China’s Government-Run Auction House Is Unstoppable

China’s Government-Run Auction House Is Unstoppable

Cain NunnsGlobalPost | 10 minutes ago | 17 | 

TAIPEI, Taiwan — In Huang Hung-jen’s plush office in old-money West Taipei, there hangs a 6-foot oil painting of US Marines manhandling an Iraqi family in their own home. The Iraqis look petrified, the Marines aggressive and overbearing. The piece, part of up-and-coming Chinese artist Yuan Liang-yu’s “War Series,” is a blunt metaphor for how China believes the human rights narrative is skewed in Washington’s favor. It’s also an example of how Beijing uses the arts to engender soft power at home and abroad. It goes without saying that Yuan wouldn’t be permitted the same artistic license were he protesting trouble spots closer to home, say in Tibet or riotous Xinjiang. But Huang, a Chinese art insider, doesn’t care about that. What he cares about is securing pieces for Beijing Poly International Auction Company, the fine arts arm of a powerful and opaque mainland Chinese business conglomerate.

The auction house has rung up mega-deals such as the 293.25-million-yuan ($49.24 million) record set for Li Keran’s “Landscape in Red or Million Red Mountains” at June’s spring show in the Forbidden City. Most of Li’s work celebrates Mao Zedong, and this 1964 piece is no different, inspired by the chairman’s poem “Qin-Yuan-Chun Changsha.”

According to Huang, an anonymous Beijing buyer purchased the painting from a Taiwanese collector, who was keen on profiting from China’s exploding fine arts market and auction business.

It’s a business that is largely driven by sales of state-approved pieces. And Poly Auction, which is ostensibly controlled by the People’s Liberation Army (PLA), is the general at the vanguard of the action in the booming arts market. It’s also a company that is a weather vane for the powerful vested interests that dominate China’s booming, and largely state-run economy.

Poly has already become the world’s third-largest auction house since opening its doors in 2005. Christie’s and Sotheby’s, the No. 1 and No. 2 houses respectively, took centuries to rise to the top by relying on a global network of auctions to drive sales.

Poly doesn’t need to scour the globe for buyers because it has more than enough of them at home. According to industry market research outfit Artprice, China overtook both the US and the UK as the world’s largest fine art market, with $4.79 billion in sales in 2011.

“It’s exploding because the Chinese have a lot of money and they want to invest. Global stocks are down and art is the hot new investment,” said Huang, who had racked up a decade’s worth of experience in Taiwanese auction houses before he was handpicked by Poly to set up the Taipei office.

Huang also says the need for cash-rich Chinese to hide earlier, and shadier, “investments” is a major driver of art purchases across the Taiwan Strait. “As China beefs up tracking of bribery, taxes and financial crimes, the Chinese buy fewer houses, cars and jewelry and prefer to pump that money into art. It’s very smart.”

The Beijing-based company has a virtual monopoly in China because foreign houses such as Christie’s and Sotheby’s have only recently been permitted to hold auctions in the country, leaving Poly to dominate smaller local firms.

“If you need to sell an important Chinese vase or painting, then you get a better price discovery at Poly than you get at Christie’s. But you have to remember that a lot of the buying [in China] is artificial,” said Sergey Skaterschikov, founder of Skate’s Art Market Research.

“They’ve set up a fully private museum, which is the equivalent of setting up a captive institutional buyer with very little transparency. In the auction business they call it show bidding,” he added. “Their own captive demand is always available to drive the prices and the volume.”

Show bidding or not, Poly has other ideas about how it has grown to challenge the Western auction houses’ hegemony. According to the company website, “The rapid growth of Poly Auction [has] no doubt benefited from the solid foundation and strong support from Poly Group … [and the] kind solicitudes from leaders of the country and the Party.”

The company’s “P” logo, the website says, is derived from the first letter of the People’s Liberation Army and is shaped like a fist to represent “confidence and power.”

“A government-owned auction house means a lot in China. For regional or city museums it’s mandatory to purchase via Poly. It’s like a ministry of auctions. When you are a ministry of auctions in a tiny European country it means nothing. But in China, you become a huge institution,” said Skaterschikov.

He says Beijing’s soft power art push is “priority No. 1 for decisions like setting up an office in New York. It’s more important than tapping into the US market, and is clearly their mandate. They make no secret of it.”

It’s fitting that such an opaque enterprise is controlled by a highly complex state business empire known for its secrecy and connections to the military, the Communist Party, and “princelings” — the scions of Party heavyweights, reviled as much for their power as the rampant corruption they are routinely accused of partaking in.

“China’s cultural plan is very smart. By encouraging foreigners to appreciate Chinese culture, language and literature, it is producing more foreigners to be sympathetic and supportive of China,” said Lo Shiu Hing, a Greater China political expert at the Hong Kong Institute of Education.

