Can China Avoid a Japan-Style Art Market Meltdown?
Shanghai Stock Exchange. Via Forbes.
The index dropped by just under 8.5% during the day’s trading. The country’s other main market indicators, both Shenzhen’s A-shares index and its Composite index, lost 7% of its value. Only once in the past 10 years has the Shanghai index taken a bigger single-day hit: 8.8% on February 27, 2007.
There are indications that Monday’s crash could have been more pronounced, save for market controls. China’s official news agency reported that two-thirds of the firms listed in the mainland lost 10% of their value in the single day of trading, which the New York Times highlights is the upward limit allowed on losses in one market session.
The hit follows more than $3 trillion or around 30% in losses incurred since the slide began in mid-June and follows the announcement of a $120 billion fund to stabilize markets among other official government interventions, which some analysts have suggested are the tip of other non-official stimulus measures. The injections did prop up markets for the past two and a half weeks. However, investor fears around the long-term viability of China’s stabilization measures and the economic reality lurking below all that extra cash have been cited as the primary driver of Monday’s major slide. And with many investors in the country in heavily leveraged positions (mostly backed by real estate) at the time of the correction, its effects could have serious knock-on effects across the economy.
The slide comes one week after artnet’s release of Q1 and Q2 numbers for auction sales globally. The report cites that purchases at auctions in Mainland China and Hong Kong are down 30% from the same period in 2014. This Chinese decline leads a downward trend in the global auction market of 6%, despite recent record-breaking sales and a significant year-over-year increase of 19% in New York.
In contrast, Christie’s Q1/Q2 report, also released last week, claims a 47% increase in spending at its auctions by Mainland Chinese buyers. The house does not give a breakdown of where those increases fell on the overall market distribution. But, in the context of that steep decline in Chinese spending on art domestically, the data suggests that a small upper tier of Chinese tycoons are leading that sizable increase in worldwide spending on prestige lots. Meanwhile, the bread and butter level of buyers that have sparked such a vast segment of the art market to invest in China have slowed their spending in step with—and in some cases perhaps in anticipation of—market contractions.
Here’s where things get interesting. Most sufficiently humble financial analysts—with the exception of the inner circle of Chinese President Xi Jinping’s economic advisers who are engineering the stabilizing measures that faltered on Monday—will admit that very few people actually have a particularly clear answer as to what’s ahead for Chinese markets. But, as reported by Quartz, several analogues do exist, one of which—Japan, 1989—has serious cross-over to what we’re seeing in the art market as well.
Hong Kong Exchange Trade Lobby, Photo by WiNG.
In the lead up to Japan’s two-decade-long stint in the economic doldrums out of which it has only recently reappeared, the country’s collectors became infamous on the auction circuit for their serial record-setting bids. Vincent van Gogh’s Sunflowers (1888) became the world’s most expensive painting in 1987 when purchased by Yasuda Marine & Fire Insurance Company for $39.9 million. Businessman Ryoei Saito set another record in 1990 when he dropped $82.5 million on another van Gogh, Portrait of Dr. Gachet (1890). An Australian collector had set a new benchmark in between, but the more than doubling of the record in just three years was quick to raise alarm among pundits about an imminent art market bubble. (If that doesn’t sound familiar, read this.)
As it turned out, the economic bubble in Japan had already burst; its effects simply hadn’t yet become apparent. In order to sustain the rampant growth that had propelled Japan to be the world’s second-largest economy, the government began subsidizing that expansion with cheap loans. Consumption fell and instead the country ended up with a hoard of so-called “zombie banks and corporations,” creating export-oriented supply for which there was insufficient demand. It invested in rolling over existing lines of credit—and thus mushrooming its debt—rather than in new growth sectors. And, a majority of that lending was collateralized in real estate, another bubble that burst.
Prices of art on the domestic Japanese market dropped 80–90% by some estimates. And Japanese collectors receded from the international stage en masse. Coupled with a decline in U.S. spending on art at the time, the art market fell dramatically, particularly in the Impressionist and Modern sector, which had seen such fervent investment from the Japanese. (Other sectors, which hadn’t experienced as much exposure to the boom, fared better.)
Across the board, China’s economy sits on a very similar-looking ledge. After Monday’s selloff, a spokesman for the China Securities Regulatory Commission told the Wall Street Journal that the subsidiary of his commision, which has been a main driver of official stabilization measures would continue to purchase shares and even increase its investment if need be. Though it would be beneficial to the market in the short term, the move is very much out of the Japanese playbook.
However, other reports suggest the government could be pulling back on its efforts to prop up the markets. Bloomberg cites major slumps in the share price of key state-backed conglomerates that had been used to juice the market over the past month as a potential sign of shifts in strategy. Other analysts have suggested that the government is simply struggling to maintain the level at which many of the firms listed on its markets have been trading.
Any back-down on government support would be welcomed by some within the global economic community, perhaps most prominently among them the International Monetary Fund (IMF), which, as Bloomberg reported, urged the Chinese state to reduce the magnitude of its interventions, keeping debt manageable in the interest of the long-term viability of its economy.
What impact such a wind-down will have in real terms on both the Chinese and global economy—and indeed China’s art market and the numerous art world ventures that have invested heavily in the region—is unclear. (Some have postulated that due to the relatively small percentage of the country’s wealth that is traded on its exchanges, the impact could be more slight than projected.) Moreover, key questions about the fundamental health of the Chinese economy and the potential knock-on effects of a planned increase in U.S. interest rates remain unanswered. Art purchases will no doubt be particularly sensitive to market corrections, something which the recent auction data suggests is already taking place. But, avoiding a long-term Japan-style meltdown of the Chinese economic machine is likely worth the sting.