How China is gearing up to fuel America’s CBD craze

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On a remote mountainside overlooking a misty valley, rows of cannabis plants are growing near fields of tobacco and corn.

This isn’t a pot farm in California. It’s in southwestern China’s Yunnan.

China has one of the strictest drug control policies in the world. But here in a mountainous region bordering Myanmar, Laos and Vietnam, cannabis is being touted as a crop that could bring untold wealth to farmers and businesses.

That’s because these plants won’t get you high. They don’t have enough of a chemical called tetrahydrocannabinol, or THC, which is responsible for the euphoric feeling.

Instead, they’re rich in cannabidiol, often called CBD, another chemical extracted from cannabis that isn’t intoxicating.

Except for one prescription drug based on CBD used to treat rare forms of childhood epilepsy, scientists still don’t know exactly how the compound affects human bodies.

But there is a craze around the hyped up ingredient, even if the current legal framework around it in the US exists in a gray area.

In the US, CBD is being added to skin creams, coffee and even dog treats.
In the US, CBD is being added to skin creams, coffee and even dog treats.

In the US and Europe, CBD has been portrayed as a cure-all, for anxiety, arthritis, acne, Parkinson's, autism – you name it. It’s being added to everything from skin creams to dog treats.

Get to know cannabis 
Hemp and marijuana are types of cannabis. Marijuana is mostly consumed for the ingredient THC, the chemical that produces a high.
Hemp is defined as cannabis with a THC level of lower than 0.3%. It can be used to produce non-intoxicating cannabis extracts, including CBD.
The United States legalized commercial hemp growing in December with the 2018 Farm Bill. Marijuana remains a controlled substance under federal law, but it’s legal for consumption in some states such as California and Colorado.
CBD is a compound that can be extracted from either hemp or marijuana.

The fast-expanding, if speculative, CBD economy is now fueling an investment mania in China, a country where smoking pot has long been viewed as close to taking poison.

“It’s like we suddenly went from winter to summer,” Pan Zongbing, who owns two CBD factories in Yunnan, said from his office over a lit cigar and a pot of Yunnan Puer tea.

“In the future, more applications will be invented. More people will be able to benefit from it. CBD will only become more popular.”

A cannabis farm that supplies dried leaves to Pan Zongbing's CBD factories.
A cannabis farm that supplies dried leaves to Pan Zongbing's CBD factories.
History of cannabis in China
CBD production in China is new, but cannabis has been grown in the country for millennia. The plants were traditionally used to make textiles, rope and paper. In traditional Chinese medicine, cannabis seeds are believed to be a cure for constipation.
After the founding of the People’s Republic of China in 1949, the national government imposed strict drug laws and banned the growing of cannabis. 
But over the past decade, two provinces legalized commercial hemp cultivation and one more is poised to do so. Farmers are required to apply for permits. 

The cultivation and consumption of marijuana, the THC-laden breed of cannabis, is strictly prohibited in China. The national government regards drug use of any kind as a threat to social stability and has imposed strict drug control policies.

But growing industrial hemp, breeds that contain very low concentrations of THC, is allowed in two provinces: Heilongjiang in China’s northeast and here in Yunnan, in the country’s southwest. 

The two provinces together produced about 13.7 tons of cannabis in 2017, according to the National Bureau of Statistics. Most of the plants are processed into textile fibers.

Some of the leaves are processed into the star product CBD, which can take the form of hemp oil or a tasteless fine white powder.

Pan is looking to build a third CBD factory.
Pan is looking to build a third CBD factory.

One of Pan’s CBD plants sits in the mountainous Eshan county in Yunnan.

The cavernous compound smells like weed. Workers wearing masks dump bag after bag of shredded leaves into humming machines, where they’re processed first into a black paste, then a golden liquid before ending up as white CBD powder. 

Pan is a machinery factory worker-turned entrepreneur from China’s east coast, more than a thousand miles away. He moved to Yunnan in 2011 to start his CBD business after hearing that the compound could give people better skin.

In order to build the factory, Pan said, he learned chemistry from scratch. With the help of local agricultural scientists, he spent four years figuring out a way to extract large quantities of CBD and remove any banned THC. 

Now Pan’s investments are paying off. His two factories together produce 4.4 tons of CBD a year, which have a market value of more than $20 million. The products are exported and added into food, medicines and e-cigarettes. 

The lucrative industry was little known to the Chinese public in the past. But in early 2019, the proliferation of CBD products in the US set off a stock market frenzy in China. 

