University of Amsterdam

Master Thesis
Empirical Analysis
of the Forming of Art Bubbles in China

Xingkui Wei

6262252

Amsterdam, 14 July 2011

dr.D.A.Salzman
Faculty of Economics and Business
University of Amsterdam

Master Thesis

Xingkui Wei 6262252

TABLE OF CONTENTS

SUMMARY .....................................................................................................................................3
1 INTRODUCTION........................................................................................................................4
2 LITERATURE REVIEW............................................................................................................6
The concept of bubble economy.............................................................................................6
The test models of bubble .......................................................................................................6
The studies on art market.......................................................................................................8
3 RESEARCH DESIGN AND METHOD...................................................................................10
Data collection .......................................................................................................................10
Research setting.....................................................................................................................10
Data analysis..........................................................................................................................12
Limitations.............................................................................................................................13
4 THEORETICAL FRAMEWORKS AND RESEARCH BACKGROUND...........................14
Asset bubble and bubble asset .............................................................................................14
Economic bubble and bubble economy...............................................................................15
Changing rules of asset bubble ............................................................................................15
Research background ...........................................................................................................16
Japan bubble economy .........................................................................................................17
5 THE APPLICATION OF MODELS AND FINDINGS ..........................................................20
The chose of influencing factors...........................................................................................20
The analysis of influencing factors and findings ................................................................21
The research of art bubbles and findings............................................................................27
6 GLOBAL ART INVESTMENT FUNDS..................................................................................31
The risks of art investment...................................................................................................31
The normal ways to mitigate risks.......................................................................................32
International art funds cases................................................................................................33
7 DISCUSSION AND CONCLUSION........................................................................................37
8 BIBLOGRAPHY........................................................................................................................39
9 REFERENCE.............................................................................................................................42
10 APPENDIXES ..........................................................................................................................44

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SUMMARY

The uprising of Chinese art auction market in latest years draws the attention of all kinds of
investors. One of the intense questions that make the investors as well as government worry about
is the reason of the forming of art bubbles in china, which influences the trends of the prices of
artworks and the risk of investment. I attempted to solve this problem by applying the bubble
economic model in the studying of the forming mechanism of art bubbles in china. I do hope to
bring some understanding of the definition of bubble economics on the view of art and try to
explain explicitly the elements to formation of the bubbles. I find that the market situation and
economic background have a deep influence on the prices of artworks. No matter in china or in
Japan, the economic bubbles were forming with the up surging of inflation rate, the booming of
real estate market and the appreciation of domestic currency. I made a regression model to find out
the main reasons for the rise of art prices, and I found that the wealth asset, transaction sum in art
auction market and CPI impact mostly on the prices of art works. And I found that the art bubble
in Chinese mainland market is not that significant, while it is very outstanding in the Hong Kong
area.

Key words: art bubble, bubble economic model, financial crisis, intrinsic value, art investment
funds, risk management

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1 INTRODUCTION
Financial crisis damped down the enthusiasm of investment in stock market and manufacturing
industry, severe real regulation on estate market makes investors in china step back. However, a
big trend of investment in art has showed up since 2008 with four Chinese modern paintings
which are more than one hundred million RMB respectively in the auction market. Financial
institutions, syndicates, as well as individual investors such as coal bosses show high positiveness
in all kinds of art auctions which is contrast to the intense financial budget under financial crisis.
Lately, there was about 100 billion RMB hot money flow into Chinese art market, which came
from Wenzhou syndicate in china. Every auction could gain more than hundred million or even
billions RMB, and 50 to 80 percent of them are venture capital (Wu, D, 2010).
This phenomenon was discussed by so many economists as a bubble economy. Indeed, as Jing,Z
(2007) , who is the deputy secretary general of Chinese collector association , says, the average
return on investment in financial securities is 15%, in real estate is 21%, but in art market, it is
outstandingly 30%. In history, china has had three times of collecting booms, which were during
the late Northern Song Dynasty, Tang Dynasty, and the late Qing Dynasty1, the art bubble now in
china is regarded as the fourth collecting booms with its outstanding feature that the over 90
million of collectors cover all kinds of occupations, religions, ages and so on. (Jing, Z, 2007).
Such large scale of market makes the price of Chinese artworks raise substantially. According to
AAMI (Atron Art Market Index), in 2010 the 100 index of tradition Chinese painting, oil painting,
modern painting, and contemporary painting has raised by 40% in one decade. When the price is
greatly diverging from the intrinsic value we call it economic bubble. As some economists
observed, the high price and high volume has formed art bubble in china. Just as Vikram
Mansharamani (2011) reported in his article The Next Art Bubble: a delicate pear-shaped
Chinese vase was the star of the week, skyrocketing past its pre-sale estimate of $800 to $1,200 to
sell for more than $18 millionIt reflects a national overconfidence that has been a consistent
ingredient in financial bubbles. Certainly, there was a bubble and everybody thought it might
take a couple more years for it to burst, but the crisis brought it on, so there's going to be a big
shake-up in the industry, Brian Wallace (2011), director of Red Gate2, said.
Most of Them think its because the slump of stock market and real estate market drives the hot
money to the art market. So why is the art bubble forming during the financial crisis, whats form
the intrinsic value of artworks, and if it is really a bubble economy, what can we do to control the
investment risk .In this thesis, I will analyze the reason of art bubble in china according to the
bubble economy theory and empirical research. Especially, I will compare the situation of china
on nowadays with the situation of Japan during 1985-1990, and then use real data to find out the
main elements of bubble economy which generated the art bubble in china. On the other hand, I

1
The Northern Song Dynasty started from 960 to 1127, the Tang Dynasty was from 618 to 907, and the Qing
Dynasty was from 1644 to 1911.
2
Red Gate Gallery is an international artists residency program providing artists, curators, writers, and academics
with the opportunity to live and create work in China.

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will summarize the global art investment funds to figure out the risk control method by investment
funds. Such a study should give insight into the practical investing environment in art market in
china, and give a guideline of investing ways; also, the study will provide some methods of risk
management in art market.
The paper is organized as follows: First, I discuss the conceptual framework of bubble economy,
including asset bubble and bubble economy, especially in the scope of art. Then I explain the
situation of Chinas art auction market at present and compare it to the Japans before the burst of
economic bubble. Next, based on the study of the condition of chinas art market, I can present the
reasons to the forming of art bubbles in china. Afterwards, I present the research methodology and
the real data that I employed to study the main factors of the forming of art bubbles as well as the
existence of art bubbles. Finally, I will introduce some cases of the art investment funds in Europe,
American as well as Asia to provide a reference to the creation of art investment funds in china.

