China’s $13 Billion Art Fraud — And What It Means For You…

August 18th, 2013 § 0 comments

Published on: Art, Antiques and Luxury Design Blog
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China’s $13 Billion Art Fraud — And What It Means For You…
by Abigail R. Esman
Posted on August 11, 2013 by Editors 13
First published on Forbes 13.8.2012 on forbes.com
www.forbes.com

If you pay attention either to China or the art market, you’ve probably heard the story: China last year became – according to art industry experts – the world’s largest market for art and antiques, surpassing the USA.

Well, here’s a shocker: it isn’t. Not even close.

Of course, you probably suspected as much: but the reasons are only now becoming clear. Exclusive interviews over the past several weeks with Chinese art dealers, auction house officials and others reveal a level of corruption significant even by Chinese standards, and more, the potential global dangers of an art market now at unprecedented heights – and growing.

I first had a whiff of the real story in March, when art market expert Clare McAndrew, speaking at The European Fine Art Fair in Maastricht, mentioned that many of the major purchases at Chinese auctions – which represent the vast bulk of China’s art market activity – were going unpaid. It is, after all, one thing to announce a multi-million dollar sale; it is entirely another actually to make it. And if buyers aren’t paying, China isn’t number one, after all.

But defaults on purchases can happen anywhere, even at Sotheby’s or Christie’s auctions in London and New York, historically the two centers for art market activity, and the largest auction markets internationally. What makes China different?
The answer, according to those I’ve talked to, revolves chiefly around China’s largest auction house, Poly Auctions, based in Beijing. While Chinese collectors are well aware, most Westerners do not know that government-owned Poly is part of a larger organization that also manufactures weaponry – or rather, as they describe it on their web site:

Poly Technologies Inc. is a large-scale defense company authorized by the Chinese Central Government for the import and export of all ranges of defense equipments for Army, Navy, Air Force, police and anti-terrorism. Since its establishment in 1984, Poly Technologies, Inc. has devoted itself to the equipment modernization for the Chinese force and the friendly nations in the world, actively participated in the R&D of military products, extensively engaged in the import and export of military equipment and technology, and provided military equipment and technology.

More specifically, according to Nancy Murphy, an art lawyer based in Beijing, “Poly is the auction arm of the People’s Liberation Army. Doesn’t every army have an auction arm?” While she admits it’s possible that “the PLA has spun the auction house off so it’s legally a stand-alone entity, its home page says ‘we are the fine art auction home of the People’s Liberation Army. Our goal is to bring the people’s art back to China.’”

That your purchases at Poly are helping to feed China’s military and oppression machine is bad enough; but worse, according to many familiar with China’s auction racket, you may be getting taken in the process – even if you’ve never bought anything from Poly. Artificially-inflated prices and manipulated sales have so disrupted the values for Chinese art and antiques that the true value of many of them remains unclear – meaning that buyers of Chinese art, antiques and antiquities worldwide are likely to pay far more for things than they’re worth. (And that’s before we calculate the explosive growth of fakes, which comprise, according to Murphy, as much as eighty percent of the material offered at Poly and a fair share of what one finds even at more respectable houses, like China’s number two auctioneer, China Guardian.)

Basically, there appear to be a pair of schemes through which such manipulations take place, both often geared either toward money laundering or the bribing of government officials, according to Murphy and Melanie Ouyang Lum, an American dealer in Chinese art based, until recently, in Shanghai and Beijing. Observed Lum, “the results at Poly are staggering. There’s a sense that they are creating a facade to encourage people from in and outside of China to invest in China’s art market, not real estate and bonds. If China is going to keep money in China, it needs strong investment vehicles.”

Among the more common schemes is one used chiefly to assist in bribes or in the building of art exchanges and investment trusts popular among Chinese investors. According to both Murphy and Lum, Poly (and possibly others) frequently guarantee sellers that an item attain a certain price – and then allow the seller himself to bid. Should general bidding stop below the level of the guarantee, the seller will bid the guaranteed amount, establishing a false but recorded value for the work. But since, as an officer of a competing auction house remarked, “you don’t pay yourself,” sellers in these cases pay only a small commission to Poly – a meager sacrifice for the reward of making a $50,000 antique soar to ten times its actual value literally overnight.

From there, the owner can either attempt to sell the piece again at the higher value, or – as often happens — give it as a “gift” to a government official, essentially providing an extremely generous bribe – or at least, one that seems that way “It ‘s a great way for the government, as well, to bribe people and exchange cash without actual buckets of cash or a paper trail,” says one source who asked not to be named. “China is always worried about a paper trail. It’s a Communist government and a corrupt government, and so you don’t want a paper trail in case the other person gets caught: but if you give someone a scroll, there’s no way to call that a $5 million bribe.”

The reverberations of such transactions, however, reach far beyond China’s shores. While the enormous bulk of the Chinese antique and antiquities market remains in mainland China, Westerners are starting to move in on the action, many duped by what appears to be exorbitant growth and a fabulous investment opportunity. After all, based on the belief that a 15th-century scroll by X sold for $Y at Poly, more reputable houses like China Guardian, Christie’s and Sotheby’s will attach estimates to similar works accordingly. If these sell within estimate, they then legitimize the earlier values “established” – however fraudulently – by the Poly sale.

