Market China

Chinese art funds on a risky road to maturity

A glut of investment products has mirrored the rise of the Chinese art market, but caution is advised

The Tianjin Cultural Artwork Exchange had to stop trading in 2011 due to fears of inflated prices

The strength of the Chinese art market, the world’s leading economy for art and antiques, has spawned a parallel boom in art funds and other art-investment vehicles worth more than Rmb5.77bn ($900m), according to the Chinese-language publication Eastmoney.

There are billions more held in art-related products offered by investment trusts and art exchanges that enable people to buy and sell shares in individual works. These have been embraced by Chinese buyers keen to broaden their portfolios at a time when traditional investments are performing poorly and are increasingly subject to government restrictions.

Experts caution that many of these vehicles are loosely regulated, that they lack a legal framework and that their managers have no experience of a down market—a pressing concern, given that the World Bank is forecasting the weakest growth in 12 years, and a slowdown in China’s economy could signal leaner times for the art trade. “Art investment in China is new, and it’s very much ‘make the rules up as you go along’,” says Bobby Mohseni, the Hong Kong-based director of the art advisers MFA Asia. “It lacks a lot in terms of clarity and compliance, and it’s hard to gauge whether the level of professionalism is there.”

New concerns

The explosion of art-investment vehicles has sparked concerns because they are thought to comprise a much greater percentage of the art market in China than in the US or Europe, and a run of redemptions would force the sale of a huge amount of art. Most funds operate with short maturities of around two years, which means that investors could soon be clamouring to withdraw their funds. “Eventually, [these funds] will need to sell their art to realise a return for investors, and whether they will be able to sell their art at a higher price in two or three years’ time is a very big risk,” says Ivan Shi, an analyst at the Chinese fund specialist Z-Ben Advisors in Shanghai. He says that most of the funds available focus on modern Chinese painting and calligraphy, which has enjoyed the steepest price increases in recent years.

Funds are said to be active at auctions in China and Hong Kong, and are rumoured to be behind recent records including the sale of a work by the Chinese master Qi Baishi for $65m at China Guardian in May last year.

Works bought at auction are also being sold on to art exchanges, which offer fractional ownership to individual investors. Ac­cord­ing to local news reports, Ren Chunxia, a woman from Jinan in eastern China, bought two oil paintings by Wu Guanzhong for HK$18.6m ($2.4m) and HK$26.4m at a Hong Kong auction held by Sotheby’s in October last year. She quickly sold the works to a new owner, who then listed them on the Taishan art exchange at prices 30% higher than those originally paid at auction, the reports say. The Chinese government recently closed down dozens of these exchanges amid fears that they were growing too fast, and it is not clear whether they will reopen.

Smoke and mirrors

A wide array of institutions offers art-related investment products, including mainstream banks, such as Minsheng Banking Corporation and China Merchants Bank, that promote art funds (as does Beijing Poly Art Investment Management, part of the auction house conglomerate). But many of China’s art-investment vehicles are operated by lightly regulated trust companies—financial institutions unique to China that combine elements of private equity, asset management and banking. In the past year, 18 domestic trust companies rolled out 45 art-trust products—more than four times the number launched in 2010. According to Ivan Shi, some of these are actually a form of loan: companies that have struggled to obtain bank loans will buy art to use as collateral. This is then packaged as an art-trust product to be sold on to rich investors with cash to spare. “It’s an easy way to get loans,” Shi says. He adds that the industry regulator, the China Banking Regulatory Commission, has, so far, not paid much attention to art-related products issued by trusts. A clamp­down cannot be ruled out, however, and if this were the case, China could easily experience the kind of boom and bust situation that unfolded in India between 2005 and 2008 when regulators shut unregistered art funds.

Of course, there are a growing number of wealthy Chinese who are not buying art purely for speculation. But it would be unwise to ignore the role that art-investment vehicles have played in the rise of China’s art market and their potential to turbocharge any correction.

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Comments

25 Jul 12
16:3 CET

CRAIG MATTOLI, GUANGZHOU

First of all, as even you have written about, recently, that the Chinese art market is number one is based on faulty data from local auction houses. Moreover, even as recently as the past few weeks, a Chinese buyer renegged on a purchase of 20 works from Sotheby's HK. You are correct that the Chinese have little in the way of investment venues, so, art has become a focus of investment. They trashed their stock market, and the only reason RE, at a 1-10 rental to mortgage ratio, hasn't crashed is that land sales are gov revenue. There is a lack of financial education. At a recent opening of an art exchange, they showed slides of random art, not owned by them, and told how it was bought a one price and sold at a much higher price. It inspired me to write an article about the usefulness of such things for China Econ Rev and Jing Daily: they would be useful if they could be sold short. The operators are only in it for the money. Remember, tho, it's not an art market but a market of art.

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