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2 LITERATURE REVIEW
In this section, I will review the literatures about the concept of bubble economy, the existing
methodology for the study of bubble economy, and the study on the art market.

The concept of bubble economy

Bubble is the most fundamental concept in the study of bubble economy, but theres no
acknowledged one up to now. There are some of the representativeness concepts as bellow:
Charles P.Kindleberger (1978, p. 16) defined a bubble as "an upward price movement over an
extended range and then implodes" and this definition is neutral. According to Kindleberger,
bubble is a process from generating to burst. It is overvalued investments that impel the forming of
bubble. Yoshio Suzuki (1998), a Japanese scholar thought that the bubble in economics is the
prices of land or goods rise or fall dramatically without any fundamental conditions. From the
view of Suzuki, bubble is relative to the condition of fundamental economy, what we need to think
clearly are what is and how to confirm the condition of fundamental economy. The basic idea of
Burmeister, Flood, and Garber (1983) is that a bubble is an extra component that arises in addition
to the component that reflects market fundamentals, which means the bubble components are
not easy to burst. Diba and Grossman (1988) described rational bubble as the price that apart from
the intrinsic value, it is nonnegative and Continuous expansion. Garber (2000, p. 4) defines a
bubble as the part of the price movement that cannot be explained by fundamentals. A definition of
bubble described by Chinese scholar Y, Dai (2001) is bubble is an economic phenomenon, namely
in a continuous process, the prices of an asset or a group of asset raise sharply, which induce the
investors to make a prediction of the further rise of prices, thus attract new investors. Their
purpose of trading is gaining profit through transaction, instead of using it. According to this
definition, investors should be speculators. Another definition is offered by Barlevy (2007) who
describes a bubble as a situation where an assets price exceeds the fundamental value of the
asset. Economist and Princeton professor Brunnermeier(2009) describes that bubbles refer to
asset prices that exceed an assets fundamental value because current owners believe that they can
resell the asset at an even higher price in the future. He further states that bubbles are typically
associated with dramatic asset price increases followed by a collapse.

The test models of bubble

Variance bounds tests
Shiller (1979) and LeRoy & Porter (1981) created the earliest econometric model for the detection
of bubble. The creation and use of this model was based on the present value model of stock prices,
i.e. stock prices should equal the value of expected dividends. As a matter of fact, variance bounds
test were not originally designed to test the economic bubble but rather to test the efficient market

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hypothesis and the present value model. Blanchard & Watson were the first researcher who
indicated that it could be used for the purpose of bubble identification. To explain the general idea
of variance bounds tests, I provide Shillers (1981) newer variance bounds test model as a
example. Shiller examined if the variance of dividends can explain the variance of stock market
prices by comparing the variance of the market price with the variance of the ex post rational price.
According to Shiller, the actual stock prices reflect the value of the estimated future dividends
applying the efficient market model. However, if the variance of the actual stock market prices is
more volatile comparing to the variance of the ex post rational price, the variance
bound is violated.
Dida & Grossmans (1988) Bubble Test
The test model examines the dividends and stock prices by analyzing the stationary features of the
stock prices and their fundamentals. The bubble test model consists of the dividend payments, the
current stock price, the present value of next periods expected stock price, and an unobservable
variable. In the empirical testing of Diba and Crossman, they applied the dataset published by
Kleidon (1980) to analyze the autocorrelation model. It was suggested in the test that explosive
rational bubble do not exist in stock prices. However, Grkaynak (2008) pointed out that there
were some problems in the econometric analysis of stationary propertieswhich would result in
contradicting results. Furthermore, he argued about the assumption of stationary of the
unobservable variable, as it may not hold under certain circumstances. In addition, Evans(1991)
disagree with the conclusion of Diba and Grossman that explosive rational bubble do not exist in
stock prices. He thought that bubbles might pop up, collapse and restart (periodically collapsing
bubbles). Because the tests model that used by Diba and Grossman can only be successfully
applied when bubbles last for most of the period observed, thus these tests are not appropriate in
testing the periodically collapsing bubbles. As the test bases on the stationary properties of the
stock prices and the dividends, it needs to be applied over a long period of time.
Froot & obstfelds (1991) bubble test
Whats new in Froot and Obstfelds study is that they make a distinction between rational bubbles
and intrinsic bubbles. The intrinsic bubbles follow endogenous economic factors, while rational
bubble was caused by extraneous economic factors. In their analysis, a model based on
endogenous economic factors can better explain the fluctuation of stock prices. The main idea of
their model is the assumption of a nonlinear relationship between fundamentals and stock prices.
Changes of fundamentals and a non-stationary price/dividend ratio would lead to the overreaction
in stock prices. In the empirical testing, they used Standard and Poors stock price and dividend
indexes from the security price index record over the period 1900-1988. They proved that there is
an overreaction in stock prices from changes in dividends, moreover, they explain in their model
that why the stock prices fluctuate so much and not declined along with the decrease of the
volatility of dividend.
Ges model
The econometric model which I used to analyze the impacted factors of the art bubble in china and

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the testing model for the level of bubble will be guided most generally by the research of bubble
economic theory and model by Ge Xinquan in 2005.The research focuses on the intrinsic
mechanism of bubble economy, and the model of bubble economy including CAPM, Fama and
French Model, stock pricing model, inspection, judgment and control methods. As his study
covered the empirical research on the shanghai stock exchange market, as well as Japan and
American stock markets, thus the instruction function of this book is very considerable. I will use
the theoretical and practical methods as a core model for my research.

The studies on art market

The article Vested interest and biased price estimates: evidence from an auction market by
Jianping Mei and Michael A. Moses indicates a relationship between auctioneer presale price
estimates and the long-term performance of artworks. They investigated the art auctions and
collected data over 5,500 pairs of transactions between 1875 and 2002, employing two
asset-pricing models to control for the difference in risks of artworks when measuring abnormal
returns. As a result they found that high estimates at the time of purchase are combined with
adverse abnormal returns. This article gives me an important thought of the impacting factors for
the art bubble in china, and also provides me a reference for the calculation of abnormal return.
The reference of my research also includes another article by Jianping Mei and Michael Moses,
which is Art as an investment and the underperformance of masterpieces. In this article, they
construct a data set of repeated sales of artworks and estimate an annual index of art prices during
1875-2000 in order to prove that the masterpieces are underperformance in the art market. The
new thought of them is the price growth index is based on the repeated sales of artworks thus they
can get a real growth rate of the transaction price. The evidence of underperformance of
masterpieces is also achieved by the repeated sales regression. In My testing model for the level of
art bubble in china, I would like to consider the underperformance of masterpiece in Chinese
auction market.
As my study would refer to the Japan bubble economy to analyze the forming of art bubble in
china, I acquire some of ideas from the article How did Japanese investments influence
international art prices, which was conducted by Takato Hiraki et al. They found that there are
some relationship among the art, Japanese land, Japanese and U.S. stock market. Although the
impact of land prices on art prices didnt show up before the burst of bubbles, it did emerge after
the burst of bubbles as the decreasing land prices in Japan urged some Japanese investors to sell
their holdings of arts at a considerable bargain. Their data handling methods give me an example
for the analysis of the relationship between the house as well as stock prices and the artworks
prices in china.
With the purpose of compare the situation of china with that of Japans during the bubble economy,
I get a keen cognition of Japanese economy by the book The Bubble Economy: Japan's
Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s from Christopher
Wood. In his book he presented the sources of bubbles in Japan from different aspects of financial
institutes such as banks, life insurance companies, securities companies, and brokers and so on. In

