Economy, Talking Point

Going, going… gone?

Shaky gavels as government cracks down on art market in anti-graft drive

Gavel w

Name your price: auctions are a means to launder money

In 2006 Zhao Tailai was unquestionably China’s most famous antique collector. In fact, he was something of a hero. That’s because the British citizen had earned the gratitude of a nation by returning some of China’s most significant treasures to his ancestral land.

Also known as Chiu Tai-loy, Zhao is the great grandson of Wu Tingfang, a Qing Dynasty diplomat who later served as foreign minister in republican China.

In 1981, when Zhao’s aunt (and Wu’s granddaughter) was dying, she gave him a treasure map. It led him to a stately home in suburban London. In what sounds like a plot from an Indiana Jones adventure, Zhao then discovered a cellar “as big as a football pitch” packed with ancient Chinese paintings and other relics, which were said to have been amassed by foreign minister Wu a century ago.

Zhao says he spent the next decade cataloguing the 100,000 or so antiques that he had unearthed. Then he decided to give the majority of them back to his homeland.

Since 1990 Zhao has donated nearly 60,000 items to various Chinese museums. The combined value of the gifts was estimated at HK$800 million ($102 million) – and that was before China’s art boom got going.

Zhao’s story got public attention thanks to several CCTV documentaries in 2006. Building on his fame, he began publishing catalogues on Chinese paintings and artefacts. But that’s not the end of his extraordinary story as he’s become involved in a new controversy.

In February last year Zhao exhibited 15 paintings in Hong Kong by the late Fu Baoshi, one of the most famous Chinese ink painters. But the collection’s authenticity was quickly challenged by Fu’s granddaughter Fu Leilei.

“Anyone with very basic knowledge and experience in art authentication could tell at first glance these paintings were fake,” she told a CCTV programme.

Zhao responded with a statement insisting that all the paintings in the exhibition were genuine, telling Fu that he had bought them in 1978 in Beijing after they have been signed off by several experts.

Just this week Sotheby’s was also forced to issue a press release defending the authenticity of a scroll that it auctioned in September. The work by Song Dynasty poet Su Shi had been sold to a Shanghainese businessman for $8.2 million and according to the New York Times it had drawn rich bids from collectors as “one of the greatest works of calligraphy”. But its new owner Liu Yiqian then asked experts at the state-run Shanghai Museum to examine the scroll. They said it was forged.

Sotheby’s has since issued a 14-page report to rebut the claims and says it stands by its verdict that the scroll is an original from Su.

Liu is saying that he will wait for other independent experts to review the case.

Regardless of the eventual outcome, both debacles reaffirm that China’s art market is not for the faint-hearted. Nor will WiC readers be taken aback by the repeat claims of fakery. For example, in issue 202 we reported on the celebrated case of a museum that was closed down when it was shown to be displaying thousands of bogus items. These included a vase supposedly dating back to the Qing Dynasty, but depicting a modern cartoon character. Netizens soon dubbed it ‘the bullshit museum’.

All this has made China’s art auction industry a hot topic, with the growing realisation there’s a darker side to the surge in demand for Chinese paintings and antiques.

The industry is now incurring the wrath of the most feared regulator too: the Party’s Central Commission for Discipline Inspection. And its concerns are not just about counterfeits, but the way in which the art world is being used as a conduit for officials to launder bribes too.

Why is the watchdog targeting art?

Currying favour with officials through gifting art has now become common enough that a new term yahui, or elegant bribery, has been coined to describe it. The practice was also singled out for special attention by the anti-graft watchdog last week, after it concluded a series of investigations into corrupt cadres in 2013.

Last year the discipline commission said it had received 1.95 million reports (up 49% from 2012) of corrupt behaviour. More than 180,000 Party members were disciplined, while at least 31 senior officials are under investigation or being prosecuted.

The biggest catches came from senior level bosses in the oil sector and at the economic planner, the NDRC. Compared to these heavyweights, Ni Fa-ke could easily have been overlooked. But the former deputy governor of Anhui province came to public attention when the China Discipline Inspection Daily (yes, the corruption watchdog has its own newspaper) published details about his case.

