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

Farah Master and Venus Wu

HONG KONG, March 24 (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 centre 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)