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his narrative, the scandals existed in all kinds of fields and ways, bureaucrats and politicians are
the manipulators of this game. This book also reveals how Japan was spending the first half of the
1990s paying off these excesses by different departments which threatened the world's economies.
It also questions many of the myths which were built up around Japanese management, indicating
the incompetence of managers who didnt think for the possibility before they invested.
As for the data I employed to build the bubble economic model, they are mostly come from the
Chinese art auction market survey reports by Artron art market monitoring center which is an
authoritative website for investors in art around the world. These reports contain the introduction
of art markets situation nowadays, the transaction volume, the price index of several kinds of
artworks, the performances of several auctions in different districts in china, and the statistics of
some hot artists total artworks in trading and the total transaction volume. According to the report,
the categories of artworks can be divided as Chinese painting and calligraphy, oil painting and
contemporary art, porcelain and other art ware. The price index includes oil painting 100 Index,
Chinese painting 400 Index, contemporary art 18 Index, realistic painting Index and so on. With
these data, I can fulfill my bubble economic model.
Apart from the methodology and data reference, I also conduct my research depending on some
updating articles online or on newspapers, for example, the article Chinese art market: an
investing opportunity of high rate of return(2009) gives me a good view of the latest situation of
the art market in China. The author interprets an uprising but still underestimated market,
including the talents of Chinese artists, the trends of home decoration art, the high return of
Chinese oil painting as well as the low return of masterpieces. The article from the art newspaper
Art reversion under financial crisis2009
focuses on the boom of Chinese contemporary
paintings after the financial crisis, and compares it to the fluctuation situation of art market of
Japan and America after the financial crisis. At the same time the author give an idea about the art
bubble will burst in a short time because of the replicability of contemporary paintings. In a
lecture from the vice secretary general of China collector association, Jing zhizhong, he mentioned
the return rate of art market in china which is far more higher than the stock and real estate market,
at the same time , he talked about the feature of this collecting boom, which gives me an
authoritative data and outlook. Tao,Y(2010) specified the art investment fund around the world,
giving me a fundamental knowledge of art investment fund.

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3 RESEARCH DESIGN AND METHOD

Data collection
The previous section reveals the theoretical frameworks of bubble economy, the tests models as
well as the present studies on art market. But they did not explain why the bubbles form in the
financial crisis time, why the Chinese art auction market upraises suddenly in these years, and if
there are high risk in art market. By extensively studying the data in Chinese art market, I applied
a theoretical model to specify the reasons for the existing of bubbles. In my pursuit of answering
the questions I mentioned above, I observe the transaction records in a great deal of auction
markets in china. There are around 100 sample institutions used by Artron art center to collect
trading data and analyze the current situation of art market. They can be divided as five different
districts, Beijing district, Yangtze River delta district, Hong Kong, Macao and Taiwan district,
Pearl River Delta district, other district in china, and other district abroad. By dividing those
districts, I can easily get the shares of different area, thus learn the development situations of them.
The reason why I chose Artron art centers quarterly reports as my resource of data is because it is
the most complete and widely used data flat around the world. It collected the transaction records
which are relative to Chinese artworks from 212 auction companies across the world in 15 years.
There were around 4000 special auctions and more than 1.3 million image-text data in the data
base; moreover, it increases with 700 special auctions and 250,000 lots every year. In addition,
artron art center put more information about the worldwide auctions of Chinese artworks from
1970 in the data base to make it more complete. On the other hand, it updates 60,000 Chinese
artists detailed information everyday, as well as 1000 galleries and 600 art institutions yearly
exhibitions. With these data, Artron art center continue to do a deep analysis of the art auction
market in china, which starts with the Artron Art Market Index since 2004. They hope the index
could be used to analyze, statistic and predict the market, but not just store the transaction
information. In their research at present, there is more data analysis and prediction, but less
investing, financial, assessing and insurance advises, thus thats an aspect that Im going to add in
my research.

Research setting
This thesis is going to specify the following objectives:
First, the real reasons for the forming of art bubble in china. As most of the economists say, the
real reason is the slump of stock market and real estate market drive the hot money of those
venture investors to the art market to capture more profits and at the same time diversify the
investment portfolio to avoid too much risk. On the other hand, even under financial crisis, the
economic of china is still showing promising prospects, thus the GDP growth may impact the

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price of artworks. As the average wage growth in 2009 which was released by Chinese
government was 12%, will the growth of income be the reason of art bubble? If it isnt, dose the
increase of plutocrats income compose the reason of art bubble in china. In addition, Mei jianping,
who is one of the founders of Mei Moses Art Index, considered that the value of artwork is
affected by the artistic style, the fame of artists, and the quality of artworks. The preference of
certain kind of artworks around the world in different times may drive the price of artworks run up.
David Eubank (2011) posted in his article about Chinese art like this: The contemporary art being
produced by a wide variety of artists throughout China is fresh and exciting and the work by many
leaders in this new art movement is powerful and important. In one of Mei and Moses study,
they showed an opinion about the auctioneer estimates would be unbiased thus influence the price
of artworks. There are more factors for the forming of art bubble in china as the particularity of
Chinese market.
The second objective is to find out the core reasons for the forming of art bubble. On the basis of
all of the factors of art bubble mentioned above, I will use econometric model to find out three to
five core reasons, at the same time, compare them with the reasons for the Japans bubble
economy. With these elements I can try to predict the future trend of art market in china, and
analyze if it is a healthy market.
Thirdly, test the art market in china and measure if it is a real bubble. some of the economists say
that since the intrinsic values of Chinese artworks are much more higher than the values that have
been recognized by the collectors around the world, so the dramatically raise of price is a good
thing as the value of Chinese culture is finally appreciated by collectors. This is one of the points
that they use to against the view of art bubble. Its true that some of Chinese paintings are
undervalued in the world wide markets, however, there are still a lot of contemporary and modern
artworks are overvalued in the auction market as some experts can see. Thus the research of art
bubble in china can give investors a guide on art investment, and is good for the rational biding in
the auction.
Last but not the least, give an overview of global art investment funds. Even when we are living in
the bubble economy, we cant tell how and when the bubble will burst. Burst of bubble will incur
serious financial problem and lead to devaluation of asset thus result in recession in this industry
and even other industries. With this concern, the existence of art investment fund is aiming to
diversify the portfolio and increase the investment return of investors. How do the investments
funds operate in different countries, if they really realize what they promise to their clients or not,
what can we do to develop the art funds market in china? However, as we all know, capital
operation would quicken the forming and expansion of bubbles, so I would like to know if the
disadvantages of funds already outweigh the advantage of it. As we can see, after the burst of
Japans bubble economy, Japan went through a long period of downturn. Thus it can be seen, the
appropriate regulation and development of Chinese art investment funds is very important for the
stable and sound development of chinas art market.

