As art bonanza hits Hong Kong, China's capital controls loom large

HONG KONG (Reuters) - As visitors sip champagne at Hong Kong’s Art Basel event this week and take selfies with replicas of deceased leaders Fidel Castro and Mao Zedong, a more urgent issue is rumbling through dealers exhibiting – how big an impact China’s capital controls will be in the coming year.

Over the past six months, Chinese buyers have faced larger constraints to get money out of the country, as the government increases scrutiny on capital outflows and steps up measures to bolster its yuan currency.

Typically, Chinese collectors had circumvented restrictions by using methods including underground banking but galleries attending Art Basel and Hong Kong’s Art Central exhibitions said getting money out of the mainland had become much harder.

Hong Kong-born Pearl Lam, who runs her own contemporary art galleries around Asia, said China’s capital controls had prompted many galleries to allow customers to pay in installments but the repayment periods had sometimes been stretched to up to three years with others not able to pay at all.

“A lot of us have got into problems because somewhere in the middle they cannot pay. So the problem is after you take a certain percentage and then they cannot follow up. What do you do? You cannot sell the painting,” Lam told Reuters in an interview.

Chinese buyers have been a huge boon to the global art market despite slowing sales in 2016, accounting for 20 percent of global sales by value according to an Art Basel Market report released on Wednesday. The global art market achieved total sales of $56.6 billion in 2016.

Buying through private dealers rather than via auction houses has also been increasingly common but non-payment and late payment remain crucial issues in the Chinese market, the report said, citing an average of 40 percent of dealers forced to accept payment terms beyond two months.

Hong Kong is a key center for art transactions due to the absence of tax and an independent currency which is pegged to the U.S. dollar. However the number of mainland buyers attending the fairs this week in China’s special administrative region was notably less, dealers observed.

Often wealthy Chinese customers have assets outside China which they can use to pay for the artwork but China’s restrictions on capital have become more blatant over the past few months, said Charles Fong, a gallery manager at Parkview Art Hong Kong.

“We can feel it. It has become tighter and more and more people have started asking to pay in installments.”

Fong said around 20 percent of their customers paid in installments and gave the example of one customer who bought a HK$1.2 million ($154,500) painting recently but split the installments over six months.

A Chinese art trader based in Hong Kong said last March a buyer bought 20 items worth HK$100 million ($12.88 million) but still had not completed payment a year later, stating it was difficult to send the money out of the mainland. The trader could not be named due to company policy.

At Art Basel on Friday, mainland tour groups, students and international visitors crowded around the art installations.

A suited Chinese man who gave his name as Wu said there were always ways to get money out of China, but acknowledged it was harder for big-ticket items.

“For small amounts its not a problem. If it’s a lot, you just need to do individual payments, for example every month or year.”

For mainland-based galleries which accept yuan, like Pékin Fine Arts, capital controls were a non-issue, said founder Meg Maggio.

Maggio, who has been in China for more than 30 years, said the mushrooming of galleries and the strength of consecutive art fairs showed the scene was booming.

“It’s a win-win, plus-plus situation.”

($1 = 7.7665 Hong Kong dollars)

Reporting by Farah Master and Venus Wu; Editing by James Pomfret