the world, but its internal market is still in its infancy. Nevertheless, the U.S. industry faces a lot of work to fully exploit this market. France dominates Chinese wine imports with half the market; while California has earned a very positive image overall, the U.S. has less than 7% share of wine imports. Australia and Chile are larger suppliers.

Its large population is one reason for China’s rich potential. China is home to six of the world’s 25 largest cities—including Shanghai, which has nearly 23 million residents.

The Chinese population consumed about 156 million 9-liter cases in 2011, placing it in fifth place among the top wine-consuming nations worldwide, according to Vinexpo's study by ISW/DGR Research Institute. Chinese consumers tend to want to serve expensive wines to impress people, and Bordeaux wines remain their first choice.

The Chinese already have a tradition of drinking locally made wine, but overall, consumption per capita is low, slightly more than 1 liter per person per year. That compares with 7 liters in the U.S. and more than 40 liters per capita in France and Italy.

Chinese consumption has been increasing fast. The British ISW/DGR research institute predicts a 36% increase in wine consumption in China vs. 9% in the rest of the world, a 54% rise from 2011 to 2015.

Much of this wine is locally produced. Chinese wine production is predicted to rise 77% from 2010 to 2014, according to numbers published by Vinexpo,  pegging China at 128 million cases compared to more than 500 million for France and Italy, 400 million-plus for Spain and 350 million for the United States.

The Chinese population has a taste for sweet wines, much of them locally produced. Local companies are planting huge vineyards in China, not all well researched. Maher said some vines are planted on their own roots, ignoring the threat of phylloxera.

Investment in California
Maher identified a few high-profile deals, plus some others, which demonstrate Chinese interest in Golden State vineyards:

• 2010, Silenus Winery (approximately $6 million); Silenus International Group.

• 2011, Sloan Estate, 40 acres ($40 million); Goldin Financial Holdings, Hong Kong.

• 2011, Spanos Berberian property with 20 acres of vines on Pritchard Hill ($15 million); no purchaser data.

• 2011 Frazier winery, vineyard and residence but no brand  ($7 million); Zhang Winery, China.

The winery advisor said that China’s rich are trying to transfer wealth out of the country because of concern over future policy changes. This is true even though they can make 20% return on investment in China vs. 6% in the U.S., because buyers are expecting to see more controls on exporting money.

Hu Jintao, who has been president of China since 2002, will relinquish that post in 2013. Xi Jinping, who studied in the U.S., is expected to replace him. Maher said China’s military leadership will also change.

Maher reported that Chinese real estate values have begun to drop sharply: The property sector, a huge employer, accounts for about one-fifth of China’s economic output.

Further, China’s investment in real estate development rose 28% to almost a trillion dollars, $200 billion more than the U.S. invested at the peak of its housing bubble in 2005. Many expect that bubble to burst, as it did here and in Japan.

Further, Maher said China leads the world in illicit fund transfers, according to nonprofit Global Financial Integrity: It estimated China lost $2 trillion from 2000 to 2008. That money is looking for safety, he said, not the highest returns. The new regime may constrict the flow, increasing demand to get money out now.

Posted on 03.15.2012 - 13:16:45 PST
Living and working in China for the past year and a half, I think this article is spot on. Royal American Wines represents Washington and Oregon wines and we are amazed by all the demand for our wines. The Chinese love sweet balanced red wines but whites are starting to grow higher in demand.
exporting wine to china