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Data analysis
To achieve all of the objectives mentioned above, there are some approaches which explicitly
explain the works that will be done during my research.
To start with, I need the data of the capital flows of the art market during 2008 to 2010, which
come from the volume of transaction collected by Artron art market monitoring center. Also, I will
conduct the research with the GDP and wage statistic released by the National Bureau of Statistics
of China. Apart from this, the price growth rates of all kind of artworks could be acquired from the
Chinese art auction market survey report.
After all of the data are prepared, I can start to build the econometric model which refers to the
bubble economic model y=b0 + b1x1 + b2x2 + + bnxn. With this model, I will substitute those
data to do regression analysis and obtain the value of every b, deciding which reasons are the core
factors for the art bubble in china.
With these factors, I can continue to test if theres real bubble in the art market. As the art pricing
model is still under studying by some economists, such as Mei, J. and M. Moses, my research is
not that realistic to carry out by the art pricing model. Therefore, I would test the bubble by index
method such as income ration or growth ration. Moreover, I would use the bubble testing model

j j

Sxj
, in which j is the Standardized coefficient of the value of j in the
Sy

regression, j is the unstandardized coefficient, and Sxj and Sy are the expected standard
deviation of explanatory variable and explained variable respectively. If the value of

j decrease while the volume of variables increase, the relationship between explanatory
variable and explained variable is negative or it is not that significant, thus if the Sxj is the
standard deviation of wealth or the income of main investors in china, then the probability of
bubbles is exists. To measure the real growth rate of bubbles, I can apply the regression model to
get the equilibrium price of artworks and then compare it with the real price of artworks in the art
market, so that to get the bubbles value and its growth rate.
The last objective is to specify some cases of the global art investment funds and the lessons that I
can get from the real practice of these investment funds. As there werent substantial experiences
of the Chinese art investment funds, I will consult the practice of Japan and some western
countries as they have more successful precedents. However, Chinese market is more special in
this situation, such as the high speed of economic development, the very large Gini Coefficient,
the social formation, and political system, so I will consider the appropriate advises for the
improvement of chinas art investment funds.
After explaining all the methods I would use to pursuit my goal, I would like to talk about the
analysis of data.
In fact, analyzing data is the core procedure of extracting the creative insights from a lot of data
collection and models building. By analyzing data, I would get an empirical result from a

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theoretical way, through which I can examine the practical abilities of theories; moreover, I can get
a new idea from the existing knowledge. However, analyzing data is also the most difficult and
the least codified part of the process (Eisenhardt, 1989). In order to find out the reasons of the
forming of bubbles in Chinese art market, I would have to constructed the development history of
Chinese art auction market by documenting all of the data chronologically, including the trading
volumes every year, the Chinese GDP, the wealth of plutocrats, the prices of different styles of
painting, and the estimate of auctioneers. Additionally, I will make tables to facilitate the further
analysis of the elements that will influence the development of art market in china. I start my
analysis by studying the activities that contribute to the forming of art bubbles, such as all the data
that I mentioned above. Especially, I would consider about how all the changes of each kind of
data every year would carry out the development. After these analyses, my attention then turns to
the core reasons to the forming of bubbles in art market. Whats the importance of specifying the
core factors of the forming of bubbles is the magnitude of their coefficient. The risk of
investment in Chinese art could be identified by these core reasons, as if the quality of the
artworks is not the main element that contribute to the raise of prices, the collection of Chinese
artworks would be involved in a lot of risk. Even though there are definite factors of development,
most of the people are not sure that if bubbles are really existing in Chinese art market or not.
Thus I would introduce the testing model into my research. The testing methods include index
methods as well as calculation of Standardized coefficient of the value of coefficient from the
regression. According to the index method, I can measure the growth rate of every data, but as
theres no precise standard lines for the confirmation of bubbles, so it is hard for me to say that it
is bubble or not. Standardized coefficient could be better used in the testing procedure as it is easy
to make a conclusion.

Limitations
Even though the data base I used is considered as widely used and most complete data pool, there
are a lot of limitations of this study that I acknowledge. As the quarterly reports that I applied for
my study are started from 2008, at the same time, they just come from one art center, thus it is
often criticized as suffering from limited generalizability. My study has tried to compensate this by
enrich the background information of the present situation of Chinese art market. Moreover, the
existing theoretical criteria and the theoretical models are use for the empirical research in my
research, thus the new findings should be used to improve the existing bubble economic models.

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4 THEORETICAL FRAMEWORKS AND

RESEARCH BACKGROUND
In this section, I first present the theoretical frameworks of bubble economy including asset bubble
and bubble asset, economic bubbles and bubble economy, the changing rules of asset bubble.
Afterwards I discuss about the research background, i.e. the development situation of art auction
market in china nowadays.

