Societe Generale Ltd, a leading French financial institution, plans to launch a wine fund in China, eyeing the country's fast growing new rich. It will be the first overseas financial group to issue a Bordeaux wine fund on the Chinese mainland.
Societe Generale received approval to start wine funds on the mainland under the qualified domestic institutional investor (QDII) scheme. Now the company is in talks with the China Banking Regulatory Commission about fund issuing details, said Hsiao-yun Lee, the chief executive officer of China-based Societe Generale Private Banking Business.
Unlike traditional investment instruments, such as stocks and bonds, Lee called wine funds an "alternative investment vehicle". Cash can be invested specifically in wine or the beverage can make up one component of a series of investment portfolios. Usually, a wine fund matures in five to seven years.
"As a long-term investment instruction, it can diversify the current assets allocation in investment portfolios," said Lee.
The Societe Generale Bordeaux wine fund is privately offered. Investors tend to be high-end clients of the private banking business. They can choose when to invest and authorize Societe Generale to sell their wine at auction at a time of their choosing.
"According to our previous wine fund management experience in Europe, sometimes the auction price may be 100 times higher than the original price," Lee said.
The average annual return rate of a Bordeaux wine fund is about 10 percent, said Lee. For high quality wine, the annual investment return can be 8 to 12 percent on average and some years it can even reach 50 percent if investors purchase the en primeur (wine before it is bottled), said Wang Baoting, vice-president of Chateau Junding, which is owned by COFCO Group.
The mainland's young rich people have preferred to invest in the wine market in recent years, and investments have been part of their daily lives. There are increasingly more young wealthy people interested in drinking and collecting wine, and many of them even see wine as a sign of a high quality life.
The average age of rich people on the mainland is 36, compared with 48 in Hong Kong and 43 in Taiwan, a report from HSBC Holdings Plc showed. By the end of 2009, there were 364,000 rich people with more than $1 million investable assets on the mainland, ranking fourth place in the world, Merrill Lynch's global wealth management reported. "There is potential on the mainland for a wine fund market," Lee said.
According to a report, wine of investment quality consists of just 0.1 percent of the total worldwide wine production every year. Because better wine needs to be stored for a long time, the market supply is limited. Investment in high quality wine will provide a relatively stable return, said Lee Robertson, a senior wine investor.
Injecting money into wine funds can spread risk and optimize investment structures for investors, said Sun Qingyun, a private banking business manager at Bank of China. "However, the returns of wine funds are affected by international market fluctuations. After the global financial crisis, people investing overseas became more prudent because of the more risky market," he said.
The Industrial and Commercial Bank of China and China CITIC Bank began to provide financial products investing in wine in cooperation with Chateau Junding in 2008. Nevertheless, private banking businesses are only just beginning to emerge on the mainland. There is a lack of specific legislation about private banking, which "will increase potential risk for investors", said Sun.