Counterfeits, inflated prices hit expanding art market

March 10, 2014 by Andrea Park

From a standing start at the turn of the millennium, the Chinese art market has expanded into the largest in the world. Classical works of art from the Ming dynasty sell for millions of dollars in the hundreds of auction houses that have sprung up across China. Chinese dealers scour Western markets to return rare pieces to China that left many years ago.  But as the market has expanded, so have the problems.

Three years ago prices were rocketing. The examples are legion: a Chinese wooden zitan display stand and cover that was originally estimated to sell for between US$20,000 and $30,000 sold at Christie’s for US$1,426,500.  Almost as surprising was the US$362,000 paid for a Chinese bronze ritual food vessel that had a US$20,000-$30,000 estimate. Items estimated for a few hundred dollars on auction websites were regularly reaching ten or twenty times their estimates.

Much of the big money is reserved for works by contemporary and modern Chinese artists. Take the example of Zhang Daqian. A prolific painter, he started as a guohua (traditional) painter, but later branched out into modernism and expressionism. He lived much of his life outside China, finally settling in Taipei. In 2012 his ‘Tibetan women with dogs’ sold for $6.2m – six times its estimate – at the inaugural sale at of the China-based Poly auction house in Hong Kong.

But nothing lasts forever. “Eagle Standing on a Pine Tree” by Qi Baishi marked a turning point for Chinese art when it sold for $65.4m during an auction by Chinese company China Guardian in May 2011. The hefty price tag for the 1946 ink painting seemed to confirm that the Chinese art market was booming. There was just one problem: the winning bidder refused to pay up for the artwork, according to the New York Times, claiming that the painting was not genuine, and backed out as a consequence. It now languishes, gathering dust, in a Beijing warehouse.

Nor was this an isolated case. Between the spring of 2011 and the following spring, 40% of people who bid more than $1.5m for individual Chinese artworks did not pay for the pieces within six months of the auctions, according to research by Art Economics. Another 15% of buyers only partially paid for their work; in other words, less than half of these bidders paid in full for these pricey pieces within half a year.

Despite a boom in interest in art in China, fuelled by the newly wealthy, the year of 2012 showed that China was not likely to be the goldmine art experts were hoping for. New York research firm Artnet reckons that the global market for Chinese art and antiques shrank from $10.6bn in 2011 to $6.9bn in 2012 in value sold, a decline of 37%. Sales of Chinese artworks in mainland China were slashed in half between 2011 and 2012, though the market for Chinese artworks overseas fared much better, increasing in value by a modest two percent. This decrease in demand in mainland China is the first since the financial crisis of 2008, according to the report. The global average price for a Chinese piece dropped from $25,900 in 2011 to $21,900 in 2012.

Why did China’s art market drop the ball? Artnet’s lead market and strategy analyst Katharine Markley told the Wall Street Journal that collectors, like the winning bidder of “Eagle Standing on a Pine Tree,” are concerned about the quality and authenticity of artworks. They are becoming smarter buyers. Additionally, auction houses rarely correct information on their sales to report that the bidders never paid, boosting the appearance of high sales volumes.

Whilst there is no doubt that the Chinese art market is one of the most important in the world, having risen from almost nothing in 2003 to a point where it surpassed the American market in 2012 in terms of revenue, with the opaque and murky information available on actual sales versus winning bids, the real dimensions of this boom are unclear.

One of the biggest problem facing China’s art market is that it is saturated with fakes. Art data company Artron enlisted the help of painter He Jiaying who was able to show that 80 out of 100 paintings attributed to him were fakes, according to the New York Times. This rate of 80% makes it easy to see why bidders get cold feet before paying for their paintings. Even Zhang Daqian was not above faking pieces, which are said to adorn the walls of several large American museums.

The Chinese government suspended or took away the licenses of 150 auction houses between 2008 and 2011 for a variety of reasons, but mostly for selling counterfeit pieces. This sort of fundamental problem shakes faith in the entire market, especially when Chinese collectors are not necessarily buying to keep.

Mainland Chinese collectors account for 64% of sales value, while Hong Kong, Macau and Taiwan clock in at 27% and sales in Europe, North America and the rest of the world comprise less than 10% of the total. Chinese buyers differ from their Western counterparts in that there is a trend to use art as a currency. Chinese people often give the works of art as gifts, or in some cases, bribes, or they resell the pieces at a higher value.

Felix Salmon of Reuters points out that in just 10 years, a Qi Baishi painting was sold and resold a total of four times. This behavior obviously inflates the Chinese art market bubble, but it is not hard to imagine that it will gradually change as China’s elite settle into their wealth and begin to place more qualitative value on art.

It is important to note that in China, the highest prices for artworks are paid for classical paintings and calligraphy, whilst overseas it is modern and contemporary works that fetch the highest prices, even though they only comprise 15% of all value overseas. Even in mainland China, while the highest average prices were paid for classical painting and calligraphy, the second highest average prices were paid for oil paintings and contemporary art.

According to Artnet, rising average prices for contemporary painting and calligraphy are due to the fact that, unlike classical paintings, contemporary pieces can be verified by the living artists. If this trend continues, the problem of fakes in the market may eventually fade into the background.

Not surprisingly, the supply in China’s contemporary art market is rising to meet demand. Bloomberg reported in September that eight of the world’s 20 top-selling artists born after 1980 are Chinese – that’s double the number of Americans on the list. Just as China is beginning to build its own luxury brands, it is also nurturing the talent of homegrown stars like Gao Yu and Peng Si.

The nationalism of China’s elite means that Chinese art collectors have focused on classical works, which fetch the highest bids and carry the greatest prestige. The counterfeit problem, along with inflated prices for a finite number of special pieces, mean that this bubble was bound to burst at some point. For now, at least, it will be modern artists that will fetch the highest prices in the glossy new auction houses now found in every major Chinese city.

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