Asset bubble and bubble asset

According to the existing literatures about the bubble economy, asset bubble is the fundamental of
bubble economy. Bubble is the part of price that exceeds the intrinsic value of an asset, which is
driven by the speculative expectancy. With the accelerating of speculative expectancy, the price
keep rising, thus the asset bubble changes from quantitatively to qualitatively, and then it will
become bubble asset. If the price of the asset still keeps going, the bubble will burst because of the
sudden reverse of expectation. To specify the nature of bubble, I have to indicate the following
points. First of all, as the asset would create bubbles, it means that the asset is not a normal asset,
but the rare asset that the owner thinks it will appreciate. Secondly, considering about the existing
study on bubble asset, people buying and holding a certain asset is not going to use it, but rather
gaining profits from the trading in market, which is a kind of speculation. Thirdly, the reason of
why the bubble is so difficult to test is because the intrinsic value of the asset is not easy to know,
we can only get it from building the asset pricing model with some relative information. Fourthly,
when the market price is higher than the intrinsic value, the bubble is positive bubble; otherwise, it
would be negative bubble. Some researcher said the positive bubble and negative bubble exist,
while some said only positive bubble exists. According to Ge, X (2005), it could be considered
that we can gain excess earnings from speculation when we have a good expectation for the
market. But when the expectation is bad, speculation could help us cut loss. So positive bubble
and negative bubble exist at the same time. Finally, there are some questions about whether the
bubble will finally burst or not, and if we can control the bubbles. A lot of researches indicate that
the economic bubble has a very small probability to burst, only if the growth of price surpasses the
endurance of capital market. However, if we notice it earlier and use the proper way to control it,
the burst of bubble would be prevented. The key of controlling the economic bubble is to precisely
estimate the marginal value of when the asset bubble turns into bubble asset. If we can take
measures to prevent the burst of bubbles before it reaches marginal value, it is optimistic that the
burst of bubbles can be avoided. Asset bubble has some advantages such as it can make the market
more vigorous, but bubble asset is harmful as it already exceeds the marginal value of controllable
bubbles.

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Economic bubble and bubble economy

As for the economic bubble, when the asset bubble exists in the market, we call it economic
bubble. Whatever it is asset bubble or the bubble in the bubble asset, it is economic bubble, as it is
generated by the speculative expectation. On the other hand, bubbles in the capital market as well
as the bubbles in economic system are all economic bubble. How to test economic bubble? Ge,X
(2005) wrote that we can treat economic system as a big asset market considering there are
countless assets in the economic system. Moreover, we can also use a real market to study the
influence of bubbles on economic system. In my study I will use the second way to combine the
asset market and economic system, build the artworks asset pricing model from the microscopic
view, and build the asset bubble economic model from the macroscopic view. Just as the bubble
asset, when one of the asset market shows bubbles, and the price keeps ascending with the
continuously speculative expectations, economic bubble would turn into bubble economy.
Afterwards, when the expansion of bubbles surpasses the endurance of economic system, it would
burst because of the reverse of expectations. If we can judge the marginal value of when the
economic bubble turns into bubble economy in time, we could prevent the expansion and even the
burst. Bubble economy is very harmful, however, as for economic bubble, if we can predict and
control it, it is not appropriate to say its harmful, neither beneficial.

Changing rules of asset bubble

The transformational procedures of bubbles from quantitatively to qualitatively can be
differentiated as bubble appearing, bubble expansion, and bubble burst. As for asset market, it
reflects the processes from sub-bubble to asset bubble, and then from asset bubble to bubble asset,
finally, from bubble asset to bubble burst. Sub-bubble can be defined as the normal phenomenon
of price deviation from real value, which is not caused by the speculative expectation. Therefore,
we can make a conclusion that speculative expectation doesnt exist in the begin, however, with
the growing of speculative expectation, the price of asset change from quantitatively to
qualitatively, i.e. from sub-bubble to asset bubble, from asset bubble to bubble asset, and then
bubble burst. Thus in the research, I need to grasp three important points. First, two moments, i.e.
the moment of the showing up of sub-bubble, and the moment of bubble burst. Second, three
qualitatively transformational processes, they are the process of sub-bubble growth, the process of
the asset bubble expansion, the process of the accelerating expansion of bubble asset. Last but not
the least, three marginal values of quantitatively transformation. One is from sub-bubble to asset
bubble, another one is from asset bubble to bubble asset, and the third one is from bubble asset to
bubble burst. We should keep this in mind that the bubble burst in one of the asset market may
give rise to economic bubble or bubble economy, i.e. the bubbles in asset market will influence a
part of or the whole economic system. The synthetical impacts on the whole economic system by
all kinds of asset markets are the weighted processes of every bubble economic phenomenon in
every asset market.

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Research background
According to the 2010 global art market trend report by ARTPRICE, china was ranking first on the
basis of selling profits in auction markets. It can be considered as china already becomes an
important part of global art market. In 2010, the scale of Chinese art market grown dramatically in
accordance with the annual report by Chinese cultural department, which could be shown on the
total transaction volume that is 169,400,000,000 RMB. In line with the statistical data by Europe
art foundation, the total amount of transaction of Chinese original and antique artworks is
98,900,000,000 RMB, making up 23% of the global market. It is the first time that china surpasses
England and ascends to the second place in worldwide art market. At the same time, chinas art
auction market realized a great-leap-forward development in 2010, the total auction artworks are
300,000 pieces, and the trading volume is 230,000 pieces, the trading rate is 75%. With the
enlarging of the scale of art market, there are a lot of new developmental tendencies, such as the
development of art agency and art investment funds, the diversification of artworks, the
communication with foreign countries, etc.
The scope of Chinese artworks is very big, which includes painting and calligraphy, porcelain,
jade ware, bronze ware and other artworks. With the warming of collection, more and more new
types of artworks enter into Chinese art market, including contemporary painting and calligraphy,
handicraft and even folk-custom articles for daily use. The value of artworks shows on the
exquisite and delicate essence, excellent handwork and uniqueness. Even though China has
abundant cultural background and affluent artworks, the art market of china didnt show a
optimistic prospect in the past. In the 1990s, Chinese contemporary art was totally a blank, as
almost all of the artworks of those famous Chinese artists were focused on the Cultural Revolution
in 1960s, which also could be explained as Chinese artworks showed a one side tendency of
ideology. It was a remarkable change in the Sotheby's auction in New York in 2004 for chinas
contemporary art market. From that moment on, Chinese contemporary art market entered into a
high speed and fast growth time, many artists find their commercial value in international market.
With the rise of the international position of china, Chinese contemporary art is showing an
enormous vigor and energy. As a new market, there are still a lot of problems in it. In china, the
secondary market, i.e. auction market is the most popular market for the trading of artworks. In the
first market and third market, i.e. galleries and derivative artworks market, there are seldom
buyers and lack of the supplemented things for the auction market, even though the number of
galleries in the 21st century has grown by three times as the number of galleries in the last century.
In china, there are a lot of individual agents for the trading of artworks rather than the gallery
operating model, which end in an irregular market. However, this old and disorder style of agents
take over the first and the second market in a great extent. There are more problems other than the
deregulation of market, such as lacking of artworks valuation institution, a great deal of fake
artworks, malignance competition between galleries and auctions, skipping popularization of
artworks by galleries, being influenced by the commercial value of international capital investors,
and aimless collection by the general public of China. The problems that exist in the Chinese art
market may cause the variation of prices from the intrinsic value of artworks. However, the

