Valuing Art in China

Auctioneers in China may have reasons to be jubilant. The recent years have seen paintings and antique prices rocketing up to empyrean levels. Last year’s spring sale saw a Qi Baishi’s work selling at RMB 425.5m (USD 66.9m), while a masterpiece by Wang Meng (1308–1385) was hammered at RMB 402.5m (USD 63.3m).

More recently, Le Keran’s landscape painting in red fetched a no-less staggering RMB 293m (USD 46m) from an anonymous bidder. It seems that China’s awakening to her economic power has also brought cultural patriotism out of the affluent.

A work by Li Keran 李可染 《萬山紅遍》

While the Hurun Report reveals that China has some 60,000 individuals with personal wealth of RMB 100m or more, the market seems unreasonably small if most artworks auctioned in the country fall within this price range. Moreover, the art boom phenomenon is confined to the domestic market. Works by the same artists sold at international auctioning houses such as Christie’s and Sotheby’s did not attract the same degree of interest.

So what is it that makes the miniscule market tick in China?

Of course, the art business is never targeted at the mass market – it carves out a mysterious niche that sometimes averts the rules of capitalism to achieve maximum profit. The key to achieve this is to make the business as opaque as possible. There are no formulae to follow when it comes to determining the base value of an item. The demand of a piece at any given time can be influenced by numerous factors. Apart from traceable ones such as provenance and condition of the item itself, others can be wildly unpredictable. Sometimes considerations about current availability and historical significance weigh less than collecting trend and personal preference, and there really is no hard-and-fast measure to these elements.

It is precisely these ambiguities that Chinese auctioning houses use to feed their growth. While their counterparts in the West took years to cultivate their potential clients’ personal taste (as evidenced by their education arms), these rising businesses eliminate the personal factors and derive revenues mostly from institutional clients.

Since 2005, there has been a surge in the number of art investment funds operating in China. The total size of these funds is estimated to be around RMB 6.4 billion (USD 1.1 billion) at the end of 2011, with an annual growth of around 38%. One of these funds was owned by the consigner of the Li Keran work, Zhongyi Chenda Investment, who had previously bought the work at Christie’s 2007 Spring Sale for HKD 35.04m (USD 4.5m). That makes an astounding 922% return over a period of 5 years – a result that art investors in the West have never even dreamt of achieving.

The long history of art funds in the West is one that seldom sees victories. Data of repeated sales of artefacts sold in London in 2005 show that only one item has achieved over 400% return over about 10 years; three items reached a return of just over 300%, spreading over periods of 3 to 30 years. The British Rail Pension Fund started investing in artworks in 1974, and sold their acquisition in the late 1980s through 1997 to realise an annual compounded return of 11.3%. And this is the only art fund in the West that gives a positive yield.

Whether Chinese art funds can outperform this benchmark is yet to be known. But some are beginning to see signs of overheating. Art can be priceless, but just how willing are investors to continue to shore up its price?

Chinese painting prices keep closely with recent results of iconic Western art. Edvard Munch’s The Scream, with its instantly recognizable image, was sold at USD 120m at Sotheby’s 2012 Spring Sale; Picasso’s Nude fetched USD 106.5m in 2010, and another of the Spanish master’s work Boy with a Pipe was sold at USD 104.2m in 2004; Monet’s Le Bassin aux Nymphéas was hammered at USD 66.2m in 2008.

A maiden visually bathing in Monet’s Le Bassin aux Nymphéas

Despite their comparable price levels, the market for Chinese painting is much smaller because laws are making it difficult for foreign auction houses to get involved. The Chinese government imposes hefty taxes on importing foreign artworks, making it commercially unattractive for major players like Christie’s and Sotheby’s to hold auctions in China. At the same time, exporting artefacts, especially antiques, is a gruesome experience of bureaucracy combat. This means art prices are less subject to international regulation, and more vulnerable to internal manipulation.

Jehan Chu, director of Hong Kong-based art advisory service Vermillion Art Collections, told BBC News that: ‘There have always been questions about the transparency of sales results of mainland Chinese auction houses.’ A report by reveals the inconsistencies between sales figures and the revenues of some major auction houses, pointing to the possibility of price exaggeration.

While it is not uncommon that the actual price paid is lower than the auction price, nor is it rare that the buyer fail to pay the price fuller in time, the lack of transparency remains the biggest challenge facing the integrity of the auctioning industry in China. Paid or not, the auction price still stands, and a hugely inflated price widely publicised in the media can be used to drive up the popularity and demand of certain artists. This technical possibility has caused speculations of irregularities, pre-arranged bidding, bribery or even money laundering behind the scenes.

Without doubt, the art market in China is booming. But like many emerging businesses in China, it needs time to build trust with its customers by demonstrating quality and integrity. Meanwhile, buyers tend to trust well-established foreign names. But the unfavourable environment and the dubious practices are presenting great obstacles for a healthy competition. Until the playing field is levelled for foreign dealers and auction houses, and laws enforced to regulate the practices of art auctioning, the market is yet to see the real potential and prices of Chinese artworks.


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