In recent years the art market in China has developed with leaps and bounds, taking the international community by surprise and creating exciting arbitrage opportunities for those in the know.

The situation has also created unprecedented opportunities for thieves, charlatans, fakers and unscrupulous adventurers of all kinds.

I myself have visited the private museums of wealthy individuals in China where hardly a single genuine object is to be found.

Nonetheless, internationally the art market has performed exceptionally well over the last 10 years and in many ways the risks associated with investing in art, if well understood, are no greater than the risks of investing in other asset classes such as corporate stocks and bonds or commodities.

In this article we will explore the development of the international art market; the place of Chinese art in that market and the recent rise of a local Chinese market for Chinese art; the various categories of art that are currently of interest to Chinese investors and their relative performance; the risks and opportunities associated with investing in art; and, finally, the opportunities that Chinese investors will come to explore in future years.

The Development of the International Art Market

The collecting of art has always been associated with the accumulation of wealth. In China , from the Song Dynasty onwards, the formation of art collections became one of the potent symbols of the Emperor's taste and wealth. Song Huizong was by any political standards a disastrous leader of his country, supervising its defeat and conquest by the Jin tartars. Nonetheless the Chinese people retain a special reverence for the Huizong emperor because of his exquisite calligraphy and patronage of the arts. In Europe Huizong may be compared with the British King George III, who lost the American colonies to George Washington, but nonetheless made significant contributions to the arts in Britain that can be seen today on any visit to Buckingham Palace or Windsor Castle.

In a way, though, we need to look beyond the collecting activities of emperors and kings to discover the origins of an international art market. Despite their huge resources, royal collectors such as the Qianlong emperor in China and Louis XIV in France were ultimately followers in taste and often had a baleful and repressive effect on the development of the arts, just as Stalin and Hitler did in the 20 th Century.

No, to understand the development of an art market, we need to turn away from the palaces and castles of the monarchs and seek out the counting houses of the merchants and bankers who funded the development of capitalism as an international system. After all, one of the key aspects of the art market is that it is a market – that is to say a public arena for the trading of commodities of a certain asset class. Where emperors such as Song Huizong and Qing Qianlong simpl y swallowed up whole collections into their imperial treasuries where the ordinary people could never see them again, merchants and bankers traded in works of art as part of their normal business activity, thus allowing regular access by the collecting public and by aspirant artists.

In Europe the development of an art market in the renaissance was intimately linked with the activities of the big merchant banking families, the Fuggers of Augsburg in the 16 th Century, the Medici of Florence in the 17 th Century and the Rothschilds in the 19 th Century. In China the merchants of Yangzhou and the Jiangnan played a similar role in the late Ming and early Qing dynasty, while the emergence of Shanghai 's commercial class dominated the art market in China in the late Qing and Republic periods. For the Fuggers and the Medici, the patronage of artists and the collecting of great works of art gave them a means of rewarding their most important clients that went beyond money. After all the gift of a Leonardo da Vinci to Francois I of France was able to lead to a Medici daughter eventually becoming Queen of France. Art and the trading of art has then meant not just a means of wealth accumulation, but also a means of access to the most powerful (and private) families in the world.

British (and Rothschild) victory at the Battle of Waterloo in 1815 led to a hundred years of British political and economic dominance and consequently to the emergence of London as a center of the international art market. The pre-eminence of Christie's (established in 1766) and Sotheby's (established in 1744) in the international art market of today is due to the continuing effects of those 100 years of British dominance.

In the twentieth century the center of world art acquisition moved to the United States , but for cultural reasons London was able to retain a significant role in the American market. In 1976 Sotheby's merged with New York firm Park Bernet to lead the inevitable shift in market activity to the United States , but London has not yet been fully eclipsed. Today New York and London between them probably account for about 80% of international art market activity, with the remainder taken up by Paris , Frankfurt, Vienna , Hong Kong and Australia . Countries such as Italy , China , Japan , India and Mexico have significant national markets, but because of restrictive legislation have not been able to enter the international marketplace.

The Place of Chinese Art in the International Art Market

In international terms Chinese art attracted serious interest starting in the late Ming period when Portuguese and Dutch traders began to return to Europe from the Far East with large cargoes of Chinese porcelain in addition to the spices, tea and silk that were so much in demand. Prior to that time the few pieces of Chinese porcelain that had been carried to Europe across the Silk Road were treated as objects of almost supernatural beauty and mounted with gold, silver and precious stones. Because of the Yuan Dynasty the Arab traders had carried Chinese porcelain to the Middle East, South-East Asia and Africa where it was similarly valued. Japan also became an important market, expanding in importance through the late Ming Dynasty.

Chinese art only became a commodity in the international art market, however, with the huge increase in fascination with eastern culture (orientalism) that developed in Europe and America in the late 19 th Century. This fashion coincided with a period of relative economic weakness in both China and Japan that saw not only the transfer of vast collections from east to west, but also a significant influence of eastern culture on western artists such as James McNeil Whistler and Vincent van Gogh.

The sacking of the Yuan Ming Yuan by an Anglo-French force during the Second Opium War in 1860 also led to a massive flow of previously unavailable Imperial works of art onto the marketplace. This destructive event was followed by a sharp decline in Qing imperial power and a steady flow of Imperial objects out of the Forbidden City and onto the International Art Market: a process only really brought to a final close by the establishment of the People's Republic of China in 1949.

The Recent Rise of a Local Chinese Market for Chinese Art

After a century of national humiliation and outflow of Chinese works of art, the prosperity of the 1960s and 1970s brought a new class of Chinese collector and dealer into the field. Hong Kong shipping magnate T.Y Chao and Swiss-based dealer Edward T. Chow both formed superb collections of Imperial ceramics, largely based on sources in London and Paris . Both collections were sold by Sotheby's, which held its first Hong Kong auction in 1973.

