The report goes on to note that “the downturn in revenue has not stopped Sotheby’s [...] from enjoying a 20.5% increase in the share price since 1 January 2016, suggesting that the financial markets are confident in the art market.” (Due to a subsequent rally throughout August, Sotheby’s stock is currently up 56.4% year-to-date.) A more accurate reading of the increase in Sotheby’s share price may be that investors are chiefly confident in the ability of the auction house to make money. Auction houses are, of course, an indicator of the art market’s health, but sale totals and the ability of auction houses to make profit for their shareholders isn’t a straightforward one-to-one correlation.
Global Market Readjustments
The art markets in the West and in China are each experiencing a readjustment, just in opposite directions and to different degrees. Over a five-year period beginning in 2010, the Western market’s two key sectors—post-war and contemporary and Impressionist and modern—leapt in value by some 273%, according to
Meanwhile, sales of Chinese art declined 15% over that same time period. That drop in demand for Chinese art occurred while China as a whole was undergoing a significant crackdown on so-called “elegant bribery,” a system by which bribes are made indirectly through the gifting of luxury goods like art. It also occurred amidst an inflating of auction prices and a significant issue of non-payment among lot winners—an issue that Todd Levin recently told Artsy remains a significant drag on the market’s value and confidence.
The Artprice report, however, places the issue firmly in the past. The report states simply that “China’s problem with unsettled bids has now been resolved by an extremely strict legal framework that has been in force for two years.” What the report fails to do is elaborate further in regard to the exact mechanism behind this new framework and the data around its implementation.
Much hay has been made about the connection between negative bond yields in Europe and growing interest in art as an investment. But the current rise in sales in China is likely also connected to the fact that mainland wealth in the country is pouring offshore in search of safe financial harbors. Many in China are still jittery after contractions in the value of the renminbi (RMB) and Chinese equity markets last August.
Though individuals are officially limited to converting $50,000 into foreign currency each year, there are numerous ways to circumvent the cap. Things have gotten so serious that officials in the country have introduced controls to limit the purchase of traditional financial products—like insurance
—in Hong Kong by mainland buyers through third party payment services.
In a recent Financial Times
piece exploring currency flight broadly, Kevin Lai—chief economist of Asia ex-Japan at Daiwa Capital Markets—said
, “the bottom line is that there is huge pressure from individuals to bring money out of China. They are always finding new ways of getting around the regulation.” The increase in art sales is, of course, due to a confluence of factors. But it seems likely that some mainland billionaires looking to get money offshore by purchasing alternative assets in Hong Kong would also look to art as a vehicle in that effort.
A slew of major sales to a small group of individuals can drastically increase the size of a market—just as the absence of big-ticket items is hurting auction totals in the West. According to a Financial Times survey
, “56.8 percent of Chinese outbound investors believe they will allocate more of their liquid wealth overseas in the coming two years.” However, it should be said that those in China using art as a harbor are in the vast minority. According to the Financial Times
, most investors are putting their money in residential property, stocks, and life insurance plans.
The general desire to get cash out of the country, however, means the incentive for mainland buyers to purchase art exists—especially due to the uncertainty of the currency combined with lower profitability in stocks and bonds. Though a smaller percentage, Chinese buyers looking at art as part of a diverse offshore portfolio could be the source of the unexpected increase, simply because of the scale of wealth leaving the mainland.
One final item of note: Hong Kong alone is keeping the Chinese art market in the black. According to the Artprice report, while Hong Kong's market growth is robust, the market on the mainland saw 22% fewer lots sold from last year. The more worrying figure from the mainland is an incredibly high 64% unsold rate. The Western art market may be correcting, but the unsold rate is still a healthy 28%. According to the report, anything north of 35% indicates “meltdown territory.” Given that mainland China’s unsold rate is 29% into the danger zone, the Chinese art market’s current prospects could well rest in money continuing to pour into Hong Kong salerooms.