Is China's fledging auction market another bubble?

With the country's stock market at the lowest point in history and real estate on the brink of an explosive bubble, the ever-more affluent Chinese seem to have a new idea on where to invest -- collection from the country's booming auction markets.

The leading auctioneer Guardian is currently showing over 6,000 articles, including paintings, calligraphy works, porcelain and jade, in Beijing's five-star Kunlun Hotel before its coming spring auctions from Friday to Sunday.

"Most of the items are found with arduous efforts and are really classical works," said Kou Qin, deputy managing director of China Guardian Auctions Co., Ltd.

The business is indeed on the rise. Guardian reported a total transaction volume of 1 billion yuan (120.9 million US dollars) last year, a drastic jump from 70 million yuan (8.5 million US dollars) in 1994, a landmark year when Guardian hurried into its first auctions only half a year after it was founded.

Rise From Oblivion

"Nobody could assure us success when we, a group of young people with no expertise in archeology or relics authentication, set up the new company. But Guardian astonished the world, selling washes by Qi Baishi and Zhang Daqian, both famous Chinese painters, for millions of yuan each that spring," recalled Kou.

China resumed the auction industry in 1986 after a long break under its planned economy. Rapid development has taken place only in the past decade.

Recent statistics from the Ministry of Commerce show that China 's auction industry registered a transaction volume of 200 billion yuan (24 billion US dollars) in 2004, a 45 percent increase over the previous year.

The business scope of auctions has extended to many sectors, from relics and art to cars, items confiscated by legal organizations and real estate to patent rights and advertisement.

The figures also show staggering profits. The final bid price for any piece of art being successfully auctioned is at least 20 percent above the asking price. For some items with a low initial offer, it is not surprising to find the sale price dozens of times higher.

In April of 2002, Guardian sold a scroll titled "Portrait of Precious Birds" painted by Emperor Huizong of the Northern Song Dynasty (960-1127), for a record price of 25.3 million yuan (3.1 million US dollars), more than three times the initial offer, after 60 rounds of intense bidding.

Market Potentials Huge

The lucrative business has drawn more players to compete. China has seen auction houses mushroom, reaching 4,000 to 5,000, employing nearly 50,000 people, including more than 5,000 registered professional auctioneers.

"With a history of 5,000 years, China is acknowledged as a potentially richer source for relics and art capable of being auctioned than most other countries. The market potential is, understandably, huge," Kou Qin said.

But he also warned that making a living through auctions is not as easy as it looks. The competition is getting more intense.

He explained that auction companies earn commissions as intermediaries, charge a 10 percent commission to the buyer and the same to the seller. However, in order to win business, some companies only charge the seller, while lowering its commission to 6 percent, or even 5 percent. Some even offer their services "free. "

Moreover, it is by no means cheap to host an auction. An auction house must spare no expense on publicity in order to attract the best pieces for its auctions. It has to send out beautifully printed catalogues, which may cost hundreds of thousands of yuan, even millions of yuan, to compile and produce. On top of these, there are venue, storage, insurance and entertainment expenses to cover.

"Some small auction companies cannot afford such expensive costs and survive for only a very short period," Kou said. (more)

Under-Table Deals Corruptive

Meanwhile, insiders also show an increasing worry over the under-table deals that are corrupting the burgeoning auction industry.

At the beginning of this year, a newly established auction house, the Red Sun, sold another painting by Emperor Huizong at 61.16 million yuan (7.4 million US dollars), but received a draft of only 15 million yuan (1.8 million US dollars) from a Shanghai collector after the media cast queries about the painting's authenticity.

"If an ancient art item is proved to be fake but still auctioned off successfully, it's very likely that the auction is involved in illegal deals, like money laundering or business frauds," said a boss of an auction house on condition of anonymity.

The boss explained that offenders could transfer large-sums of illicit money quickly and securely via auctions. They could also elevate the prices of relics or art works deceptively and leave them with banks as a pledge to secure immense loans.

Some people even take advantage of auctions to bribe government officials by buying at exorbitant prices "art works" the officials entrust auction houses to sell, he said.

Investors Cautioned

To ensure the healthy development of the industry, the country emended its auction law in 2004, which clarifies stipulations concerning the auctioning of cultural relics, the most disputable articles in terms of their authenticity and qualities.

Meanwhile, the State Administration of Cultural Heritage began issuing specific relics auction licenses last May. More than 100 auction houses have received such permits.

The qualifications needed for the license include permits from local cultural heritage as well as industry and commerce departments, validation for registered capital and certificates of at least five professional auctioneers.

"More than one third of the companies applying for the license have been washed out. It's a good start for the government to strengthen the supervision and to standardize the industry," said Wang Fenghai, secretary-general of China Association of Auctioneers.

Mei Ninghua, director of the Beijing Administrative Bureau of Cultural Heritage, stressed that more efforts should be devoted to studying the rules of the auction trade, inflated by leapfrog progress in recent years, to avoid similar bubbles in real estate and stock markets and to maintain a sound sustainable development.

Fang Yanshan, a Beijing collector of ancient silk products, considered that most of the initial offers in the auction market are now unreasonably expensive with little room left for added value.

"We have to be more cautious in selecting items with qualities matching up to prices and able to repay us more profits in less than five years. Investment is like gambling if it's done without far-sighted wisdom," Fang said.

Source: Xinhua