China's biggest art auctioneer resists official efforts to reform the market

China's biggest art auctioneer is resisting government efforts to reform the market to restore the confidence of buyers, writeGraham Bowley andDavid Barboza

PUBLISHED : Monday, 23 December, 2013, 5:49pm
UPDATED : Monday, 23 December, 2013, 5:49pm

Eight years ago, as personal incomes on the mainland soared, China Poly Group, a state-run conglomerate that began life selling weapons for the People's Liberation Army (PLA), decided to venture onto another sort of battlefield - the art market.

The corporation had already expanded into theatres, sports cars, real estate and even television sitcoms, and the new division, Beijing Poly International Auction, soon joined the others in Poly's imposing modernist office tower in the capital, where visitors can shop for a painting on the third floor, or a missile system on the 27th.

In its short life, Poly Auction has risen to become the third-largest auction house in the world, behind Christie's and Sotheby's. Its 2012 reported sales totalled nearly US$1 billion and its auction rooms now buzz with the energy of thousands of new consumers eager to buy a piece of their cultural history or invest in the recent art boom.

But while the art market in China remains robust - its US$14 billion in sales last year make it the second-largest in the world after the US - it is also rife with fraud, forgeries and payment defaults that, experts say, are undermining the confidence of consumers.

Fearing that buyers will flee the market, government ministries and the China Association of Auctioneers, are pushing corrective initiatives, including asking auction houses to report sales that fall through and training experts to better identify forgeries.

At first glance, Poly Auction, as a state-backed business that accounts for 11 per cent of the country's auction revenues, would appear to be an ideal place to start.

But it is becoming clear that the powerful company, rather than serving as an instrument of reform, may pose a formidable challenge to it. Beyond its 55 per cent government ownership, Poly Auction is part of a company with a proud military heritage, expansive business interests and strong ties to China's highest echelons - all sources of influence that critics say help shield it from encroaching regulations.

An industry study found that last year Poly had one of the worst records of buyers who did not pay, a persistent problem in the Chinese art market.

When auction houses do not always note these failed transactions, as was the case with Poly, their reported sales figures exceed reality.

The study found that Poly's revenue was one of the most exaggerated among the top houses. And unlike major rivals, Poly has baulked in recent years at allowing the auction trade association to publish full details of its sales.

Thomas Galbraith, a New York-based art market analyst and expert on the Chinese art world, says Poly's attitude is a hurdle for those trying to set standards. "Some in the industry and government want to introduce regulation into the market, while others see nothing wrong," he says.

Poly has its defenders, even among trade association officials seeking to clean up the market, and company officials say the critics are being unfair. "The government has a stricter policy on state-owned enterprises than on private enterprises," says Zhao Xu, the executive director of the company.

Either way, although Poly is just one of more than 350 Chinese art auction houses, its size and reach mean that no meaningful effort to address the irregularities can succeed without its participation.

Poly Auction's influence in the art world stems in large part from its parent, a three-decade-old company whose founders include several lions of the Communist Party. One founder, Wang Jun, is the son of a close associate of Mao. Another, He Ping, is a former general who is married to the daughter of Deng Xiaoping.

Although Poly Group's official ties to the military were cut in 1999, it is still staffed by former military officers and led by the relatives of senior party officials. When Poly entered the auction market at the turn of the century, the sale of high-end Chinese art was largely the preserve of foreign houses operating from Hong Kong and an older, privately owned company, China Guardian.

But China's market was expanding fast - auction sales more than doubled between 2004 and 2005 - and Poly Group, sensing an opportunity, brought in Zhao, a dealer, as executive director of its new auction business.

By 2007, Poly, the upstart, had come to rival Guardian in sales. Its deep pockets meant it could offer consignors cash advances, and the company's wide web of contacts helped lure the new rich of China to its auction floor, experts say.

"Individual buyers recognise us as part of the government," says Zhao, 44. "They trust us, since we are part of the state-owned enterprise."

Poly officials say the company's power and ties to the military elite are often overstated. "We are just a normal business company," Zhao says. "We have no PLA backing."

There is no question that Poly has not been as compliant as other houses with the industry-wide effort to improve the accuracy of sales reporting. Auction houses clearly want buyers to pay.

But when they don't - which often happens on the mainland for reasons that include the buyers becoming suspicious that they have purchased a fake - it is in the house's interest to obscure the problem by treating the defaults as sales.

As well as exaggerating revenues, this practice props up prices and promotes the market as being hotter than it is, experts say. Unlike Guardian and other houses, Poly refused for the past two years to allow the auction association to publish data on the individual works whose sales had not been paid for completely.

On top of that, the auction association's studies ultimately found that Poly is increasingly struggling with a nonpayment problem. In 2012, for example, the association found that, because of nonpayments, only 34 per cent of the sales Poly reported for works valued at more than US$1.6 million each were actually completed by May of the following year.

By contrast, Guardian's payment rate has improved, with 83 per cent of sales completed last year, up from 53 per cent. Zhao complained that the association's analysis is biased, arguing that the statistics are incorrect, since Poly auctions take place later in the year than others, giving it less time to corral recalcitrant payers.

In addition, although the study found that two-thirds of the high-end sales were never completed, it also showed that Poly had received at least some money in many of those cases.

Poly says it believes in more flexible payment schedules for clients with good credit. It says it has been dutiful in participating in corrective programmes run by the auction association, a position the group does not dispute.

The competition for buyers is expected to intensify in coming years with Western auction houses entering the Chinese market more fully.

Sotheby's has formed a joint venture with a state-owned Chinese company and held an auction in Beijing this month. Christie's has won a licence to operate independently and this autumn held its first auction.

Both are larger than Poly in manpower - Sotheby's has more than five times as many employees worldwide as Poly Auction's 260 - and carry a reputation for probity which, while hardly ironclad, could be a competitive edge in the fraud-ridden Chinese art world.

For now, both Christie's and Sotheby's are only permitted to auction watches, wine, jewellery and contemporary Chinese art, not the more lucrative relics and traditional Chinese painting and calligraphy.

Asked if foreign competitors concern him, Zhao shrugs. To do business in China, with its unique customs and cultural tics, is not as easy as simply setting up shop, he indicates.

"They are not qualified," he says of Christie's and Sotheby's, "to be our rivals for now."

The New York Times