by Stuart George

On February 27, the Hong Kong government abolished taxes on wine and beer (but not spirits) with immediate effect, having posted a record surplus of HK$115.6 billion (US$14.8 bn) for the fiscal year ending in March 31. Alcohol tax had already been halved to 40 percent in 2007, but this abolition immediately turned Hong Kong into a fine-wine entrepôt.

Financial Secretary John Tsang said in his budget speech that the abolition would cost the city's government HK$560 million ($72 m) in annual tax revenue, but sales by Hong Kong's "wine-trading and distribution businesses" may rise by as much as HK$4 billion due to the change, he believed. Tsang stated that Asia's total spending on table wine (excluding Japan) now stood at around HK$55 billion. His figures were supported by statistics from the Trade and Development Council of Hong Kong, which on March 11 reported that it expected Asia's wine market to grow 10-20 percent per year in the next five years, with regional consumption set to double. Mainland China, Hong Kong, Taiwan, Singapore, and Korea will lead growth as consumption value in the region, excluding Japan, will reach HK$130 billion (US$16.67 bn) by 2012 and HK$210 billion (US$27 bn) by 2017. The TDC predicted that China would import HK$870 million (US$111 m) worth of wine by 2017.

Following the abolition, Hong Kong wine retail prices were lowered by an average of 22 percent, according to Berry Bros & Rudd, which also reported that it had enjoyed its busiest day for more than a decade, selling more fine wine in the two days after the tax abolition than in the previous two months. Berrys cut its prices by 15 percent across the board. Farr Vintners cut its prices by 15-30 percent for all its fine Bordeaux. Not all wine retailers were pleased, though, since there is now the opportunity for Hong Kong residents to buy wine online or overseas at lower prices and import it themselves. Many restaurants were displeased, too: They already have stock that has been paid for and cannot afford to lower their prices.

It is believed that as much as a quarter of the US$300 million+ of wine sold at international auctions last year was bought by Hong Kong residents, said Boris de Vroomen, managing director of Moët Hennessy Diageo Hong Kong Ltd. In London, about 40 percent of the £600 million/US$1.2 billion of annual sales by fine-wine merchants is to residents of Hong Kong, Macau, and China, according to de Vroomen: "Most of that is actually to Hong Kong, although China is growing." At Sotheby's London sales in 2007, Asian private buyers represented 50 percent of sales by value.

Just two days after Mr Tsang's announcement, Bonhams revealed that it would hold its inaugural wine auction in Hong Kong on April 24 -- the first major wine auction to be held in Hong Kong since 2001. Frank Martell, Bonhams' international director of fine and rare wines, said: "Hong Kong has long been recognized as the wineindustry leader in the East, but in recent years participation has skyrocketed. Clearly the proposed exemption of wine from duty with immediate effect can only further encourage the expansion of wine culture throughout all of China as more people have greater access to the highest-quality wines. Historically, a large portion of wines purchased was kept overseas but may now be brought back to Hong Kong without penalty.

This could prove to be the most significant event in the history of wine as a commodity, since the entire winedrinking population in the East can now participate in an unfettered manner." Asked how Bonhams was able to announce its first Hong Kong fine-wine auction so promptly and so fortuitously after the tax abolition, D Levi Morgan, Bonhams & Butterfields' director of public relations, explained: "Frank Martell called me a few days before the government officials were to meet and advised that we'd heard the rumblings of this. He then began making calls to see if we could put a Hong Kong sale together should the government change the wine rules [...]. They did, and we were ready to announce our intention. Its tough to be the first out of the box, but our expectations are high!"

Hong Kong's wine collectors control one million cases of fine wine, according to Crown Wine Cellars, Bonhams' partner in the Hong Kong auction. Bonhams received 600 seat requests for the auction, about 90 percent from locals, said Carson Chan, Bonhams' Hong Kong-based managing director. Chan said Bonhams has had to reject most requests because the UNESCO World Heritage site -- an underground bunker used by the British army to store explosives in Hong Kong's 1941 fight against invading Japanese troops, and now Crown Wine Cellars' facility -- couldn't accommodate so many people.

Also on February 27, Acker Merrall & Condit announced its intention to hold a wine auction at the luxurious Island Shangri-La hotel on May 31, as well as establish a Hong Kong retail outlet in 2009.

Although Singapore and Tokyo have much lower duty rates, Hong Kong has an excellent geographic position, and its proximity to mainland China assures its position as the new center of Asia's fine-wine market. Zachys will be holding a sale in October, but Christie's and Sotheby's appear to have taken a "watch and wait" policy, perhaps deterred by potential headaches such as the transportation and storage of rare and more fragile vintages in Hong Kong's subtropical heat. Kevin Chang, CEO of Sotheby's Asia, says that Sotheby's has a "worldwide strategy of sourcing globally and selling centrally." This might also deter Sotheby's from entering the Hong Kong market for the time being.

Another potential deterrent is that mainland China can still be a difficult place in which to trade. In late March, Chinese Customs began investigating wine importers. Don St Pierre Jr, managing partner of China's leading importer ASC Fine Wines, was detained as part of a broad inspection of the industry and spent several weeks in detention, according to the Associated Press news agency.

But if Bonhams' and Acker Merrall's sales match the hype, other auction houses will doubtless venture into the wine-red sea of the Kowloon Peninsula.