China’s regulatory environment leads to growth in the art market

Christies Auction House was the first to enter the secondary art market in mainland China in 2005. It licensed its brand name to a local auction house, and received RMB 97,000,000 (roughly $11,100,000) for its initial sale.^[1]With eight years of market experience, Christies opened its own branch in Shanghai shortly after obtaining an auction license. Christies achieved a total of RMB 222.030.200 (roughly $35,000,000) in its first sale in March. The gallery, BUND ONE is a century old historical building in the center of Shanghai.^[2]

China’s primary art market has also seen a rapid growth trend over the past two decades. To tap this market potential, a growing number of internationally renowned galleries have opened Chinese branches. These international galleries dominated two major art hubs: Beijing (Galleria Continua, in 2004, and Pace Gallery, in 2008), and Shanghai. They were concentrated in Shanghai (Perrotin 2018, Almine Rech Gallery 2019, and Lisson Gallery 2019), and together they formed a strong competitor to the domestic galleries. Art fairs such as West Bund Art & Design were also taking place.^[3]and ART021 Shanghai Contemporary Art Fair^[4]They have brought together top galleries, artists, art lovers, and art enthusiasts from all over the world, contributing to large volumes international art transactions and accelerating China’s integration with the global market.

A Relaxed Regulatory Environment

The huge growth of the Chinese art market can be explained by a relaxed regulatory environment. The art industry in China, unlike the restrained media industry, is much more welcoming for foreign investors. The current Negative List for Foreign Investment allows foreign direct investments in all areas of the art industry, except antiques-related business (i.e. antique auction houses, auction shops, state-owned museums, and antique auction houses).^[5]A business filing is required in order to open an auction house on the mainland of China. The threshold for an auction license is lower for foreign-owned enterprises since 2019, when the Auction Administration Regulation was amended by the PRC Ministry of Commerce.^[6]A license for auction requires that an entity must have a minimum of RMB 1,000,000 (roughly $160,000) in registered capital, a minimum of one auctioneer and physical premises. By-laws and an auction procedure are also required. It is easy to establish a gallery in mainland China.

A night watchman ensures that the government does not intervene in the non-antique industry’s business activities. The regulation of the auction industry is based on legislation and, more often, industry self-regulation. The Auction Law of PRC^[7]These regulations share many provisions with the PRC Civil Code. The Anti-unfair Competition Law. And the Product Liability Law. They also include auction-specific provisions, such as conflict-of-interest rules and auction procedures. China Association of Auctioneers provides industry self-regulation.^[8]As the auction industry association,, a series has been developed that outlines industry standards and contracts for different types. The standard for art auctions covers a wide variety of topics, including lots collection and catalogue compilation, industry terminology, and best practices for auctioneers.

Gallery regulation is even more stringent. The Art Deal Regulation, which is specific to the art industry and contains three prongs: business file, redlines for business activities and import and export compliance.^[9]Most of them, however, are either procedure-oriented or intuitive. Art dealers cannot hide the origin of the art or forge the authentication documents.

Survival in a Unique Landscape

The contrast between the regulatory complexity of the primary and second art markets reflects a unique landscape of the Chinese market for art: the dominance over the primary market. The primary market, which consists mainly of galleries, and the secondary market (mostly auction house) play a distinct role in Western countries. In mainland China, however, many resources and market professionals are now focusing on the auction business.^[10]For a decade, auction houses in China have been tapping into China’s primary art market. They collect lots directly from artists, rather than only from collectors. Some of the most prominent auction houses, including Beijing Poly and China Guardian, have been expanding their private sales business ever since 2013, when the Auction Supervision Regulation was adopted.^[11]Eliminated the ban on auction houses selling private items.^[12]This expansion may explain why China was able, in 2021, to dominate the global public auction market with its 33% market share.^[13]