With Christie's also opening in Hong Kong in the 1980s the gradual shift in the Chinese art auction market from the west back to China began. Initially New York and London remained the more important markets for both Christie's and Sotheby's, but as more and more lots were knocked down to buyers from Asia, both houses began to shift their business to Hong Kong .

In the early 1990s the situation changed again with the establishment of the first Mainland Chinese auction houses. Many collectors in Hong Kong and South-East Asia were delighted to be able to consign their collections for sale to the Mainland, not only benefiting from lower transaction costs, but also avoiding the colonial British auction houses.

Today the Mainland Houses compete with Christie's and Sotheby's in terms of annual Asian art turnover. China Guardian, the leading Beijing house transacted over US$88 million in their Fall 2005 sales, compared with Christie's just under US$70 million in their Fall auctions in Hong Kong .

London and New York play less and less of a role in the International Market for Chinese Art and it may be safe to say that this market is now definitively repatriated to China .

The Various Categories of Art that are Currently of Interest to Chinese Investors and their Relative Performance

That being said there are still major categories of Chinese art that are not actively sought after by collectors from the Mainland. These include mingqi (tomb objects); avant-garde contemporary Chinese art; classical Chinese paintings; Song and Yuan ceramics; and Chinese export art. These categories remain keenly sought after by collectors in the United States and Europe who will continue to give Chinese collectors competition for many years to come.

Where Mainland Chinese collectors have shown most interest to date has been in Ming and Qing ceramics, 19 th and 20 th Century Chinese paintings, jade and works of art associated with the Chinese emperors. This taste is not confined to the Mainland and bidders from Hong Kong , Taiwan and Singapore have been actively bidding at all the major Mainland houses. Record prices such as the HK$115.4 million paid by dealer William Chak on behalf of a Chinese client for a tiny Guyuexuan vase offered at Sotheby's on October 23 rd 2005 in Hong Kong , show the very strong demand for objects directly associated with the Qianlong Emperor in particular. Paintings from the collection of the Qianlong Emperor, particularly those of the Jesuit priest Guiseppe Castiglione (Lang Shining) have also achieved spectacular results in recent years, as have jades, cloisonné enamels and lacquer wares bearing the Qianlong Emperor's seal.

Interestingly the two highest prices paid at auction for Chinese works of art apart from the Guyuexuan vase are the US$27,679,100 paid by dealer Guiseppe Eskenazi on behalf of a Swiss collector for a massive Yuan Dynasty guan at Christie's in London in July 2005 and US$9,246,000 paid by a British collector for an important late Shang Dynasty fang-lei at Christie's in New York in March 2001.

Within China itself the works of several modern Chinese painters such as Qi Baishi, Xu Beihong and Wu Guanzhong have broken auction records in recent years. It is in this area of Chinese painting that Chinese collectors have contributed to extraordinary price inflation. The average price for twentieth century Chinese painting is up about 1000% over the past 10 years and several painters' works have well exceeded the average. This phenomenon has led to a flood of Chinese paintings collected by overseas Chinese making its way back into the country.

The Risks and Opportunities Associated with Investing in Art

The rapid expansion of the domestic art market has given Mainland Chinese collectors a baptism by fire. Never has so much fake material been transacted in such a short time nor so keenly consumed by gullible or indifferent buyers.

The market has been driven by great ignorance and by a huge rush of liquidity into the marketplace created by the rapid expansion of China 's export-processing and domestic markets, in particular for property.

It is a market where over 32 auction houses have been established in Shanghai alone and several thousand across the whole country; where the need to fill catalogues has driven auction houses to be less than discriminating in their selection of consignments and where buyers have been far too gullible in their acquisitions.

The fall out from the inevitable market crash will be devastating and huge collections of fakes will languish for years in the possession of individuals who cannot bare the loss of face involved in admitting that they were duped.

In time though the market will find equilibrium and more professional standards of operation will allow certain players to survive. Only a few auction houses will survive, as serious collectors will learn which to trust. Collectors will learn to inquire more diligently into the qualifications of advisors, dealers, curators and appraisers. Professional associations and legislation will have to be developed to maintain standards.

One benefit to the current chaos and disorganization of the Chinese art market is that numerous opportunities for investment still remain. A large quantity of more-easily authenticated Chinese art still lies in overseas collections. Contemporary Chinese art is seeing a huge growth and today's fashions will often neglect artists of great underlying quality. There is no fundamental reason why Chinese collectors should collect Chinese art any more than American collectors collect American art: thus if Chinese art is overvalued there is a case for selling into a bull market and looking overseas for undervalued assets. Southeast Asian art could be a good example.

The Opportunities that Chinese Investors will Come to Explore in Future Years.

The future always turns out to be in the present. Already many collectors have started to cash out of the Chinese art market and to look elsewhere for interesting areas to collect. One such area is Buddhist art, with the religious traditions of the Himalayas offering great potential. Another opportunity is to follow the Chinese diasporas and to look for artists of talent who may have worked or be working in places as far away as Brazil and Indonesia , South Africa and France . A third is to look at the work of foreigners who have visited and worked in China over the centuries. If the work of Guiseppe Castiglione, an Italian Jesuit working in Beijing, can command such high prices, then why not the works of George Chinnery, a British painter who worked in Guangdong in the early 19 th Century or of the many painters and photographers who visited China in the late 19 th Century? Finally, the younger generation of Chinese collectors, coming to maturity in the information age, will possible prove to be more international in outlook than their predecessors? Who, for instance, is going to address the fact that China does not have a single museum of world art?