MCLC: Poly Auction

[Denton, Kirk]

MCLC LIST
From: kirk (denton.2 at osu.edu)
Subject: Poly Auction
***********************************************************

Source: NYT (11/28/13):
http://www.nytimes.com/projects/2013/china-poly-auction/

A CULTURE OF BIDDING
An Art Power Rises in China, Posing Issue for Reform
By Graham Bowley and David Barboza
Additional Research by Amanda Cox and Shi Da

Eight years ago, as personal incomes here soared, China Poly Group
Corporation, a state-run conglomerate that began life selling weapons for
the People’s Liberation Army, decided to venture onto another sort of
battlefield — the art market.

The corporation had already expanded into theaters, sports cars, real
estate, even television sitcoms, and the new division, Beijing Poly
International Auction, soon joined the others in Poly’s imposing
modernist, sand-colored office tower here, where visitors can shop for a
painting on the third floor or a missile system on the 27th.

In its short life, Poly Auction has risen to become the third-largest
auction house in the world, behind Christie’s and Sotheby’s. Its 2012
reported sales totaled nearly $1 billion, and its auction rooms now buzz
with the energy of thousands of new consumers eager to buy a piece of
their cultural history or invest in the recent art boom.

But while the art market in China remains robust — its $14 billion in
sales last year make it the second-largest in the world after the United
States — it is also rife with fraud, forgeries and payment defaults that,
experts say, are undermining consumer confidence.

Fearing that buyers will flee the market, government ministries and the
China Association of Auctioneers, are pushing corrective initiatives,
including asking auction houses to report sales that fall through and
training experts to better identify forgeries. At first glance, Poly
Auction, as a state-backed business that accounts for 11 percent of the
country’s auction revenues, would appear to be an ideal place to start.
But it is becoming clear that the powerful company, rather than serving as
an instrument of reform, may pose a formidable challenge to it.

Beyond its 55 percent government ownership, Poly Auction is part of a
company with a proud military heritage, expansive business interests and
strong ties to China’s highest echelons, all sources of influence that
critics say help shield it from encroaching regulations.

An industry study found that last year Poly had one of the worst records
of buyers who did not pay, a persistent problem in the Chinese art market.
When auction houses do not always note these failed transactions, as was
the case with Poly, their reported sales figures exceed reality. The study
found that Poly’s revenue was one of the most exaggerated among the top
houses. And unlike major rivals, Poly has balked in recent years at
allowing the auction trade association to publish full details of its
sales.

Thomas Galbraith, a New York-based art market analyst and expert on the
Chinese art world, said Poly’s attitude is a hurdle for those trying to
set standards. “Some in the industry and government want to introduce
regulation into the market,” he said, “while others see nothing wrong.”

Poly has its defenders, even among trade association officials seeking to
clean up the market, and company officials say the study and critics are
being unfair. “The government has a stricter policy on state-owned
enterprises than on private enterprises,” said Zhao Xu, the executive
director of the company. Either way, although Poly is just one of more
than 350 Chinese art auction houses, its size and reach mean that no
meaningful effort to address the irregularities can succeed without its
participation.

“In the Chinese art market,” said Nancy M. Murphy, an expert on Chinese
art law and a lawyer at the Beijing firm Jincheng, Tongda & Neal, “Poly is
the 800-pound gorilla in the room.”

Poly Auction’s influence in the art world stems in large part from its
parent, a three-decade-old company whose founders include several lions of
the Communist Party. One founder, Wang Jun, is the son of a close
associate of Mao. Another, He Ping, is a former general who is married to
the daughter of Deng Xiaoping, who led China for much of the 1980s and
1990s.

Though Poly Group’s official ties to the military were cut in 1999, it is
still staffed by former military officers and led by the relatives of
senior Party officials. It still refers to its socialist mission, retains
a stylized P from the People’s Liberation Army as its logo and remains
involved in arms trading. (In February, the United States imposed
sanctions on Poly Technologies, the defense equipment division, accusing
it of violating a nonproliferation policy that controls weapons traffic
with Iran, Syria and North Korea.)

In the 1980s, the Poly Group began to reinvest its arms profits in other
sectors of the economy, including hotels and office towers. As the Chinese
grew wealthier, the corporation branched out into culture and opened
theaters and performance halls.

In 1999, it established a presence in the visual arts when it opened the
Poly Museum, stocked with national treasures. Some of these works, now on
display in the ninth-floor galleries of its headquarters, have been
reclaimed from abroad, an effort that earned Poly considerable good will
in a country still harboring sour memories of looting by colonial powers.