Ni was put in charge of Anhui’s land resources in 2008 but he also served – without Party authorisation – as the chairman of the province’s jewellery association. And his obsession for the finer things in life was soon being exploited by real estate developers, with the China Discipline Inspection Daily reporting that 80% of the bribes Ni took were in the form of jade and paintings.

After his arrest, Ni explained his preference to investigators. Compared to cash, gemstones were “more elegant, more civilised and more meaningful when passed on to offspring,” he suggested. More importantly, it was easier to cover up what was going on. “Jades and paintings offer investment value and easy storage,” Ni confessed. “Insiders know you have such a hobby. Outsiders don’t know how much they are worth.”

In fact, Ni’s collection of gemstones was so large that he asked a business crony to build an exhibition centre and display them there to camouflage his ownership. (Ni was caught before it was built.)

The discipline commission said inspectors confiscated 90 paintings from his family too.

Ni isn’t alone. A state-run legal publication revealed in 2010 that Zhou Jinhuo, an official in Fujian province, had accumulated 30% of the total production of Shoushan stones (coloured stones used for carving royal seals in imperial China), while investigators found more than 100 art works including ivory sculptures, calligraphy scrolls and a stone Budda at the home of Wen Qiang, head of Chongqing’s judicial bureau, in 2009.

Qiushi, another high-level Party journal, has weighed in on the same topic. “Senior officials letting such hobbies be known is as good as soliciting bribes publicly,” it claimed. “Ni Fa-ke’s case is a stern warning for these officials.”

But China Business News noted that it was unusual for the authorities to give so much publicity to Ni’s case – especially as he is still under judicial prosecution. The paper reckoned the corruption watchdog is “pointing its sword” to deter further cases of yahui.

How big is China’s art market?

It has grown from barely existing a decade ago to one of the world’s largest today.

Artron, an art data firm, said sales in China exceeded those in the United States for the first time in 2010 and that sales last year were Rmb57 billion ($9.4 billion).

That was a small increase on Rmb54 billion in 2012, but way off the Rmb97 billion peak set in 2011.

A report co-authored by the China Association of Auctioneers (CAA) and international art group Artnet suggested that there were 788 auctions in 2012 resulting in total sales of Rmb29 billion. Again, this was a significant decline on the year before, when Rmb55 billion of business was reported.

The drop between 2012 and 2011, according to the CAA, was due to “only half of the works offered at auction actually selling”.

Cases of default or late payment by buyers differentiate China’s market from the international norm. For example, Eagle Standing on a Pine Tree, a 1946 ink painting by Qi Baishi, was sold for a record-breaking $65.4 million in May 2011. But the New York Times noted that Qi’s masterpiece was languishing in a Beijing warehouse two years after the auction, as the bidder had refused to cough up the cash. Why? Doubts were raised about the painting’s authenticity.

Beside forgery concerns, payment defaults typically occur when bidders agree to sky-high valuations in an attempt to prop up prices for works by particular painters or artists that these “market makers” collect.

Some auction houses seem ready to turn a blind eye as long as the (eventually aborted) sales make the market look strong.

In spite of the various bids that have fallen through, Chinese art is still changing hands at a much higher velocity than their equivalents in Western markets. Reuters reported last October that a painting by Qi Baishi had sold four times at auction over the last 10 years, with the price ballooning from $30,000 to $794,000. The New York Times also says that Qi’s work has now gone under the hammer more than 27,000 times in China in the past 20 years.

With some of the items at auctions looking likely to have involved counterfeit work, collectors and investors should be very wary. But the huge demand for Chinese art suggests otherwise, as buyers swoop on pieces. When The Times (of London) surveyed 1.4 million readers in 2009 for the 200 greatest artists of the 20th century, not a single Chinese national made the list. Tastes seem to be changing. According to data from, no Chinese painters featured in the top 10 highest grossing artists in 2008. By 2011, six out of 10 were Chinese.

What is fuelling the surge in interest? “The price of Chinese art is really abnormal,” Jiang Yinfeng, a painter and art critic told the Worker’s Daily. Then he explained why: “Art has become the best tool for money laundering and corruption.”

So how does elegant bribery work?

China’s culture of gift-giving is one of the driving forces behind higher prices. Just like Ni Fa-ke’s case, much of the demand comes from businessmen snapping up artefacts as presents for officials.

