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Hong Kong art market takes hit from Beijing’s efforts to curb capital outflows

Some galleries at Art Basel report slower business as their wealthy customers – mostly mainland Chinese buyers – are having trouble taking money out of the country

PUBLISHED : Friday, 24 March, 2017, 7:10pm
UPDATED : Friday, 24 March, 2017, 9:30pm

The Hong Kong art market has taken a hit from Beijing’s recent efforts to curb capital outflows, with fewer mainland collectors splashing out on expensive pieces at Art Basel, which ends on Saturday.

While private collectors from more than 70 countries attended the five-day annual art extravaganza, some galleries reported slower business as their wealthy customers – mostly mainland buyers – were having trouble taking money out of the country.

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Some mainland buyers said they had to settle for cheaper artworks under the payment limit set by the mainland authorities, but others managed to skirt the measures by using overseas funds.

Wang Songqi, partner at Shanxi-based investment company Kinlyhong Capital, said it took longer for art investment companies to pay their bills, as procedures for foreign investment had become more complicated since late last year, when Beijing launched a set of restrictions to keep money onshore.

“I understand that the authorities want to stop dubious deals aimed at moving money out of the country, but there is also a need for rational and normal investment,” he said.

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Like Wang’s company, an increasing number of mainland businesses started buying artworks from overseas as a way to diversify their asset portfolios.

Many used to take advantage of the Qualified Domestic Institutional Investor scheme, which allowed mainland firms to invest abroad.

However, the State Administration of Foreign Exchange (SAFE) stopped issuing new licences in 2015 following a depreciation in the value of the yuan.

Since then, companies have mainly relied on bank transactions to make overseas payments.

But the procedure is complicated as banks have to report to regulators if the overseas cash transaction exceeds 200,000 yuan (HK$225,000). This limit will be cut further to 50,000 yuan in July.

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Individual art lovers will clearly have to contain their hunger. “The impact of [capital controls] is very significant if you want to buy more paintings,” said Laura Chen, who came to the fair from the mainland.

That is because Chinese nationals are only allowed to convert and freely remit up to US$50,000 or its equivalent per year, an amount that can easily be breached with just a few artworks. A larger amount would need approval from SAFE. The implementation of the policy has also recently become stricter.

Chen said she would only buy one or two artworks this year.

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Overseas galleries, which have been heavily reliant on mainland buyers in recent years, are also concerned.

“I don’t know what to expect this year,” said Jean Bernier, owner of Athens-based gallery Bernier-Eliades, who has attended the fair since it first came to Hong Kong in 2013.

However, Bernier said most of his regular mainland clients were still coming to the fair.

About 25 to 30 per cent of the gallery’s clients were from mainland China, he added.

“There are fewer mainland buyers walking around,” said Victor de Bonnecaze, associate director of Paris-based Galerie Daniel Templon.

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But Marc Spiegler, global director of Art Basel, was more optimistic. “It’s far too early to speculate about what effect it will have. We haven’t seen any major slowdown, either at fairs in Asia or in the activities of Chinese buyers abroad.”

The heavy clampdown on overseas property investment saw deals worth US$75 billion cancelled last year, but the mainland authorities do not seem to be targeting art investments.

The government halved the import tax on paintings and sculptures to 3 per cent in January.

Despite tighter capital controls, some mainland buyers are still finding ways to make bigger payments.

Yan Lugen, a property developer from Nanjing, said he had prepared US$10 million in cash to shop at Art Basel this year.

The long-time collector who owns more than 3,000 artworks said he could easily get round the policy by using funds from his Hong Kong-registered company instead of his mainland firms.