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| China’s Newly Developing Art Funds |
| By Zhu Guodong |
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 ince the turn of this century, art funds have begun to develop in China in response to the increasingly hot Chinese art market.
On June 18, 2007, the China Minsheng Bank initiated an art investment plan, becoming the first banking institution in China licensed by the China Banking Regulatory Commission to get into the area of art funds.
He Juxing, the general manager of Minsheng’s Brand Management Department, announced some of the bank's ambitious plans to invest in Chinese contemporary art. Among the plans: Minsheng officially acquired the Yan Huang Art Museum, which was founded by Huang Zhou, a distinguished artist and collector of traditional Chinese paintings. Also, Minsheng said it is preparing to establish a new art museum – Minsheng Modern Art Museum. And even though it is a bank, Minsheng is planning art forums, which would include educational and cultural programs. The bank is even planning to set up individual funds to support Chinese artists.
 Minsheng is not the first to set up an art fund. Insiders generally agree that Hua Yuzhou, board chairman of Hua Culture Co. Ltd. in Shanghai, is one of the earliest operators in Chinese art collections. Three years ago Hua Culture was entrusted by a Hong Kong private art fund with operations in art collections and investment for the fund, operating an annual 20 to 100 million renminbi, or about $3 million to $15 million. Hua Culture promised an annual return of 15 percent.
Two years ago Hua Culture also acquired the right to operate the Chinese Art Foundation, a non-profit state fund which began in 2006 to give part of its fund (an annual 30 to 50 million RMB yuan) to Hua Culture for operations in collecting in the hope of keeping quality Chinese painting works from flowing to other countries.
Asked why Hua Culture could become operators of some of the earliest art funds in China, Hua Yuzhou believed it came out of their understanding and love of art. “For both Chinese Art Foundation and that Hong Kong private art fund, we keep to a guideline that we should collect on the basis of our research into the developing course of Chinese art, and all our collected works are Chinese oil paintings. Besides our confidence in the future prospect of this market, for one thing, we believe Chinese oil paintings can highly distill and integrate the essence of our national culture; for the other, we can help to keep the works of quality artists in our country, and it turns out to be a remedy for the deficiency in the work of current Chinese art museums.”
Even before 2005 art funds became a major force in world art market, yet no one had expected the art fund fever would develop so quickly in Chinese  art market. But some experts say that many consumers, after buying houses, stocks and cars are looking for other investments. And one of the options has been turning to art funds.
Xie Bing, general producer of “Investment and Collection” on InforNews Channel of Phoenix TV, is an accomplished expert in art investment and collection circles. He believes the emergence of art funds is closely related to the general environment of art market. “The background of the art fund fever: firstly, Chinese economic growth is on a fast lane; secondly, the value of RMB has been rising against the US dollar; thirdly, the Chinese yuan will eventually become a free convertible currency. All these factors are sure to encourage Chinese cultural market to improve.”
Li Huafang, a researcher at Shanghai Finance and Law Research Institute, has done some research on the Chinese art market. He believes that, like stock and real estate market fevers, the thriving art market came equally as a result of the surplus capital funds. So long as there is such a basis and there is high expectation of RMB’s appreciations, the Chinese art market will constantly seek breakthroughs. As Li told a reporter, “There is larger space for art works to rise in values, but there is equally a higher threshold and not all people who have money could meddle with it. Since you have no idea of art or no energy to play with it, but you don’t want to miss this wave of art bull market, you’d better entrust your money to professional institutions.”
 Li believes that, like many Chinese stockholders becoming stock fund investors, many individual art investors will also end up art fund investors later. “Why would stockholders become fund investors? Some would because they have money but don’t know how to play with stocks, others may have experienced several waves of buy at stock rise and sell at stock fall and found they could never play even with institutions and then feel content to buying some fund to earn average returns from the bull market. Art investors should assess the space for value appreciation of collected works, should make investigations into the market fluctuations, and should even determine the truth of art works; all these jobs are very complicated, so why not entrust the money to art investment institutions?” In conclusion, Li believes the art market, like stock market, will also undergo a process in which numerous individual collectors turn into art fund investors. In the same way, like China’s stock market being boosted mostly by stock funds, art funds will surely drive art bull market to higher breakthroughs after they have grown bigger and stronger.