Listed companies rushed to announce their grand entry into the cannabis market, vowing to plant hemp, build new CBD factories and explore CBD’s potential in treating epilepsy and Alzheimer’s. 

Their stock prices soared on the news. One packaging material company, Shanghai Shunho New Materials Technology, rallied nearly 400% in the months after receiving a hemp growing permit. 

Regulators have intervened by warning about uncertainties in the market. Many shares soon began dropping, but some investors and local officials remain bullish. 

In rural regions, such as in Yunnan, officials have paid visits to cannabis farms and showed up at launch ceremonies, praising the industry as a new driver for job creation and poverty alleviation.

Pan said he is expecting stiffer competition as more companies start building their own CBD plants, but he is confident his about his business. 

In fact, he’s currently looking for a new site for his third factory, which is expected to quadruple his yearly output to about 17.6 tons. 

He’s also thinking about setting up plants in neighboring countries such as Laos and Thailand, so he could avoid some of the impact from the US-China trade war, which has seen Washington heaping tariffs on nearly all Chinese imports. 

Pan Zongbing's factories in Yunnan produce about four metric tons of CBD powder a year.
Pan Zongbing's factories in Yunnan produce about four metric tons of CBD powder a year. 

In 2018, consumers are estimated to have spent a few hundred million dollars on CBD products globally, with the US being the biggest market. 

Estimates of future global demand vary. One cannabis research firm, BDS Analytics, says the US market alone will surge to $20 billion in the next five years. 

The majority of CBD products currently sold in the US are produced domestically, according to cannabis analysts, but rising demand has fuelled a global investment boom, much of it driven by speculation. 

No one knows if CBD drugs and food will eventually be fully legalized by the US Food and Drug Administration (which is studying the compound) and if consumers will keep clamoring for the products.

Andrew Kesser, a New York-based cannabis analyst with William O’Neil & Co, said hemp-related stocks worldwide have been on a bumpy ride. 

“Obviously there’s a lot of uncertainties,” Kesser said. “It’s such a new market everywhere. Most of these companies have not been around for very long. And the laws are sort of coming together and changing very quickly.”

The majority of CBD products currently sold in the US are produced domestically.
The majority of CBD products currently sold in the US are produced domestically. 

But hemp investment enthusiasts are betting on a bright future. They think CBD’s much-touted benefits could one day be proven by science, and maybe even countries like China would allow CBD products on its supermarket shelves. 

In June, about two hundred people from drugs, cosmetics and e-cigarette firms and even cryptocurrency companies gathered at a glamorous hotel ballroom in Hong Kong to talk about investing in hemp. 

“Chinese people are beginning to understand that industrial hemp is not a drug,” Apple Zeng, an investor and organizer of “The First Asia Hemp Summit,” said from behind a lectern decorated with a drawing of cannabis leaf. “It actually has great value.”

Speakers delivered enthusiastic lectures on hemp cultivation techniques, CBD’s prospects in calming pets as well as the application of blockchain technology in CBD investments. 

Outside, guests exchanged name cards and chatted about their money-making plans over coffee and canapes.

California-based Brian Jiang said his portfolio covered blockchain, artificial intelligence and fintech. Besides those, he has also acquired 1,000 acres of cannabis farms in California and Arizona. 

“We invest in anything with high returns,” Jiang said. “CBD has great medical value. The return is a lot higher than artificial intelligence.”

In Hong Kong, investors discuss their hemp investment plans at a conference in June.
In Hong Kong, investors discuss their hemp investment plans at a conference in June.

It’s not hard to see Chinese millennials embracing CBD, the way they’ve taken to avocado and quinoa.

But it’s unlikely America’s cannabis-wellness trend will be allowed to sweep into the country any time soon. With many other countries legalizing cannabis consumption, Beijing has pledged to tighten its control over hemp manufacturing at home, even as production has expanded.

A few adventurous consumers who have heard of CBD are buying it online, often through shopping agents based in the US and Europe. Businesses are required to apply permits for selling imported health supplements, though unapproved products are commonly found online. 

On the e-commerce site Taobao, customers claim in their reviews that CBD oil helped them sleep better or eased their anxiety. (Both Taobao and Inkstone are owned by Alibaba.) 

The manufacturers themselves also offer positive first-person testimonies: in Yunnan, Pan puts a few drops of CBD oil beneath his tongue about three times a week. He says the chemical could repair damaged cells and help him stay young and happy. 

America’s CBD boom has triggered an export-oriented investment frenzy in China that appears to be just starting.

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