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fundamental economy of china would be the basic factor that impact on the forming of bubbles in
art market. First of all, inflation is an intense problem that bothered Chinese people since 2007.
The CPI of china was more than 6% while it didnt include the prices of commercial houses.
Inflation will trigger the sudden rise of prices, when the prices are greatly deviating from the true
value of artworks, art bubbles show up. Moreover, the real estate is the carrier of bubble economy.
Giving the rational house price to income ratio should be 3 to 6, Chinese real estate market has the
largest bubbles among all of other markets in china as most of the cities price to income ratios are
all above 10, and some of the cities such as Shanghai and Beijing are even over 16. On the other
hand, the fast growing of economy attracts more and more capital, which could be shown on the
stock market. In 2007, the market value of stock market reached 120.39% of GDP, which can be
explain superficially that the development of capital market can relieve the dependence of national
economy to banking finance, thus reduce and scatter risks, at the same time, a risk and profit
symmetrical capital market can satisfy the different levels of demands of investors, ending in a
more vigorous national economy. Nevertheless, whats different from the situation of America is
the total amount of direct finance and indirect finance in chinas capital market are asymmetric.
During the first 7 months of 2007, stock market finance and refinance were 200 billion in total,
while the loans from banks were over 4000 billion. It means that most of the capital didnt go to
the real production industries but to the stock market to earn the profits from speculation. When
the rise of price related to speculation, there is a high possibility of asset bubbles. Furthermore, the
influence of appreciation of Chinese currency on the forming of bubble economy is obvious. Since
the increase of foreign investment and international capital, the foreign exchange reserve increase
and Chinese currency appreciates inevitablely. However, because china chose a peg to dollar, so in
a few years ago Chinese currency depreciated with dollar. According to some data, the real
depreciate rate was around 15%, which induced a vast of inflows of international capitals. Since
2008, china bought a great amount of American debt, and at the same time, it put a lot of Chinese
currency on exchanging dollars. Those Chinese currency were used by Americans to buy the
products in Chinese market, thus the inflation occurred because of the excess circulation of
Chinese currency. Under the circumstances, it is very easy to be considered as there are bubbles in
the art market, especially when it shows such a striking up rising in latest years. As Japan went
through a bubble economy in 1970s, I think it has some similarities between the situation in china
and that of Japan before the bubble burst. Therefore, I will introduce some information about the
Japan economy bubble and extract some idea of the forming of art bubble in china through the
analysis of Japan bubble economy.

Japan bubble economy

To talk about the background of the formation of Japan bubble economy, I start from the highly
developing economy in a long run. After the Second World War, Japan had undergone a
fluctuating, flourishing and recession period. In the 1950s, Japan realized qualitative leaps, which
was also a foundation of Japans economic miracle. The rational growth in 1960 gave a deep
impression to the rest of the world. The 1970s and 1980s are unstably growing periods. Japans

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economic bubble was fermenting, taking shape, and expanding at that time. We can get the
information of the economic situation in 1950s from Appendix 1, which shows that the investment
rate and economic growth rate are ranking the first among a few of important countries in Europe
and America. In the 1960s, the growth of economy not only showed on the continually high speed
of growth, but also on the breakthrough of economic quality. For instance, Japan realized full
employment in this period, rebalanced the international balance payment, and established
excellent heavy industry system, etc. Since 1965 to 1970, Japan had been through three brisk
markets, which are Jinmu boom, Iwato boom, Iraq's zang boom. Entering into the time of 1970s,
Japan outperformed the Income Doubling Programme, and the whole market was under a
stimulated investment condition. However, because of the Japan reconstruction plan by the
government, the bank loan was out of control, which inducing the overinvestment in real estate
market and the rise of price of lands. One of the reasons why the prices of lands increase in a great
deal is because land was regarded as the safest properties, thus it become a main object of
speculation. A distinguish feature of bank credit in Japan is the land mortgage. What we can get
from Appendix 2 is the price index of lands and the index of bank loans between 1955 and 1972.
Apart from the economic condition of Japan which could exert on the formation of bubbles, the
appreciation of Japanese Yen also influenced the expansion of economic bubbles. To explain the
reason of the cause of appreciation, I would like to make clear it on the basis of the carrying out of
the Plaza Accord by America. Since the end of the 1960s, America was in a cyclical economic
crisis. As the overvaluation of dollar, America suffered a serious adverse balance, the western
financial market undersold dollar for a lot of times, and in a rush to purchase gold, Japanese Yen,
and Deutsche Mark. On the other aspect, the oil crisis pushed America and western countries into
stagflation. Japan took the lead to break away from the dilemma in 1970s, and in 1980s, the high
growth of economy attracted the worlds attention. In order to stimulate domestic economy,
America carried out the tax reduction plan and tight money policy, which received a certain effect
on the remission of stagflation but exacerbated the adverse balance of international payment. In
1980, the trade balance between America and Japan was $7.662 billion. However, it turned out to
be $46.15 billion in 1985, which was 5 times more than that of 1980. Thus America wanted to
depreciate dollar and increase the external competitiveness. This is an important reason for the
appreciation of Japanese Yen except from the internal factors. Studying from the domestic
environment of Japan, there was a deep impression on the appreciation of Japanese Yen by the
financial internationalization and liberalization. In addition, the appreciation of Japanese Yen was
a demand of its political internationalization. Without a doubt, the appreciation of Japanese Yen
exerted a huge influence on the economy. Viewing from a short term, it triggered a Yen
appreciation depression in 1986, the actual economic growth rate declined from 5.2% to 2.6%.
Nevertheless, because of this depression, Japan caught this opportunity to change its economic
growth way from external demand orientation to domestic demand orientation. With the guide of
domestic consumption, the domestic investment came to a upsurge between 1986 and 1987, which
induced the boom of the prices of lands and stocks and speculation, as well as bubble economy.
Moreover, the financial liberalization and long term low interest rate policy acted an important
role in the formation of bubble economy. Since the end of 1970s to the beginning of 1980s,

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capitals changed from shortage to redundancy, traditional type of financial systems like divided
operation was not applicable for the development of economy, thus Japan transited into financial
liberalization and internationalization. The features of financial liberalization and
internationalization include interest rate liberalization, abolishing the restriction of the range of
banks operation, and domestic and foreign exchange funds liberalization. Because of the
diversification of free interest rates, it made speculation of lands and stocks more convenient. In
addition, the House financial specialized company applied more opportunity for a great amount of
capitals flowing into stock and real estate markets. Enterprises ignored the danger of economic
bubbles, and continued to raise more capitals by issuing stocks and convertible bonds, which
fostered the craze of investment.