Xie Bing at Phoenix TV, believes the involvement of funds and institutions must bring about art market indexes, market transparency and professionals, and the strength of institutions in art market must overwhelm the individual investment actions in the future.
Like public or private offering funds in the stock market having to compare their net values and annual rates of return, the rate of return on investment  of art funds also remains a major indicator. According to our reporter’s investigation, the return on investment of art funds in recent two years could not compete with that of stock funds generally, but measured in a relatively longer time period, art funds perform no less well than stock funds, and in some years their returns far exceed those of stock funds.
Hua Culture Co. Ltd. had a sucessful Hong Kong private art fund. Hua Yuzhou said, “Though we promised an annual return of 15 percent to the fund, actually, the works we collected three years ago could now earn at least a 125 percent return after tax.”
While the financial product of “Sanda Art Investment” Zhou Yueping operated pursues a steady growth of returns. Zhou said, “The product we operate usually produces a return of from 8% to 20%. Investors have right to choose which art works to buy, and we promised them a bottom-line return of 8%. If investors believe the art works they invest in have a value-increase range lower than 8%, we can repurchase them at a price of 108%; if the art works they invest in have a value increase of over 20%, they will get the 20% return and we will get the extra return over that 20%. Of course, if investors believe the return has exceeded 20%, they can choose to take the art works back as his own collection.”
Both art funds and stock funds would pursue a return on investment, because profit-making effect will attract investors. Actually, operating techniques of art funds are also similar to those of stock funds: attending to fluctuations of the market and selling at higher price and buying at lower price, accumulating high potential stocks (such as those unpolished competent painters of great potentials), and highlighting the configuration of mainstream dominant portfolios (such as mainstreaml art market products), etc.
 Xie Bing also concludes that, since the Chinese art market resembles the early-stage Chinese stock market, there exists an equally a chaotic situation in art market, such as shady stock dealers and art fund scams. But eventually, he says, the market will improve and art works will appreciate in value.
Even though art funds have attracted unprecedented great attentions, experts and market professionals generally agree that Chinese art funds are still faced with numerous obstacles and bottlenecks, and they still have a long way to go.
Though Hua Yuzhou is one of the earliest art fund operators in China, he remains reserved as to the Chinese art fund fever. He admits, for example to having "no confidence” in the market. He believes art funds have actually posed an even higher threshold/obstacle than stock funds.
He said, “Art investment is not the same thing as securities, stock shares and other investments; art can be related to economy, but art is ultimately distinctive from economy. To invest in art you should acquire a clear goal – you must love art and have a full enthusiasm for art; an investor must have a clear guideline for his collections, and he must develop a very clear idea of the nature and development of art and a long-term framework for investment. On top of these, art funds must be a long-term enterprise, for art works cannot be equated with general commodities, and short-term operations are detrimental to the growth of art market and artists as well as against the law of art market itself.”
Another bank getting in on the art craze is the China Construction Bank, one of China's biggest banks. Hou Jianpei, vice-president of Zhejiang Provincial Branch of the China Construction Bank, said they founded a financial management center for art fortunes in May of 2007, providing VIP clients with art appraisal, art collection and other value-added services. Nowadays, he says, there is an increasingly large population of art collectors, who are also regarded as the target customers of banks, but when stepping in art market, banks must cope with credit risks: art has no price but art works are priced; then how to assess the value of art works objectively and set for them a generally agreed price, and how to determine the truth of art works would end  up keys to the emergence and resolution of credit risks. He said somebody once had attempted to use econometrics to calculate the value and risk of art works, but had failed because of the lack of “cash flow” with art works and collections.
Hou Jianpei at the China Construction Bank proposed a tentative plan from the perspective of lawfulness and the security of fund operations. He said the bank is researching art financing service products, trying cooperation with trust companies and art investment companies.
An official at the Zhengda Modern Art Museum, which was founded by Shanghai Zhengda Group, says, “We’re starting an art fund and we’re devoted to a special non-profit art fund to nurture artists and collect art works by way of operating our fund of funds. It is long-term and is set up to support the development of art”. Experts generally agreed that, in developing art funds in China, public-interested funds, particularly those that promote the development of art, should be vigorously encouraged.
Tranlated: Hu Zhu 
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