He says China’s auction house is similar to the cultural arm of the Confucius Institute, an organization run and funded by Beijing that has centers around the world devoted to teaching Chinese language and culture.

“Art is more passive, whereas the Confucius Institute is a more active arm of the Chinese government. But both are cultural arms of Chinese foreign policy.”

The institute is not all that unusual, and one could look at the UK’s British Council or Germany’s Goethe-Institute for comparison.

However, critics of Confucius Institutes say they are cultural Trojan Horses, designed to enable a foothold for the Chinese government in Western universities, push China’s “soft power” narrative, and gloss over the harsher realities of political and civil life in the Middle Kingdom.

For Poly, its push beyond its borders is a marked shift in direction for an outfit that started life with a mandate to acquire mostly Ming and Qing Dynasty pieces from overseas collectors. Observers say that mandate was designed to stoke nationalist sentiment at home of a rising China reacquiring works that Beijing says were often looted through foreign aggression.

However, savvy businessmen soon realized that auction purchases — and later donations to the state — of prized Chinese artwork were a great way to curry favor with Beijing.

In 2007, Macau gambling tycoon Stanley Ho paid about $8.9 million for a Qing Dynasty bronze, which he later donated to Poly’s private museum in the Chinese capital. Ho had seen Beijing end his virtual monopoly over gambling in the former Portuguese colony a few years earlier. By 2007, US-based casino operator Las Vegas Sands Corporation had opened its second casino on the new strip. The $2.4 billion Venetian, the world’s largest casino, could have spelled the end for the 90-year-old billionaire.

However, insiders say Ho, an open polygamist who allegedly retains strong ties to Chinese organized crime, was soon reinstated to the good books when a few of his 17 children were awarded new casino licenses in the booming territory.

“We aren’t really focusing on the real high-end priceless antiquities anymore,” said Huang.

“Our CEO in Beijing says he doesn’t want to spend that kind of money because someone else will buy it and give it to us anyway. It’s a good way to get the government to look after you and allow your company to grow.”

China’s Poly Group: The most important company you’ve never heard of

Is it an art auctioneer, a miner, an arms dealer, a front for the army? Probably all of the above.

Editor’s note: This is part of GlobalPost’s two-part series about China’s Poly Group. See Part 1 about Poly’s powerful art auction house.

TAIPEI, Taiwan — Picture the China Poly Group Corporation as the first of a set of Russian nesting dolls.

Each of the larger wooden baubles represents a new line of diverse subsidiaries that shield its cloistered, princeling-controlled core.

China Poly Group Corporation is the parent of hundreds of subsidiaries — the exact number is a closely guarded secret. It has construction, real estate, resource extraction, fishing, military and entertainment firms. It also owns the world’s No. 3 art auction house.

It would be easy to describe the Beijing-based conglomerate as a bellwether firm in China’s state-dominated economic landscape. Its arms exports to troubled spots such as Myanmar or Zimbabwe make way for resource extraction projects for Chinese-owned firms. Its supremacy in Chinese cultural industries provides Beijing with an arm to export its “soft power” narrative overseas.

On the surface it looks like a state-run outfit that checks off all of Beijing’s political, corporate and military boxes. But that masks the fractious relationships within the cliques that make up the country’s ruling elite. Analysts say the reality is Poly’s one cog in a machine run by powerful vested interests that are often in direct competition with each other.

On any given day, observers say, Poly might ship arms to Zimbabwe or Sudan, announce plans to build a highway from Iraq to Syria or win China distribution rights for Ferrari or Maserati. The next day, it might hold a public offering on the Nasdaq for a movie distributor, win a lengthy exclusive fishing rights deal for Mauritius’ economic waters, be accused of bribing a former Namibian defense minister or get linked to missile sales to Iran or Saudi Arabia.

But, until recently, it was mainly known for Poly Technologies, China’s biggest arms exporter.

“Poly Tech has been on Amnesty [International]’s radar for a long time because of their arms shipments to conflict zones, especially Africa. There’s been an effort to shine a spotlight on Poly’s failure to apply any kind of international human rights standards to their exports of weapons,” says Frank Jannuzi, head of rights group Amnesty International’s Washington office and former Senate Foreign Relations Committee’s policy director for East Asian and Pacific Affairs.

“Skepticism about the Chinese to regulate their own arms trade is well founded when you have a company like Poly that is so diversified and has such strong connections, or ‘guangxi,’ with the Chinese leadership,” Jannuzi added.

Poly Group started in 1983 as a subsidiary of China International Trust and Investment Corporation (CITIC), a state-owned investment company. Set up at the behest of Deng Xiaoping in 1979, CITIC soon became one of China’s most influential financial and industrial conglomerates.

