Food

How Did Moon Cakes Become Financial Products?

There are some strange financial derivatives in the Chinese market, including mooncakes, hairy crabs, sneakers and designer toys. Let's see what's going on.

Moon cake is not only a kind of traditional food in China, but also a kind of holiday food. It originated in the Tang Dynasty. Every year during the Mid-Autumn Festival, people in Greater China eat moon cakes while enjoying the moon. 

However, in the last decade, there has been a tendency to securitize moon cakes and other Chinese foods such as Hairy Crabs and Zongzi

Yes, you read it right, it’s securitization. 

This makes these commodities, including moon cakes, gradually form a huge secondary market, and some people even regard these commodities as stock-like wealth management products. 

What on earth is going on? Let’s explain it in detail.

Moon Cake Securitization

Before we talk about the process of turning moon cakes into securities, we need to have a brief understanding of a financial knowledge: asset securitization

Asset securitization is a financial term. It refers to the quantification of a certain property in reality to form a negotiable securities that can be easily traded. Its rigorous explanation can be found on Wikipedia

Let’s explain this process in human language: 

Suppose you have a ton of gold and you want to sell it to different people in batches, but multiple cuts may cause gold wear and tear. Therefore, you value the overall value of a ton of gold at 100 million yuan and the price of each gram of gold at 100 yuan.

You allow customers to buy your gold by grams, but instead of getting a gram of gold right away, they will get a coupon for gold. This coupon stipulates that when all the gold is sold, you will hire a worker to divide the gold and distribute it to everyone who has bought the coupon at once.

This is a 2020 Haagen-Dazs mooncake coupon, which represents the design of a typical mooncake coupon. It usually has exquisite printing (a few use paper-cut envelopes), patterns with the meaning of the Mid-Autumn Festival (such as Moon, Moon Rabbit, Chang’e), and some exchange coupons print their face value prominently to seek better performance as gifts.

The above process is a typical asset securitization, and the gold coupon is a kind of securities. 

The asset securitization of mooncakes is similar to this, which originates from mooncake exchange coupons.

In China, since the 1900’s, most mooncakes have been sold in the form of coupons. 

In China, most mooncakes are sold in the form of coupons, because to some extent, mooncakes are similar to gold and are difficult to be traded at any time: People only eat moon cakes on the Mid-Autumn Festival, but if they only buy moon cakes on this day, they need to wait in line. 

The weight of moon cakes is very heavy, so if you buy moon cakes as a gift, it is very inconvenient. The shelf life of moon cakes is not long. If you buy moon cakes too long in advance, they will go bad. 

The manufacturers of mooncakes have invented mooncake coupons, which go on sale two months before the Mid-Autumn Festival every year. After people buy moon cake coupons, they can generally exchange real moon cakes within two months before the Mid-Autumn Festival and one month after the Mid-Autumn Festival. 

The emergence of this kind of mooncake exchange coupons has brought convenience to both sides of the transaction. Mooncake manufacturers can know in advance how many real mooncakes they need to produce through the sales of coupons. On the other hand, it is more convenient for consumers to give moon cakes as gifts to others, and they do not have to wait in line at the time of purchase. 

However, it is the same as the esidential mortgage-backed security that triggered Subprime mortgage crisis in the United States in 2007. After securitization, the moon cakes have high profits and financial risks.

The Real Exorbitant Profits of Mooncake Securities

Generally speaking, the most basic principle of asset securitization is “do not overissue”: if you have 100g of gold, you can only sell 100 sets of 1g gold coupons; if you have 1000 boxes of moon cakes, you can only sell 1000 sets of mooncake coupons. 

However, the reality is usually not. Many high-risk asset securitization follow the dangerous logic of issuing securities before producing assets. This is obviously the case in the field of food. 

Mooncake manufacturers will not first produce 1 million boxes of mooncakes and then print 1 million mooncake coupons for sale. Instead, 1 million mooncake coupons are printed at a very low cost to sell, and then real mooncakes are produced according to sales volume. 

