China's art market booms, but bubbles loom

What was China's hottest investment market in 2011? No, it wasn't stocks or apartments. It was art.

Driven by speculative capital fleeing the country's turbulent stock market and a cooling real-estate sector, the art market showed strong growth with trade volumes expected to exceed 200 billion yuan (31.75 billion U.S. dollars) in 2011.

Turnover of China Guardian Auction Co. and Poly International Auction Co., the country's two largest auction houses, soared to 11.23 billion yuan and 12.1 billion yuan in 2011, representing a year-on-year rise of 49 percent and 20 percent, respectively.

GDP IMPETUS

With fast increases in personal wealth and a growing middle class, Chinese investors have flocked to the art market to obtain alternative assets.

Statistics showed that the annual rate of return on art investments stood at around 26 percent over the past six years, outperforming the rates in the stock market and housing sector, both of which with large risks.

Meanwhile, Chinese works of art shattered auction records. Sixteen items -- mostly ancient paintings and imperial porcelain -- sold for more than 100 million yuan each in 2010.

In May 2011, a painting by contemporary Chinese artist Qi Baishi sold for 425.5 million yuan, a record high for contemporary modern Chinese paintings and calligraphy.

An art market cannot thrive without a booming economy. Despite weak external demand due to wobbly recovery in the United States and the sovereign debt crisis in the European Union, China's economy managed to expand by 9.4 percent during the first three quarters of 2011.

When a country's per capita GDP reaches 1,000-2,000 U.S. dollars, its citizens create demand for art investment. When the country's per capita GDP hits 5,000 U.S. dollars, its art market will enter a fast expansion period, experts said.

Although art investment in China is still at an early stage as its GDP per head just reached 4,000 U.S. dollars, market participants believe the market has huge growth potential.

"China's art market is facing tremendous opportunities, underpinned by the prosperity of the cultural industry and the gradual maturity of consigners, buyers and other market players," said Kou Qin, vice president of China Guardian Auction Co.

In 2010, China overtook the United Kingdom to become the world's second-largest art market after the U.S.

China's auction and gallery sales totaled 169.4 billion yuan in 2010, up 41 percent year-on-year, accounting for a 23-percent share of the global market, according to a report issued by the Ministry of Culture.

ART FUNDS

Art funds have popped up in the country on clients' surging investment demand. China had more than 70 art funds as of Nov. 18, with initial capital of 5.77 billion yuan, data showed.

However, a huge influx of capital into the art market gave rise to problems such as price bubbles and excessive speculation.

The holding period for art works is a key factor in generating returns. "Generally speaking, the holding period for art funds should be at least 3-5 years. But art funds in China hold for only a year-and-a-half on average because investors do not want to wait that long," said Gan Xuejun, chairman of Beijing Huachen Auctions Co.

Gan suggested domestic art funds learn from the British Rail Pension Fund, which generated annual returns of over 20 percent partly because the fund did not rush to monetize art works it bought and instead waited for a good time to sell.

"It takes time for an art fund to establish a position, wait until the price of the works rise and then close the position. As illiquid assets, art suits investors rather than speculators," Gan said.

Yang Yufeng, an art investment expert, said a lack of art fund professionals has also hindered the healthy growth of the industry.

"Art fund managers should have solid knowledge of both the art market and the financial market, and they need to stay independent," he said.

Although the gloomy economic situation will likely to dampen investors' purchasing power and lead to a fall in the supply of artwork in 2012, analysts said China can take this opportunity to squeeze bubbles and curb rapid rises in the prices of works of art.

"The art market should not be driven by speculation and greed. Market adjustment is necessary," noted Gong Jisui, professor at the Central Academy of Fine Arts.