China is now the world’s largest art market. Yet, despite rules that full payment must be received within six months, many large bids made in China’s art auction houses last year remained unpaid when this time limit expired. The Telegraph reports:

The survey of last year’s autumn sales from 250 Chinese auction houses found that two fifths of sales above 10m yuan (approximately £1m) had not been fully paid by April this year, according to Ou Shuying, the Association’s deputy general-secretary […]

In some cases dealers found themselves locked in a chain as they ‘shuffled’ their collections, with collectors awaiting payment on an item they had sold in order to generate sufficient cash to pay for the new item on which they had already bid.

In others, dealers bid wildly to increase prices and stoke general sentiment, or owners attempt to bid up their own items only to find left themselves ‘holding the baby’, while in a last category dealers ‘purchased’ objects speculatively, hoping to find buyers after the event.

While many bidders are defaulting on their payments, there is no policy that forces the bidders to pay, and auction houses also do not take responsibility for the payments. The Daily Beast adds:

“The art market has changed,” Coulson says. “It has gone from professionals only to a kind of luxury retailing where you have no idea who you are dealing with.” Coulson also points to a flaw in auction procedure that lets truant buyers off the hook: houses do not have to honor most defaulted bids. That’s a major liability for sellers, since antiquities returned by auctioneers for nonpayment can generally only be sold again in private deals at deep discounts. But there’s little incentive to change the policy, since the bulk of middlemen commissions—up to 25 percent of prices—come from buyers, whom auction houses are keen to keep happy.

“For a seller, the worst is to be in doubt whether the work is actually sold or not,” says Jean Marc Decrop, a prominent dealer specializing in Asian contemporary art. Last year, Decrop found himself in that exact position, wondering if he’d ever see the money for a Chinese painting that went under the hammer in Hong Kong. (He finally did get paid, after four agonizing months.) Decrop notes that during the peak of the credit crunch, one U.S. buyer developed a cash-flow problem, but in that case—unlike with the Chinese purchaser—the American was open about it and arranged to pay via an installment plan.

There have been calls for increased regulation of auction houses because in some cases they are used to push bribes or export Chinese artworks. NPR reports on the various forms of fraud that plague the Chinese art market:

Sometimes auctions are used to pass bribes. For example, the buyer overbids for something mediocre — or even fake — and so passes money legally to the seller. Many auction houses turn a blind eye, since the higher the price, the higher their commission […]

Such late payment or even non-payment is a sign that dodgy auction practices are being exported, as Chinese funds swell overseas art markets. In China, non-payment for winning bids is very common indeed, precipitating moves by Chinese auction houses to require potential bidders to put down deposits […]

Many are now arguing for reform of China’s auction law. One major issue is that Chinese auction houses are not responsible for the authenticity of the goods they sell, as long as they issue a disclaimer. But the problem is that the fakery is endemic. In all too many cases, the art is fake, the bids are rigged, the experts are crooked, and the bills are never settled. It’s difficult to know what is real, aside from the corruption.

See also China’s New Cultural Revolution: A surge in art collecting and Chinese Art Price Show signs of Stabilizing, via CDT.