In Google, you can get a lot of results by using the Chinese word “mooncake coupons” as the key word. Some of them are design templates for mooncake coupons, which are used to allow small and medium-sized businesses to print their own mooncake coupons at a low cost.

Some manufacturers have sold 1 million mooncake coupons without even producing 100,000 boxes of mooncakes and have not been held accountable: because many of the mooncake coupons given as gifts will not be exchanged at all. 

Its trading logic goes like this:

  • A well-known mooncake brand AA has announced that it will sell a 200-yuan mooncake (at a cost of 100 yuan) in the form of coupons, which will be wholesale to its distributor BB at a price of 140 yuan. 
  • Consumer Mr.Wang bought a mooncake coupon from BB for 180 yuan and gave it to his company’s leader, Mr. Zhang. 
  • Because Mr. Zhang is a middle manager of the company, he has received more than 30 mooncake coupons from customers, friends and subordinates (in Chinese culture, giving mooncakes is often not a bribe).
  • Mr. Zhang and his family only used three coupons, because although the moon cakes were delicious, they were not healthy. It is impossible for them to exchange and eat all the moon cakes Mr. Zhang got. 
  • With less than a week to go before the Mid-Autumn Festival, in order not to let his coupons go to waste, Mr. Zhang sold the remaining 27 mooncake coupons to the “black market” mooncake coupon collectors at a price of 40 yuan each.
  • Mooncake brand AA buys back the coupons it once sold for 50 yuan from these “mooncake coupon collectors”.
  • AA, the moon cake brand, bought back the coupons from these “mooncake coupon recyclers” for 50 yuan, which they had sold for 140 yuan.

Next, these coupons have two destinies: If the Mid-Autumn Festival has not yet arrived, it will be wholesale to BB again at a price of 140 yuan and try to sell it to consumers again. If the Mid-Autumn Festival is over, it will not continue to be sold.

Maybe you’ve been distracted by this process. Let’s take a look at what each side has gained in the process:

  1. If the mooncake coupon is not cashed, the profit earned by the mooncake brand AA on each coupon is: 90 yuan = 140 yuan (initial wholesale price)-50 yuan (recovery price).
  2. If the mooncake is cashed, the profit that the mooncake brand AA can earn on each mooncake exchange coupon is: 40 yuan = 140 yuan (initial wholesale price)-100yuan (cost) .  
  3. For each reclaimed coupon, the recycler earns a profit of 10 yuan (50-40). 
  4. Regardless of whether the mooncakes are cashed or not, the distributor BB will make a profit of 40 yuan (180-140). 
  5. Whether the moon cakes are cashed or not, Mr. Wang gave Mr. Zhang a favor worth 200 yuan. 
  6. Mr. Zhang received a total of 6000 yuan worth of favors from 30 people and ate three boxes of real moon cakes.

In other words, in the process, mooncake brand AA actually produced only 3 boxes of mooncakes, satisfying 30 gift purchases on the market. If circular sales are taken into account, the proportion will become even larger. 

If this happens in the real financial sector, it will eventually lead to a financial crisis. But in the field of traditional Chinese food, most of them will be safe. The reason is simple: in the whole process, everyone gets what they want. 

The manufacturer makes a profit, the consumer gives the gift, and the recipient receives the gift (the part he needs).

This profiteering is also the reason why many foreign catering companies (such as Starbucks and Haagen-Dazs) are keen to sell moon cakes in China.

Apart From Mooncakes, What Other Commodities Have Been Securitized in China?

First of all, this commodity securitization appears in all kinds of traditional Chinese holiday foods, such as Zongzi and Hairy Crabs. 

This is easy to understand because they all share the same characteristics as moon cakes: entities are not easy to carry and trade, and are often used to give gifts. 

