Positive Momentum For Collectors, Institutions And Auction Houses
Looking to expand beyond its highly lucrative Hong Kong enclave into the mainland China art market — where it has been to date blocked from holding auctions — for quite some time now, Sotheby’s has finally staked a claim in Beijing. This week, as reported by the Art Newspaper, the British auction giant inked a ten-year partnership with state-owned Beijing GeHua Art Company, investing some US$1.2 million for 80 percent ownership of the firm.
Coming off the heels of Sotheby’s launch of a 15,000 square foot space in Hong Kong this May, which is to be used for everything from hosting regular auctions to exhibitions, lectures, special events and other cultural programs throughout the year, the GeHua partnership seems mostly aimed at leveraging the recently announced 83,000 square meter (893,405 square foot) freeport currently being developed by GeHua and slated to be built in Beijing’s Tianzhu Free Trade Zone by late 2013.
This, in our view, is perhaps the most interesting aspect of this deal — and the one with the most far-ranging implications. Rumored to cost upwards of US$750 million, the freeport “will serve as a tax-advantaged storage location and provide a platform for art-related auctions and private selling exhibitions of non-cultural relics, traveling exhibitions, and educational activities,” according to a Sotheby’s report.
Allowing Chinese collectors to purchase and store art more freely, avoiding concerns about import duties and scrutiny, the freeport plan could be one of the biggest things to hit the Chinese art market in decades. These anxieties about the ongoing tax crackdown in mainland China have dampened Chinese collector enthusiasm at some recent auctions in the Mainland as well as Hong Kong. But with the opening of the Beijing freeport, Chinese collectors would have the ability to bring their overseas purchases to mainland China to hold at the facility before deciding their next steps — hang onto the works for the long term or pay duties then fill private museums or show off their collections at home. Erasing this intermediate concern could, ultimately, be a good thing for Chinese collectors and the Hong Kong and mainland auction markets as a whole.
According to Sotheby’s, the GeHua partnership “will strategically enhance Sotheby’s long-term presence in mainland China and allow it to potentially capitalize on the opportunities presented by the Chinese art market.” More pointedly, since foreign auction houses are restricted to only doing business in Hong Kong, unless they partner with a domestic firm in the mainland, the agreement means Sotheby’s can now operate in Beijing as Christie’s has done (with mixed results) with the domestic Chinese auction house Forever. (And as Chinese auction houses like China Guardian have increasingly looked to do in Hong Kong.)
It’s the possibility of holding regular auctions at the proposed Beijing freeport that could be among the most lucrative and important for Sotheby’s, particularly as it pertains to increased buying by local collectors, competing on-the-ground with massive local players like China Guardian and Beijing Poly, and spurring the development of the mainland Chinese auction market.
Thus far, the announcement has been well received by many art market observers and investors. As David Schick, managing director of Stifel Nicolaus Equity Research, told the Art Newspaper, “[Sotheby’s] brings art market gravitas (and a small investment) while Beijing GeHua Art Company brings Chinese market prerequisites. [The agreement] shows the power of the Sotheby’s brand—with just $1.2m investment [Sotheby’s] has essentially been invited to partner with a state-owned art venture.”
As Jing Daily noted in July, though it’s questionable whether the Beijing freeport will, as its builders hope, catapult Beijing beyond Hong Kong and Singapore to become the preeminent Asian art trading hub, the facility does have the potential to spur domestic Chinese collectors to buy more art (especially at overseas auctions) and breathe new life into the mainland China art market. To date, many Chinese collectors have been reluctant to import high-priced art, antiques and even wine owing to the Mainland’s stiff duties. The construction of this freeport — and the involvement of a trusted and established name like Sotheby’s — could fundamentally reshape the Beijing and mainland China art scenes. As we wrote:
If and when the Beijing freeport opens, it could prove an important factor in easing current anxieties of some mainland Chinese collectors about high import taxes and ultimately help the development of the Chinese art market as a whole. Currently, with Chinese collector concerns remaining high about punitive taxes — and the government’s focus on the art market intensifying — collectors continue to spend millions on Chinese art at auction houses in New York, London and Hong Kong, regularly storing auction purchases overseas as well.
Down the line, speculation remains that the Chinese government may ultimately hammer out tax compromises with major art collectors, to offer incentives in exchange for the donation of works to public arts institutions at some point. Until that point, the opening of the Beijing freeport would allow collectors to “repatriate” overseas purchases and hold them, tax-free, in China while awaiting Beijing’s slow moves.
Getting involved in the early planning stages of the Beijing freeport has additional potential for Sotheby’s. As the Art Newspaper noted, under the terms of its partnership contract, “GeHua will not allow any other company to conduct auctions or selling shows within its authorised areas of the freeport, and is restricted from forming partnerships with specified competitors.” Still, as the construction date of the freeport remains to be determined, Sotheby’s retains the right to end the contract if GeHua’s plans fail to materialize. Certainly a smart move on the part of Sotheby’s, and — given that the freeport is built and serves its stated function — good for Chinese collectors, dealers and arts institutions.