When Poly entered the auction market a few years later, the sale of
high-end Chinese art was largely the preserve of foreign houses operating
from Hong Kong and an older, privately owned company, China Guardian. But
China’s market was expanding fast — auction sales more than doubled
between 2004 and 2005 — and Poly Group, sensing an opportunity, brought in
Mr. Zhao, a dealer, as executive director of its new auction business.

By 2007, Poly, the upstart, had come to rival Guardian in sales. Its deep
pockets meant it could offer consignors cash advances, and the company’s
wide web of contacts helped lure the new rich of China to its auction
floor, experts say.

“Individual buyers, they recognize us as part of the government,” said Mr.
Zhao, who is 44. “They trust us, since we are part of the state-owned
enterprise.”

China Poly Group has grown into a $61 billion conglomerate, including:DOUG
KANTER FOR THE NYT

Many credit Poly’s ascension to Mr. Zhao’s energetic, personal way of
doing business. Associates say he operates his own private club next door
to the Poly headquarters, where he wines and dines important collectors,
though Mr. Zhao said such meetings are strictly social. In other
instances, he has pursued a customer who failed to pay by donning a towel
and tracking him down in a sauna.

Though Poly has no shortage of state-connected overseers, there is a
bustle in Mr. Zhao’s third-floor office that one might expect at a tech
start-up, not at an arm of a sprawling, state-owned company with $61
billion in assets. Spare shirts hang in a closet, and paintings and
photographs, including several of Mr. Zhao with the former Chinese
President Jiang Zemin, line the walls.

Mr. Zhao presides regally, constantly checking his smartphone as aides
come and go, some carrying the antiquities and traditional paintings and
calligraphy that are the mainstay of the market. At one point, a worker
unrolled a scroll in front of his desk.

“We will not be able to auction this,” Mr. Zhao declared, waving it away
dismissively.

“Zhao is like a general,” Yang Bin, a wealthy businessman and art
collector who counts Mr. Zhao as a friend, said in an interview.

Mr. Zhao personally owns about 18 percent of the auction house, according
to company records, with other private investors owning about 27 percent.

The Poly Group is overseen by the State-owned Assets Supervision and
Administration Commission, which monitors 113 of China’s biggest state-run
companies. But even experts who specialize in the workings of these
companies don’t know just how Poly functions as a corporation, how power
is shared internally, to whom its executives are really accountable or how
its revenues and benefits are distributed.

Mr. Zhao said that despite the large state stake in his company, he feels
largely autonomous. He operates two private businesses of his own, a
gallery and an online auction site. “To work for Poly,” he said, “is to
work for myself.”

Meg Maggio, who runs a Beijing art gallery and has done consulting for
Poly, described Mr. Zhao as an innovative leader. "It took Guardian 20
years to achieve what Poly accomplished in less than 10 years under the
strong directorship of Zhao Xu," she said.

For all of Mr. Zhao’s savvy and influence, though, it is Poly’s
relationship with the state and the reach of its affiliated businesses
that have fostered its ascension in the art world, experts say. They claim
that, because of Poly’s ties to elites in the Chinese government, it
enjoys greater freedom in moving cultural relics in and out of the country
and more leeway from the tax bureau. Poly also can be more dismissive of
recent efforts, led by the trade association, with the of commerce and
culture ministries, to reform the Chinese art market, the experts say.

“It’s a privileged institution that is more powerful than what we would
consider some of the lesser state agencies,” said Tai Ming Cheung,
director of the Institute on Global Conflict and Cooperation at the
University of California, San Diego, and an expert on Chinese state
companies.

Though reported revenues for last year suggest that Poly has eclipsed
Guardian, the first major art auction business on the mainland, Guardian
has not complained about Poly’s government connections and has some of its
own. State-run companies own about 10 percent of Guardian, which has long
had a reputation for a more cautious approach to business.

“Our styles are different,” Kou Qin, Guardian’s director and vice
president, said of the two auction houses.

Poly officials said the company’s power and ties to military elites are
often overstated. “We are just a normal business company,” Mr. Zhao said.
“We have no P.L.A. backing,” he added, referring to the People’s
Liberation Army.

Modernizing a MarketThere is no question, though, that Poly has not been
as compliant as other houses with the industrywide effort to improve the
accuracy of sales reporting.

Auction houses clearly want buyers to pay. But when they don’t — which
happens routinely here for reasons that include the buyers’ becoming leery
that they’ve purchased a fake — it is in the house’s interest to obscure
the problem by treating the defaults as sales. As well as exaggerating
revenues, this practice props up prices and promotes the market as being
hotter than it is, experts say.