But this raises a host of larger questions: Is the 15th-century scroll that sells at Sotheby’s (for example) really worth $Y? Or is it worth, actually, the amount of the last legitimate bid at Poly – which could be hundreds of thousands of dollars lower? How far back does this go? And what does it do to collectors and investors worldwide?

The same practice, according to Murphy, controls the so-called art exchanges, through which people may purchase shares in a work of art in anticipation of profit on its eventual resale.

“Everyone – buyers, sellers, journalists – believes Poly is not held to the same standards an auction house in the West would be,” says Murphy. “Yet though this is a universally held belief, it has not been proved. As one experienced art dealer from the mainland said to me, ‘who is going to audit Poly?’ Second to the Communist Party, the PLA is the most powerful organization in China. And in some ways, maybe more powerful.”

For their part, Poly has categorically denied all the allegations, despite the fact that they were confirmed for me by three independent parties and various tax-related documents. In an e-mail, Daniel Tang, the auctioneer’s New York representative, stated: Regarding the allegations that Poly Auction has been less than completely honest about the selling prices of artworks in public statements and that clients have bid on their own works with the knowledge of Poly management, our company has no involvement in these alleged practices. Poly Auction insists on the principle of being honest, fair, and just to our clients; we hold this operating standard in the highest regard.”

Fortunately, all this shenanigans, while perhaps useful for the Chinese military, is likely only to affect a small portion of Western buyers of Chinese art, most of whom focus on Chinese contemporary – a different – and smaller — market (though it, too, has its problems). While the market for these works has certainly cooled of late, Wang Yannan, President of China Guardian – the country’s second largest auction house after Poly – points out that younger Chinese collectors are beginning to explore lesser-known artists – and, she says, actually paying for them. Others, says Mrs. Wang, are seeking out contemporary ink works by artists such as Liu Dan, who studied in the US, and Li Huayi, who is based in China and San Francisco. Even so, she says, “because of economic strains, it’s now difficult to get consignments, and so revenue shrinks.” Still, major works continue to achieve major prices, reaching as high as $20 million and above.

If, that is, they’re real. That is often not the case, according to Murphy, who estimates that as many as 80 percent of the pieces that appear on the Chinese auction and gallery market are not – presenting risks, too, for collectors of both Chinese contemporary art and of contemporary Chinese ink and calligraphy. ”We know that in the Chinese art field there is uniform agreement that the number of fakes has increased a lot in the past ten years,” she says. “With a lot more buyers, it’s an instant formula for creating fakes. True,” she adds, “the proportion of fakes sold all over the planet has also increased, but when you talk about a degree of the commonness of these practices in China, everyone has fakes. And when you look at Poly and Guardian who are supposed to be the number one and two auction houses, you don’t expect even forty percent of the works to be fake.”

Apparently, the trend has gone international: forgeries even of contemporary art are now appearing on the Western market. An article in the Vancouver Sun recently quoted Hugh Bulmer, Asian art specialist at Vancouver auction house Maynards, who claims to have noted “a marked increase in people trying to pass off copies of Chinese artwork as originals in Vancouver.
‘The market is full of it,’ he said. “And you can guarantee that if something sold for a million dollars in Hong Kong last week, it will be copied and will be on the streets of Vancouver this week.’”

True, the Hong Kong market is not the mainland market: Hong Kong collectors are more Westernized in their dealings, and show a stronger interest in Chinese contemporary, while the mainland market emphasizes antiques and antiquities. But the trend is alarming, particularly when the investment of many of these works outside of China is still under debate: will the trend hold?

Indeed, a number of experts I spoke to feel that overall, the Chinese contemporary craze has died down, and will not be likely to rekindle – in part because of the precarious political situation in mainland China, and in part because of a lack of professionalism found in the studios of many of China’s top contemporary artists, where frequently works are produced by a factory-line of assistants, even without the artists’ supervision.

In addition, the government is cracking down: galleries are being forced to close, and artists are being detained with frightening frequency – as are other art world employees. The arrests and harassments go beyond the more high-profile cases such as that of dissident artist Ai Wei-Wei; according to Lum, when exhibitions open in the government-owned art district of 798, the police will check to see if it’s controversial or not. “I’ve seen an exhibition open and then be closed for a week,” she says. “When it reopens, some of the art works are gone.” Many galleries have consequently simply closed up shop, she says – and those that are doing well, “all have connections to someone in power.”

And it’s not just the artists: faced with the growing power and wealth of its military, China’s Party government is also cracking down on the art trade, investigating rampant tax fraud and import scams of work coming in from abroad. (Murphy is currently representing a Beijing-based German art handler, Nils Jennrich, who has been detained for attempting to skirt customs duties by undervaluing imported art works.) How much this is likely to affect Western dealers such as Pace who are investing heavily in the Chinese market these days remains to be seen, but some say privately that in order for any of them to survive, they will have to play “by Chinese rules.”

All of which points to an art scene that goes beyond local corruption, infecting the market worldwide. Meantime, efforts by both government and military branches of China’s leadership to exploit the country’s $13 billion art trade, profiteering off the froth and foam of its overheated market, feeds the battle for power between them. But whatever that means for the country’s future, collectors – and international art market watchers – need not become victims, too.

Best wishes,
Abigail R. Esman

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    Passionate about both art and entrepreneurship, the art dealer João Correia founded two companies: Collezionista, an art advisory firm based in São Paulo, and, I Know What I Like, a contemporary art debate society based in London. He also writes regularly to the media and to this personal blog in English and Portuguese languages.
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