The 'hundred million yuan' era of artworks: the bubble is hard

by xyxgyp1998 on 2012-02-26 18:54:22

The "Hundred Million Yuan" Era of Artworks: A Hard Bubble by Liu Tian

The fiery atmosphere of the spring auction market in the art world is palpable, with breaking records becoming this year's key theme. Qi Baishi's work *Tall Pines and Cranes* achieved an astronomical price of 425.5 million yuan RMB; Yuan Dynasty artist Wang Meng's *Zhi Chuan Yi Ju Tu* was sold for 402.5 million yuan, just behind last year's spring auction record set by Huang Tingjian's calligraphy piece *Dizhu Ming*, which fetched 436.8 million yuan, making it the second most expensive ancient Chinese painting domestically. Zhang Daqian's *Couple Under a Tree* was sold for 191 million Hong Kong dollars, setting a new personal record for the artist; Wu Guanzhong's *Lions Grove* was sold for 115 million yuan, creating a new record for both Chinese modern art and his own works...

Institutional Capital Driving the Market?

In fact, starting from 2010, the Chinese painting auction market entered the "hundred million yuan era." For instance, China Guardian's spring auction featured Zhang Daqian's silk masterpiece *Aihun Lake*, created in 1968, which sold for 100.8 million yuan; Beijing Poly Spring Auction's *Autumn Mountain Temple Figure* by Yuan Dynasty artist Wang Meng sold for 136.64 million yuan, while Huang Tingjian's calligraphy piece *Dizhu Ming* fetched a total price of 436.8 million yuan. In China Guardian's autumn auction, Wang Xizhi's cursive script *Ping'an Tie* scroll sold for 308 million yuan; Beijing Poly Autumn Auction saw Xu Beihong's monumental realistic painting *Ba Ren Ji Shui Tu*, created during the Anti-Japanese War in 1938, sell for 171 million yuan...

So how should we interpret these "astronomical" works worth hundreds of millions? "Firstly, it's important to understand that the concept of hundreds of millions now is different from the past; under high inflation, money is constantly shrinking," said Xuan Jiaxin, Vice President of the Shanghai Collectors Association, in an interview with The First Financial Daily's *Wealth*. Currently, investing in artworks is no longer merely a collection activity but more of a financial behavior. "There are now many financial institutions participating in the art market, driving up the prices."

AMRC Art Market Analysis Research Center pointed out in its *Art Market Research Report for the First Half of 2010* that institutionalization of capital has become one of the characteristics of the current art market. Firstly, institutional funds entering the market mainly refer to purchasing behaviors by enterprises and other legal entities outside of government procurement, with a broader industry background such as finance, real estate, manufacturing, energy, construction, etc.; secondly, art investment funds entering the market include various types like private equity and public offerings.

The report also pointed out that the institutionalization of capital in the art market manifests itself in the obvious advantage of scaled capital, and the bidding amounts often reaching tens of millions have rapidly "marginalized" individual purchasing behaviors, similar to the distinction between "institutions" and "retail investors" in the stock market; secondly, due to the systematic goals of institutional collections and the precise choices of investment funds aimed at investment returns, both naturally focus on those scarce artistic resources with clear cultural value and social consensus, inevitably causing the prices of "famous artists" especially "masterpieces" to soar, thus creating China's hundred-million-yuan-level price records for artworks.

Liquidity Casting the "Hundred Million Yuan" Era?

Many experts also believe that the "hundred million yuan" era of art is related to liquidity. "After the 2008 financial crisis, the state released a lot of liquidity, bank loans and money supply were very sufficient, leading to excessive liquidity," said Mei Jianping, Professor of Finance at Cheung Kong Graduate School of Business and founder of the Mei-Mo Art Index. Additionally, since the current stock and real estate markets are not particularly ideal, some idle funds have entered the art market to seek opportunities.

"This year, the stock and real estate markets indeed aren't doing well, so there will definitely be a diversion of funds into the art market," said Ma Xuedong, Director of the Research Department at AMRC Art Market Analysis Research Center. The art market itself has a relatively small scale of funds, so even a small amount of inflow can have a significant impact. "More and more funds are now viewing art as an investment."

"Starting last year, many unfamiliar faces have joined the art market," said a boss of a Shanghai auction house. Previously, the art market was only for players and collectors, but now it is continuously welcoming "strangers." "Among them are many entrepreneurs and wealthy classes."

"With the development of China's economy, a considerable number of successful people have started treating art collection as a rigid demand for consumption," said Mei Jianping. Historically, successful Chinese people have had a long tradition of cultural consumption, but in the past, economic strength was a limiting factor. "Now, the entire society's rigid demand for art consumption is continuously increasing."

The Merrill Lynch and Capgemini report *World Wealth Report 2009* released in June 2010 pointed out that the number of Chinese millionaires reached 477,000, accounting for 4.77% globally, ranking fourth worldwide, with an annual increase of 31%, the highest globally, and leading Asia in surpassing Europe in terms of wealth volume. "Artworks, coins, antiques, and wine with 'tangible, long-term' value have become widely focused investment categories among China's wealthy population, directly resulting in a 25% annual growth rate in China's art market."

