Beijing auction house takes on rivals in Hong Kong

When Beijing Poly International Auction announced on its website in late summer that it would hold its first sales in Hong Kong this year, many in the art world wondered whether it was for real. "I heard they are still waiting to see how China Guardian fares in its [Hong Kong debut]," a senior executive of an international auction house said in September.

If so, Poly certainly received a positive signal when China Guardian Auctions, its main rival on the mainland, raked in HK$354 million for its Chinese ink paintings and calligraphy sales - in one single afternoon on October 7. Poly will hold its inaugural auction in Hong Kong on November 24 and 25 - on the same weekend of Christie's major autumn sales.

Zhao Xu, executive director of Beijing Poly International Auction, says the company has been planning its "landing" here for two years; the timing is purely coincidental. "We are confident in competition with Christie's and Sotheby's," Zhao says. "We believe our presence in Hong Kong means a lot to collectors of Chinese artefacts outside the mainland."

Arguably the largest auctioneer on the mainland, Poly is pulling out all stops for its Hong Kong debut. The sale at the Grand Hyatt Hong Kong will feature 300 works ranging from Chinese ink painting and oils to porcelain and jewellery. Highlights include a 1944 painting, Tibetan Women with Dogs, by Chinese ink master Chang Dai-chien, also known as Zhang Daqian, with an estimate of HK$7.2 million to HK$8 million; a 1959 oil painting, Composition No59, by Chinese-French abstract art master Chu Teh-chun, expected to be sold for between HK$8 million and HK$16 million; and a Qing dynasty blue-and-white porcelain, between HK$12 million and HK$18 million.

In total, Zhao expects the sale to bring in between HK$400 million and HK$500 million. "All the items are sourced from collectors overseas," he says. "Some were acquired from original collectors during our 18 public soliciting trips to North America."

Poly International Auction has been plagued by suspicions about its origins as an offshoot of enterprises owned by the Chinese military. Established in 2005, it is a subsidiary of Poly Culture Group, whose parent, the China Poly Group, is engaged in five core businesses. These include import and export of defence equipment for military and civilian use, real estate, culture, mining and explosives equipment production.

Zhao dismisses claims his company has strong military backing. "We've had no such backing for a long time. I am not in the military," he says, speaking from the auction house's offices in the New Poly Plaza in central Beijing.

The young auction house has expanded rapidly over the past few years in tandem with the growing ranks of wealthy mainlanders eager to build their own collections. In 2011, it reaped 12.1 billion yuan (HK$14.9 billion) in sales, with its spring auction registering a record high of 6 billion yuan.

According to Art Market Trends 2011 released by market guide Artprice earlier this year, Poly International ranks fourth globally (generating US$901.6 million last year) after major players Christie's, Sotheby's and China Guardian.

Analysts in Beijing believe Poly's arrival in Hong Kong is driven both by its ambitions to expand overseas as well as recent tax probes by the central government, which has led to several high-profile arrests. One involved the detention of two employees of air freight company Integrated Fine Art Solutions - Nils Jennrich, a German national, and his Chinese colleague Lydia Chu - in March for allegedly undervaluing art imports to the mainland in order to help buyers avoid 10 million yuan in import duties and value-added taxes. The pair is reportedly now out of jail but still under house arrest.

"The tightening-up brings tremendous uncertainty to the [mainland] art market and propels the leading houses to look for their second option overseas," says Ji Tao, a researcher with the Auction Research Centre of Central Finance and Economics University in Beijing. "Poly will probably keep its high-end inventory in Hong Kong, which may lower its sales in Beijing."

Yang Min, editor-in-chief of Collection, a bi-weekly art magazine in Beijing, agrees the government clampdown has prompted auction houses to step up plans to establish international outposts. However, this development may spur a government rethink about its tax policy, she says. "I hope they will take steps to readdress the bottleneck in the art market."

Beijing gave the art market a boost early this year when it lowered import duties on artefacts from 12 per cent to 6 per cent. But auction houses face another 17 per cent of value-added tax on imported works.

It's only natural for Poly to have a profile and business here, says Alexandra Seno, an art market analyst in Hong Kong. "The port allows the easy exit and entry of goods, and there are no sales taxes," she says. "Serious collectors from Hong Kong, Taiwan and Singapore already look at the Poly auctions in China. Having sales in Hong Kong might just be more convenient for collectors, especially in terms of logistics and payments."

However, Poly's Zhao dismisses suggestions that the low tax regime motivated his company's opening in Hong Kong. "It has little to do with taxes." Instead he attributes the swift establishment of their base here primarily to their coup in recruiting Zhang Yixiu, a former Christie's senior staffer, to head the Hong Kong office. "We have long coveted Zhang's expertise and his devotion to customers, and his joining is an important step in our entry into the Hong Kong market," Zhao says.

A specialist in 20th-century Asian and contemporary art at Christie's and its Beijing liaison, Zhang left the company in the wake of the mainland crackdown on tax evasion. He became executive director of Poly Auction Hong Kong in August.

The mainland auctioneer is in Hong Kong for the long haul, with a 10,000 sq ft office and exhibition space in One Pacific Place in Admiralty - just two floors up from Sotheby's. Poly will open its doors next month and hopes to bolster its staff strength to 50 people within a year to provide customers with a full range of services from logistics to storage to settlement of sales.

"Ninety-nine per cent of collectors of Chinese art works are Chinese and I believe they will be happy to see a state-owned, Chinese-run auction house having a permanent presence in Hong Kong," Zhao says. He is hopeful that Poly can fetch HK$1 billion in sales in the first year. "This will make us even in our operation, considering the high running cost in Hong Kong which may hover around HK$100 million for us."

But with auction revenues already slowing at Christie's and Sotheby's, Poly Hong Kong may face some rocky times. "Auctions in Hong Kong have slowed down because buyers from China are purchasing less. Their auction revenues for the first two quarters of 2012 are about half what they were in 2011," says Seno.

"Poly's success in Hong Kong will depend on the quality of the inventory they offer, the level of service they provide to buyers and sellers, and whether they can encourage existing clients to spend more in Hong Kong."

Additional reporting by Kevin Kwong

Auction previews will be held at the Grand Hyatt Hong Kong on Nov 23