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5 THE APPLICATION OF MODELS AND

FINDINGS
The chose of influencing factors
The factors that I used to specify the price of artwork in auction market are GDP, art market
transaction sum, Chinese wealthy peoples total asset, real estate investment, the Index of Chinese
Modern Art Masters and Consumer Price Index. The dependent variable is the average price of the
lots in auction market which is calculated by the total sum of the transaction of artworks in auction
market and the total transaction volume in every half year. Just as the problem that concerned by
Mei and Moses, the artworks are incomparable, so the prices are too different to put them together.
The simply summing of all the prices and dividing them by the transaction volume can not show
the true level of price in Chinese auction market. Whats done by Mei and Moses was analyzing
the repeating sales records of every artwork to get the real return rate. My object is to indicate the
factors that influence the artworks price and form the art bubbles, so I can just select the average
price as dependent variable. What I used to think about is the average price of the top 100 lots in
auction market, but it neglects the normal prices and low prices. It means it can not represent the
real situation of the whole market, thus I still insisted on the result from the transaction sum and
volume.
Jus as what I explained in the last chapter, GDP is a very important factor that will impact on the
forming of economic bubbles. GDP represent the whole economic condition of a country, the fast
growing of GDP in China will induce a new round of investment, as well as the investment in art
market. So I put GDP as the first variable in the regression model. All of the GDP data came from
the National Bureau of Statistics of China.
I collect the art market transaction sum from the Chinese Art Auction Market Survey Report by
Artron Art Market Monitoring Center. From 2003 to 2008, the transaction sum rise with an
average rate of 55% every year, showing a stunning market prospect in the future. What I can get
from this fast growth is the capitalization of art market in china is forming. The capitalization and
the operation of money in art market will raise the prices of art, and speculators will take
advantages of the flourish of this market. Like what I said before, speculation is an important
factor of the forming of economic bubbles. Thus transaction sum in auction market is a very
necessary element in the regression model for the analysis of prices.
As art collection is more like a hobby of wealthy people or a method for investment by syndicates,
so the condition of the asset of wealthy people in china is influencing the art market. I get the data
from Asia-Pacific Wealth Report, and as they are annual reports, I divided the annual data into
semi-annual data by every years growth rate, and then converted it from dollar to RMB with the
period average exchange rate published on the website of the Peoples Bank of China.
Not only the capitals in art market would be the main factors that induce the ascending of art

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prices, the condition of capital flows in the real estate market would also impact on the prices of
art. One of the questions that I wanted to solve is why the art bubbles form during the financial
crisis, thus by adding the real estate investment capitals into the regression model, I can explain
the relationship between the flourish of art market and the depression during the financial crisis.
With the financial crisis and government regulatory system, the real estate market seems to slow
down the investing speed, investors tend to look for a new opportunity in art market, so a great
deal of capitals were transferred from real estate market to art market, which means the reduce of
capitals in real estate market will increase the capitals in art market. So the coefficient between
price and real estate investment capitals would be negative. Once I was considering about the
transaction sum in the stock market, but I observed that the transaction sums are not varying too
much from 2007 to 2010 except 2008, so I didnt put it into the regression model.
A factor that can also specify the relationship between the flourish of art market and financial
crisis is the Consumer Price Index. I talked about the appreciation of Chinese currency stimulates
the formation of economic bubbles in the last chapter, and the appreciation of Chinese currency
mostly come from the favorable balance of international trade. But as china chose a peg to US
dollar, Chinese currency didnt appreciate with its actual appreciation rate. However, after the
financial crisis in 2008, Chinese currency appreciate quite a lot comparing with US dollar because
of the currency policy used by America, as a result, the inflation in the domestic market of China
seems to be more and more serious. The inflation of prices is a quite important reason for the
sudden increase of prices and explains the driving force to art price by financial crisis. Consumer
Price Index is a good index that can show the inflation rate of a whole country. I collect the data
from the National Bureau of Statistics of China.
The last factor that I chose to put in the regression model is a special art index called the Index of
Modern Chinese Art Masters, which was included in the Chinese Art Auction Market Survey
Report. I was impressed by the prices of four Chinese modern art masters paintings in 2008,
which were more than hundred million at that time. So Im looking forwards to see more
encouraging prices of modern art in the auction market, and the result is very delighted. The high
price and high quality modern artworks are dominating the whole auction market, and the modern
art index hit 8283 point in 2010 from around 2000 point in 2007. So I considered about putting the
index as an element in the regression model to see the function of modern art to the average price
of artworks in the auction market.

The analysis of influencing factors and findings

Table 1 gives the data of all the factors including GDP, art market transaction sum (AMTS),
Chinese wealthy peoples total asset (WA), real estate investment sum (RI), the Index of Chinese
Modern Art Masters (AI), and Consumer Price Index (CPI). I show them semi-annually as the
auction season takes part in every half year.

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Table 1
Average Art Price And Influencing Factors

PRICE/10thouRMB

GDP/Bln RMB

AMTS/Bln

WA/Bln

RI/Bln

AI

CPI

200706

16.42

11599.9

8.53994

14.69353

988.723

2670

103.2

200712

18.58

14981.1

14.6314

15.61931

1539.242

2908

104.8

200806

18.65

14047.8

12.52868

13.0769

1319.567

2662

107.9

200812

14.2

17356.7

7.61845

11.44049

1738.415

2554

105.9

200906

11.79

14820.4

6.88508

13.72589

1450.533

2420

98.9

200912

18.45

19269.9

15.64616

16.02508

2172.638

3824

99.3

201006

22.71

17361.5

20.14063

16.9188

1974.712

7530

102.6

201012

27.85

22436.8

37.21097

17.40698

2851.988

8283

103.3

In Brunnermeier and Julliard (2007)s study, they conclude that current high inflation might be
disruptive for the economy and/or inflation might proxy for future downturns, therefore depressing
current housing value, thus the high inflation in china would have a negative impact on the art
bubbles. I use the fixed base consumer price Index to deflate the average prices of artworks and
the transaction sum in art market, and at the same time, I applied GDP Index and Permanent Asset
Investment Index to deflate the GDP and real estate investment respectively. After removing the
inflation element from the historical data, I got the data in the table below
Table 2
Average Art Price And Influencing Factors(after deflating)
PRICE/10thouRMB

GDP/Bln RMB

AMTS/Bln

WA/Bln

RI/Bln

AI

CPI

200706

17.98

17346.3

9.35379

16.09382

1120.322

2670

103.2

200712

20.35

224040.2

16.02577

17.10783

1744.115

2908

104.8

200806

19.29

17781.71

12.95841

13.52544

1359.286

2662

107.9

200812

14.69

21970.11

7.87976

11.8329

1790.741

2554

105.9

200906

12.17

17301.33

7.10678

14.16786

1529.007

2420

98.9

200912

19.04

22495.71

16.14997

16.54109

2290.178

3824

99.3

201006

22.71

17361.5

20.14063

16.9188

1974.712

7530

102.6

201012

27.85

22436.8

37.21097

17.40698

2851.988

8283

103.3

With those data, I used Eviews to create a regression model and calculate every variables
coefficient. Then I get the table as below.