Chinese people eat zongzi on the Dragon Boat Festival and hairy crabs on the Mid-Autumn Festival, and unlike Dumplings, Yuanxiao and Spring rolls, these two foods are also used to give gifts in traditional culture.

Therefore, selling in the form of coupons can significantly increase the sales of these two kinds of food. 

In the case of Hairy crabs, merchants have developed a more excessive means of business-“transit trade”. 

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Transit trade is an international trade term, which usually means that when goods are exported from country A to country B, the goods must stop at the port of country C and carry out an import and export because of their geographical location or trade policy. Although any enterprise in country C did not participate in the actual transaction, it eventually became sold by country C to country B rather than country A to country B. 

Chinese hairy crabs, similar to Chinese tea, are priced on the basis of origin. Among them, hairy crabs from Yangcheng Lake in southern China are the most expensive.

In order to sell hairy crab coupons at high prices, hairy crab brands almost only sell “Yangcheng Lake hairy crab coupons”. When the production of hairy crabs in Yangcheng Lake area is insufficient, they will ship hairy crabs from other areas to Yangcheng Lake for breeding a week or two before sale, and then sell them. 

At this point, commodity securitisation began to change completely, in which no one but the merchant got what they wanted.

Another bad example is in the field of sneakers.

In October 2019, the Shanghai Branch of the People’s Bank of China (which is not a commercial bank, but the Chinese government department responsible for bank regulation and monetary policy) issued an extremely rare risk alert.

The alert, entitled “be on guard against the craze of speculation in shoes and guard against financial risks”, pointed out that there were suspicions of pyramid selling, financial fraud and illegal securities trading in second-hand trading of sports shoes in China at that time. 

The thing is, with economic growth, China ushered in a new consumption trend in 2018. In this consumption trend, the main consumer group has changed from middle-aged people to well-off students and young people who have just worked. 

As a result, trendy clothing, designer toys, expensive electronics and luxury goods for young people have become the main flashpoints of the market. Some fashion communities for young people saw this opportunity and began to securitize goods. 

As we all know, there are many limited models and joint models in the field of sports shoes, which are sold only briefly for a specific period of time, and the total amount is limited. Previously, enthusiasts would also trade these limited edition sneakers as collectibles on second-hand trading platforms.

However, due to the high storage, logistics and maintenance costs of sports shoes, the frequency of these second-hand transactions is extremely low. When it was securitised, everything was different.

Screenshots of some second-hand shoe exchanges are very similar to financial exchanges, and some even allow trading using Bitcoin.

Among the “exchanges” launched by these online fashion communities, sports shoes are divisible. It doesn’t matter if you can’t afford a $11,000 pair of Air Jordan 11S, you can buy a 1% pair of Air Jordan 11S for $110.

When the price of a real Air Jordan 11s goes up, so will the 1% you own.

It is achieved in this way: the original shoe owner sends a pair of shoes to the exchange, and the exchange values it not to the owner of the shoe in cash, but to the “stock” of the shoe.

These “stocks” can be exchanged for cash, but the price varies from minute to minute, depending on how popular the shoes are in the market. After acquiring the shares, the owner of the shoes can decide when to sell them and turn them into cash. In the process, you can even engage in short selling and leveraged trading.

This is already a real stock exchange rather than a second-hand exchange, and the traders are not sneaker enthusiasts but speculators. The media even reported that some sneaker exchanges did not have real sneaker inventory at all, but just created shoe stocks out of thin air.

At this point, commodity securitization is no longer a means of trading, but a means of fraud. This is also the reason why the Government issued that warning. And Chinese netizens call it cutting chives.

See Also: In Chinese, What Does It Mean to Cut Chives (harvest chives)?

On the whole, commodity securitization does not only have its disadvantages, it does make it easier for some commodities to complete transactions. But otherwise, you have to be careful.

Have you ever bought commodity securities? You can leave a story in the comments section.

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