Is There a Bubble?

Does the "hundred million yuan" art market have valuation bubbles?

"The overall trend of this year's art market continues from last year, with many participants, naturally driving prices higher," said Ma Xuedong. Regarding single pieces, high-priced works are actually still few, and the price increases for mid-to-low-end works are not large. "Works like Wang Meng's fetching over 400 million yuan are something you might encounter once every few years, quite rare. Wu Guanzhong's works breaking the billion mark is related to his passing, as prices usually rise shortly after an artist's death, and *Lions Grove* is a representative work from his peak creative period."

"If we look at the overall market price, the art market price is still reasonable, without too much bubble, basically keeping pace with China's economic development speed," said Mei Jianping. Whether there is a bubble should depend on the overall price, not just the prices of a couple of top-tier artworks.

"The billion-yuan level for artworks might become a norm," said Xuan Jiaxin. However, some works within this price range may contain bubble components, which result from a lack of understanding of the artistic and economic value rules. "The value of art mainly consists of the person's value, artistic value, and market value, all of which are actually quite stable, but many entrepreneurs lack the ability to appreciate these aspects, focusing more on thematic elements, which leads to part of the artwork's price being driven by face-saving considerations."

Xuan Jiaxin cited Qi Baishi's *Tall Pines and Cranes* with a four-character seal inscription, which set a record-breaking price of 425.5 million yuan RMB, as an example. This work was painted by Qi Baishi for Chiang Kai-shek's sixtieth birthday, with the title including the word "Chairman." "Many people might value the topic and hype surrounding this piece," said Xuan Jiaxin. Although Qi Baishi's achievements and status in the art world are established, these two works are rather ordinary. "Even the title has issues—it should be 'eagle standing tall,' not 'pine standing tall.' Moreover, these two works are pieced together. When Liu Yiqian bought them originally, the total price was only 18 million yuan, clearly deviating from their true value." Xuan Jiaxin bluntly stated that the buyer of this painting might end up losing all their money.

"Currently, the overall art market price isn't high, but some individual works are indeed overpriced," said Xuan Jiaxin. Modern and contemporary art prices shouldn't be too high. "One of the most important characteristics of art is its scarcity. There is simply too much modern and contemporary art available, so a large increase might not be reasonable and could involve speculative elements."

Will the Art Bull Market Continue?

From 2009 to 2010, the Chinese art market was the first to emerge from the global financial crisis in 2009, achieving a "V"-shaped recovery and re-entering a fast-growing track in 2010.

According to data from the AMRC Art Market Analysis Research Center, the total transaction amount of the Chinese art auction market in 2010 reached 58.875 billion yuan, setting a new record for the total transaction amount of Chinese art auctions. Before 2010, the highest transaction amount in the Chinese art auction market was 22.304 billion yuan in 2007. In comparison, the 58.875 billion yuan transaction amount in 2010 increased by 163.97% compared to the previous highest value. "Doubling growth" is insufficient to describe the breakthrough achieved by the Chinese art market in 2010.

So, after frequent "record-breaking" performances in the spring auctions in 2011, how will the Chinese art market perform? "The market situation in the first half of this year wasn't as crazy as last year, but the overall transaction amount is still growing," said Ma Xuedong. Based on China Guardian's auction data, the total auction volume last year was over 9 billion yuan, and this spring's auction alone reached over 5 billion yuan. "It will definitely grow more than last year, but the growth rate won't be too large."

"After the financial crisis, the connection between the art market and the macro-economy has become increasingly close," said Ma Xuedong. As long as the Chinese economy maintains a steady development trend, the art market will steadily grow, with basically no significant fluctuations.

"The art market may experience short-term temporary adjustments, and investors need to be mentally prepared," said Mei Jianping. This risk mainly stems from challenges faced by China's economic structural transformation, such as inflation, where the state may take strong tightening measures, negatively impacting the capital market.

"Inflation is a double-edged sword for the art market; on one hand, it causes tight capital, but on the other hand, high inflation promotes rapid income growth," said Mei Jianping. From a long-term perspective, if inflation continues to rise, it will have a positive effect on art because art is an excellent hedge against inflation.

Mei Jianping compared the Mei-Mo American Composite Art Price Index with the Winan American Residential Real Estate Price Index and found that from 1960 to 2010, art easily outperformed real estate, achieving a 9.3% annual return rate versus a 5.5% annual return rate for residential properties, making art a higher-return long-term investment asset.

During the U.S. high-inflation period from 1965 to 1990, art achieved a 13.9% annual return rate, far surpassing the 7.9% return rate of residential investments. Both outperformed the concurrent annual inflation rate of 5.9%. The conclusion is that art is a better inflation-hedging investment tool than residential property, but art carries higher risks than residential property.

Mei Jianping emphasized that the history of the art market does not necessarily represent the future, and lessons learned elsewhere may not apply here. The art market carries risks, and caution is advised when entering.

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