The authenticity of the pieces doesn’t always matter too. A painting – phony or not – is an opportunity to ‘wash’ a bribe. Step one: the official is given the painting by the business associate. Step two: the official – most likely through a family member – auctions it off and watches as his business cronies buy it back at an inflated price. Step three: the official gets the cash.

The process has two main advantages: it’s easier than passing around suitcases of Rmb100 notes; and it leaves the final funds relatively ‘clean’.

After the painting is sold, the money appears ‘legitimate’, leaving less evidence of a link between a favour and a bribe.

According to CBN, there are various different strategies. For example, with the collaboration of authenticators, a truly precious antique might be classified as a counterfeit and sold by the businessman (a.k.a the briber) to the official at a knockdown price. At some point in the future its provenance is miraculously restored. The item is sold once more – sometimes back to the original business associate!

According to Yao Yao, an art expert who co-authored Money Laundering Insider in 2011, more sophisticated schemes have flourished. In some cases interconnected parties spend years cornering art categories and bidding up their prices, Yao told Artron. Ideally foreign counterparties are involved, Yao says, because the easiest way to inflate prices is to sell art overseas, make up a story and then sell it back in a Chinese auction.

“Let’s say the painting was looted by a certain general during the Opium War – it’s price would spiral tens or hundred times in China,” Yao noted. “Doing so will even earn the buyer a reputation of returning a national treasure back to the motherland.”

Of course, money laundering in the art world isn’t unique to China. Hannibal, a painting by Jean-Michel Basquiat, last year serves as a timely reminder (seized by US authorities, it was bought originally by a Brazilian embezzler for money-laundering purposes).

At least China’s graftbusters have started to figure out what is going on too. According to Xinhua, the Ministry of Commerce is working on the creation of an “auction index” of Chinese relics and art, which is said to be a curtain-raiser for further steps by the government to regulate the market.

Who could suffer from a crackdown?

Obviously, a tightening of the rules to target some of the more dubious transactions could hit some of the country’s auction houses. There are more than 350 of them in China at the moment, although the authorities have suspended the licences of more than 100 firms since 2008, mostly on forgery concerns.

The biggest player in the industry is Poly Auction of the China Poly Group (read WiC203 for our profile of the military-rooted state giant). With $1 billion reported in sales for 2012, Poly Auction is already the third-largest auctioneer globally, behind Christie’s and Sotheby’s. That makes it a hugely influential player and a potential instrument for reform in the industry. But the New York Times reported in December that it hasn’t been too cooperative in some of the disciplinary investigations into alleged cases of yahui or shown much enthusiasm for improving the accuracy of its sales reporting.

It goes without saying that a clampdown on dodgy art deals will hit auction sales volumes and the resulting commissions. But the great unknown is the percentage of sales that are genuine rather than illicit (i.e. graft-driven).

Auctioneers won’t be the only ones to feel the impact of more stringent oversight in the industry. Local economies that thrive on counterfeit production may suffer too. For example, pottery sales in Jingdezhen, a town with a storied history for producing porcelain, might take a hit. Previously we have written about how bogus items have been designed by local artisans specifically for the purposes of corruption (see WiC186).

Unravelling prices could trouble the financial markets too. Art-collateralised loans are at an infant stage at Chinese banks, but trust firms have been pushing speculative cash into the art market through wealth management products. In a report published in September, China Orient (one of the asset management firms charged with cleaning up the financial sector’s bad debts) warned that art, coal and real estate are the “three riskiest minefields” for trust firms.

Nevertheless, the new directives have made plain that eliminating ‘elegant bribery’ is a priority for the Party’s discipline watchdog. For wayward officials holding covert collections of paintings, jades and other antiques, these could be uncomfortable times. If they try to sell their holdings now, they know the chances of being caught have increased. But having unexplained collections in their possession is risky too. Perhaps they should follow the practice of 17th century English bureaucrat (and diarist) Samuel Pepys. When the Great Fire of London burned uncomfortably close to his home, Pepys went out under cover of darkness and buried his prized possessions in his garden. It might be time to break out the shovels for a few of China’s more dishonest officials too.

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