Surprisingly though, quite a few international galleries opened their Chinese branches and survived and thrived in the unique environment. This helped to balance both markets. Timing and authenticity are key to their success. Since the Chinese market has developed into a new stage, most international galleries have entered the Chinese market over the past decade. 2011 saw China’s art market become the largest in the world and also marked the bubble burst. The number of transactions at art auctions fell by more than 53% in 2012. This was due to a significant amount of short-term investors realizing that the art market was not an avenue for quick returns on their capital. They exited the market.^[14]Since then, the Chinese market for art has changed from an earlier stage in China where auctions were the main driver of its growth to the current stage, in which the importance and importance of the primary market are being recognized.^[15]Because of the high market potential for Western artists and low price volatility, collectors have become more mature and rational. Additionally, people have more access to Western art through art fairs and exhibits in the past decade. This has allowed them to appreciate and want Western art more. However, drastic economic and social changes have also allowed them to indulge in art collecting and conspicuous consumption. These galleries were able to compete with domestic galleries because of their artist resources and the growing demand for western artwork.

The galleries are also able to compete against auction houses that are exempt from certain claims made by buyers. Auction houses are protected by the Auction Law’s safe harbor provision. This protects them against any product claim or forgery claim. However, they must make a prior good faith disclaimer that it will not guarantee the authenticity and quality of the lot. In practice, most auction houses include this disclaimer within their conditions of sale. Multiple lawsuits have been filed based on claims of art forgery. Most of these disputes ended in courts affirming that such disclaimers are valid.^[16]This has led to art collectors who are concerned about the authenticity of artwork being sold to the primary market. Gallery can purchase artwork directly from the artists represented by them, so the risk of buying a forgery is reduced to a minimum.

The tax and exchange control are two of the biggest challenges.

Cross-border art transactions pose challenges for international galleries, especially in relation to exchange control, tax burden, and tax burden from the Chinese government.

The Chinese government has been increasing its foreign exchange control in order to stabilize the RMB exchange rate. Each Chinese citizen has the right to convert RMB into foreign currencies, up to a maximum amount of $50,000 per year.^[17]This presents a problem for international galleries without a physical presence in China. The quota is so low that a single piece can easily exceed it. Some Western galleries have devised innovative ways to address these complexities. They work with legal and financial service providers to develop a special payment structure for collectors.^[18]

Taxes present a greater challenge. Each cross-border transaction in art is subject to tariffs and VAT (value-added tax). The total tax rate for each purchase is (1+VAT rate) + (1+ tariff rate).^[19]Since 2019, the VAT on imported goods has been lowered to 13% from 16%.^[20]The tariff rate will vary depending on the media used, with photography ranging from 6% to 1% and painting and sculptures ranging from 6% to 0%. Installation art is excluded.^[21]If, for example, mainland Chinese collectors acquire Western artworks and want them to their homes, the total tax rate would then be (1+13%) x (1)+1% -1=14.13%.^[22]Geopolitics can also have an impact on the tariff rate. In response to the Sino-U.S. trade conflict in 2018, Chinese customers imposed tariffs on artworks imported from America or made by American artist. Many Chinese collectors chose Hong Kong to be their delivery destination because of the low tax burden.^[23]

There is a silver lining to every cloud. In recent years, Shanghai and Beijing have taken initiative to build bonded warehouses like Le Freepot Shanghai Westbund or Shanghai Waigaoqiao Free Trade Zone and Beijing Tianzhu Free Trade Zone. Bonded warehouses can reduce stress on cash flow and simplify customs clearance procedures for art dealers. The central government also offered preferential policies to art dealers at the China International Import Expo. This is the first expo dedicated to imports in the world and is held annually in Shanghai since 2018. It aims to promote China’s domestic market to foreign businesses. In order to encourage repatriation of cultural properties, the government exempted five artworks and cultural property from VAT and tariff in the two recent Expos.^[24]

As can be seen from the Expo, China’s art market will continue opening as usual, echoing Xi Jinpings 2014 ambition for Shanghai to become the new APAC hub of international art trades.^[25]

Authored by Zach Dai, a law clerk at Sheppard MullinsCentury city office.