Unlike Guardian and other houses, Poly refused for the past two years to
allow the auction association to publish data on the individual works
whose sales had not been paid for completely. On top of that, the auction
association’s studies ultimately found that Poly is increasingly
struggling with a nonpayment problem. In 2012, for example, the
association found that, because of nonpayments, only 34 percent of the
sales Poly reported for works valued at more than $1.6 million each were
actually completed by May of the following year.

By contrast, Guardian’s payment rate has improved, with 83 percent of
sales completed last year, up from 53 percent.
Mr. Zhao complained that the association’s analysis is biased, arguing
that the statistics are incorrect, since Poly auctions take place later in
the year than others, giving it less time to corral recalcitrant payers.
In addition, although the study found that two-thirds of the high-end
sales were never completed, it also showed that Poly had received at least
some money in many of those cases.

Poly said it believes in more flexible payment schedules for clients with
good credit. Otherwise, it said, it has been dutiful in participating in
corrective programs run by the auction association, a position the group
did not dispute.

“Poly is one of our very important and supportive members,” the
association said in a statement.

But Mr. Galbraith, the analyst, said officials from the association and
other auction houses have complained to him that Poly shows little
interest in overhauling a system under which it has done so well. Mr.
Galbraith spoke last spring at the Chinese auction association’s major
conference, where problems in the market were a focus. Poly, he said, was
represented by a low-level official who did not stay long.

“Here is the most important meeting for Chinese auction houses,” he said.
“Someone from Poly showed up at some point for the drinks session and then
left. Meanwhile, the rest of the room is filled with the C.E.O.s of other
auction houses.”

Auction houses account for an estimated 70 percent of the art sales in
China, compared with roughly 50 percent in the United States, according to
Arts Economics, a research company that studies the international market.
And the top houses, lavish considerable attention on their customers, more
so than their counterparts in the West, according to people who have
worked in both settings.

“Experts are expected to be full-time milkmaids at times,” said Mike
Bruhn, a consultant who worked at Guardian for two years as an adviser on
international business.

Satisfying this Chinese thirst for respect and attention can mean an
auction house expert might accompany important buyers to exhibitions, or
perhaps provide tickets to a sporting event, or even refrain from chasing
them if, as so often happens here, they are slow in paying.

Many of the Chinese art market’s problems stem from how young it is,
economically speaking. The culture of bidding is still novel, newly
wealthy buyers are inexperienced, and the auction houses themselves are
figuring things out as they go along. Certainly, the style of auctions at
Poly and Guardian, and other top Chinese houses, is distinct from their
high-tier counterparts in the West.

In New York and London, evening art auctions are discreet, air-kissing
affairs. Buyers are typically veteran, elegantly dressed collectors who
know one another and signal bids subtly to auctioneers conducting business
in soft tones.

At auctions here, despite the presence of well-trained, white-gloved
attendants, casually dressed buyers munch on snacks from paper bags and
chat on cellphones, creating a low-level din throughout the bidding.
Purchasers of expensive paintings have been known to roll up their canvas,
tuck it under an arm and stroll out into the night air.

The competition for buyers is expected to intensify in coming years with
Western auction houses entering the Chinese market more fully. Sotheby’s
has formed a joint venture with a state-owned Chinese company and held a
December auction at a hotel here. Christie’s has won a license to operate
independently in China and this fall held its first auction.

Both are significantly larger than Poly in manpower — Sotheby’s has more
than five times as many employees worldwide as Poly Auction’s 260 — and
carry a reputation for probity which, while hardly ironclad, could be a
competitive edge in the fraud-ridden Chinese art world.

For now, though, both Christie’s and Sotheby’s remain on a tight leash,
permitted to auction only watches, wine, jewelry and contemporary Chinese
art, not the more lucrative relics and traditional Chinese painting and
calligraphy.

Poly officials, however, speak confidently of their ability to ward off
the competition and are focusing instead on their company’s expansion.
Last year, Poly staged its first auction in Hong Kong, where the Western
houses do significant business, and opened a New York office to help it
secure consignments in the United States, celebrating with a party at the
Harvard Club. One indication of Poly Group’s ambition is a plan to sell
shares in its cultural division on the Hong Kong Stock Exchange in the
near future.

“They don’t want to be one of the great auction houses of China but one of
the great auction houses of the world,” said Laura B. Whitman, a
specialist in Chinese art formerly with Sotheby’s and Christie’s.

Asked in an interview whether the foreign competitors concern him, Mr.
Zhao shrugged. To do business in China, with its unique customs and
cultural tics, is not as easy as simply setting up shop, he indicated.

“They are not qualified,” he said of Christie’s and Sotheby’s, “to be our
rivals for now.”