A 1997 report by Rand Corporation, a global policy think tank, called the investment firm “a front company for the PLA” (the Chinese People’s Liberation Army) and chastised Poly for illegally importing 2,000 AK-47 assault rifles into the US in 1996.

Deng installed Wang Jun, the son of a revolutionary elder, as head of both CITIC and Poly Group. Wang’s other claim to fame was a “Chinagate” subject, when it emerged the US Democratic Party had arranged for him to attend a coffee meeting at the White House in 1996 with former President Bill Clinton.

Deng’s son-in-law, He Ping, a former army major general, was made president of Poly, and is still listed as honorary chairman of the company, which is top-heavy with former high-ranking PLA officers or the relatives and allies of Deng.

Business was good until former President Jiang Zemin became so concerned about rampant corruption within the army that he ordered the divestment of their business interests in 1998.

Today, the state-owned Assets Supervision and Administration Commission of the State Council is supposed to control Poly, like all other state-owned enterprises, but observers say the move was largely cosmetic and the company is still run by former PLA officers and their relatives.

“Corruption in Chinese politics is so institutionalized. Back in the ‘80s, Deng told Party veterans that their time was up. If China was to modernize then it would need engineers, scientists and bankers,” said Parris Chang, a former Penn State professor and Taiwan National Security Council deputy director.

“He told them that if they left their military and party posts, they wouldn’t be shortchanged. ‘We will have ways to compensate you, and your children.’ This is part of the symbiotic relationship between government-sponsored businesses, the party and the government itself,” Chang said.

That’s helped fuel the emergence over the past two or three decades of a Chinese “military industrial complex,” he added.

“Poly and several others are engaged in [China’s military rise] through their arms sales and resource extractions abroad. When the US complained that Poly was selling arms to IranSaudi Arabia and other Middle East states, Deng asked them [Poly leadership] to come into his office and asked how much they made. When they replied that it was $2 billion, he said ‘not bad’ and the matter was dropped.”

It was the arms business where Poly first made its name — and earned a reputation for bending the rules.

“China’s international strategy is driven by market access to natural resources. Any priority that conflicts with those imperatives, whether it’s honoring its own laws on freedom of expression or adhering to international sanctions or supporting heinous regimes like Sudan,Syria or Iran, then the Chinese have a conflict that needs to be resolved internally. Unfortunately, it’s usually resolved in favor of growth and access to raw materials,” said Amnesty’s Januzzi via Skype.

While companies such as Poly have long been accused of providing arms to despots and low-interest loans in return for resource concessions, some observers say that doesn’t mean these deals are always carried out with the backing of Beijing.

Derek Scissors, a senior research fellow for Asia economics at Washington-based conservative think tank The Heritage Foundation, says China’s Foreign Ministry can’t rein in most powerful state-owned enterprises (SOEs) because their connections to Communist Party and military royalty shield them from reproach.

“Poly isn’t particularly large by centrally controlled standards, which have three of the top 10 firms in the world. They don’t seem to be very specialized in anything and that makes a lot of people suspicious that this is essentially another PLA front company,” said Scissors.
Scissors says Poly’s often go-it-alone approach and reluctance to answer to officials on the ground is “completely normal” for Chinese SOEs with powerful connections. “What’s interesting about Poly is that [state assets watchdog] SASAC has been pushing companies to stop investing overseas in non-core businesses, but it’s still allowed to be heavily involved in a series of these fad industries.”

A common, albeit mistaken, maxim of Western media is that China is a country controlled by 12 old guys in a smoky back room, where all princelings, the state and Party are connected and working together. But some China watchers say that while there are times of cooperation, divisions and competition also run deep.

“The more you get into it, the more complex these relationships are. The reason they are so complicated is that, as they were being detached from the state, there were so many different hands in the pot and everybody got a piece of the action. It’s an extraordinarily complicated process,” said Curtis Milhaupt, a China legal expert at Columbia University. He testified in February’s congressional hearings on policy options for addressing Chinese state firms at the US-China Economic and Security Review Commission.

Curtis says China was bereft of the family-run conglomerates commonly found in other parts of Asia after the Chinese revolution, so the Party and its scions have substituted these missing family groups as the new economic power elite.

“Obviously there’s a big down side to that in terms of corruption, nepotism and this black box quality that China’s SOEs have. Trying to get to the bottom of it is very tricky. But when we say that these companies are controlled by the state, it really buries a huge amount of complexity and conflicting interests,” said Curtis.

But what isn’t so complicated is the type of support Poly’s businesses receive from the state. And when those interests collide, it’s not always the government that has the upper hand.

“Chinese politics is so polarized and fractured. The military-industrial complex and the so-called oil lobby are very powerful. Their views and interests are not always the same as the foreign ministry so they often don’t care about what the foreign ministry thinks. The foreign ministry doesn’t make the final decision anymore. This is why they can’t deliver on some of their promises,” said Chang.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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