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Table 3
Variable Coefficient And Test

Dependent Variable: PRICE

Method: Least Squares
Date: 07/11/11

Time: 23:49

Sample: 200706

201012

Included observations: 8
Variable

Coefficient

Std. Error

t-Statistic

Prob.

GDP

-1.27E-06

3.40E-07

-3.733359

0.1666

AMTS

0.132252

0.067847

1.949272

0.3018

WA

1.549269

0.216378

7.160017

0.0883

RI

0.001877

0.000856

2.191747

0.2725

AI

0.000125

0.000167

0.747818

0.5912

CPI

0.820924

0.106063

7.739953

0.0818

-95.1032

14.07634

-6.756246

0.0935

R-squared

0.998935

Mean dependent var

19.255

Adjusted R-squared

0.992547

S.D. dependent var

4.776705

S.E. of regression

0.412386

Akaike info criterion

0.736847

Sum squared resid

0.170063

Schwarz criterion

0.806358

Log likelihood

4.052613

F-statistic

156.3624

Durbin-Watson stat

2.155608

Prob(F-statistic)

0.061139

Under the t-test, the critical value of t a / 2 n k 1 should be 2.35. We can see from the table
above that the t-statistic of AI is the smallest, so I remove AI from the regression model and run
the regression one more time. The result is shown in the Table 4

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Table 4
Variable Coefficient And Test

Dependent Variable: PRICE

Method: Least Squares
Date: 07/11/11

Time: 23:55

Sample: 200706 201012

Included observations: 8
Variable

Coefficient

Std. Error

t-Statistic

Prob.

GDP

-1.39E-06

2.60E-07

-5.362649

0.0331

AMTS

0.147382

0.05718

2.577507

0.1233

WA

1.60022

0.181334

8.824713

0.0126

RI

0.001986

0.000745

2.665848

0.1166

CPI

0.832485

0.092649

8.985324

0.0122

-96.9722

12.23134

-7.928177

0.0155

R-squared

0.99834

Mean dependent var

19.255

0.994189

S.D. dependent var

4.776705

S.E. of regression

0.36412

Akaike info criterion

0.93104

Sum squared resid

0.265167

Schwarz criterion

0.990621

Adjusted
R-squared

Log likelihood

2.275839

F-statistic

240.5325

Durbin-Watson stat

2.242481

Prob(F-statistic)

0.004145

I get the coefficients of every variable from Table 4, i.e.

b0 = -96.9722, b1 = 0.00000139, b2 = 0.147382, b3 = 1.60022, b4 = 0.001986, b5 = 0.832485.
I substitute these coefficients into the regression model, so I get the equation as below,

y 96.9722 0.00000139 x1 0.147382 x 2 1.60022 x3 0.001986 x 4 0.832485 x5

Firstly, I did F test to test the significance of the regression model, which could give me a general
idea of whether the linear relationships between xi and y are outstanding or not. My hypothesis is

H 0 : 1 2 6 0
I will test my hypothesis according to F-statistic

SS R /( K 1)
SS e /(T K )

If F F 0.05( K 1, T K ) , the H0 hypothesis will be rejected, which means there are

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outstanding relationship between variables and dependent variable.

As we can see from the Table 2 F-statistic is 6022.281, and according to the distribution
table, F0.05 (5,2) 19.30 the F-statistic is much larger than F0.05 (5,2) , thus the regression model
is reliable. We can also see that the p-value of F is 0.004145, which is smaller than the significant
value 0.05.
After the F-test, I also did the t-test to see the respective relationship between every variables and
dependent variable. Firstly I give a hypothesis as below:

H0 : j 0

H1 : j 0

j 1,2,..., k

I give the significant value as 0.05, so if t t a / 2 n k 1 , the H0 will be rejected, which means
there is significant relationship between this variable and dependent variable.
As we can see, the t-statistic of every variable is
Variable

t-Statistic

-7.928177

GDP

-5.362649

AMTS

2.577507

WA

8.824713

RI

2.665848

CPI

8.985324

The critical value of t is 2.35, thus all of the variables pass the t-test. However, the p-values of RI
and AMTS are larger than 0.05, I think its because the sample volume is too small. With the
successful result of all the coefficients, I use the regression model to make a forecast prices table
to examine the coefficients one more time.
Table 5
Predictive Price And Actual Price
year

price forecast

actual price

200706

18.26822

17.98

200712

20.34402

20.35

200806

19.10862

19.29

200812

14.81918

14.69

200906

12.09224

12.17

200912

19.04284

19.04

201006

22.41644

22.71

201012

27.98845

27.85

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According to the table, theres no significant deviation from the actual prices, and the coefficient
determination value R2 is 0.99834, which is really high, so the regression model is very precise
for the forecast of average prices. This model is successfully tested by F-test, t-test and coefficient
determination test, therefore I can analyze the coefficient of every variables with their apparent
value in the regression model.
From Table 2 we can see the largest coefficient is the coefficient of wealthy peoples asset in china,
which shows the fundamental supporters of the art market still play an important role in the new
round of art collection boom. Even though the collectors are expanding to all kinds of classes in
Chinese society, the incremental wealth of reach people is the main force for the increase of art
prices. On the other hand, the investors in china as well as the investors from across world tend to
focus on the value of Chinese contemporary culture, thus drive the prices higher. In this view, the
booming of art market is like a revolution but not a bubble.
The second large coefficient is CPI, the appreciation of Chinese currency cause the rise of prices
in every fields including art market, although inflation in a country is a dangerous signal that the
economic bubbles are hiding under the flourish of the whole market, the sudden rise of artworks
prices by the growing of CPI doesnt show the serious problem of economic bubbles, but explains
the booming of art market during the financial crisis. Its a strong evidence to support the guess of
the connection between art market and financial crisis.
The third largest coefficient is art market transaction sum. The large amount of capital inflows to
the art market, making the prices of art rise substantially. if the capital flows in art market is the
main reason that drives the prices upward, we can know that firstly, a lot of investors in china are
tending to put their capitals in art market rather than in the real estate or stock market in these
years, and secondly, the demand of art motivate the idea of speculation, with the temptation by the
gaining from buying and selling art in auction market rather than appreciating and collecting
artworks, investors transfer their investing capitals to speculate on art, thus induce the forming of
art bubbles. However, from the value of coefficient, we cant get the idea about the driving force
by the speculative capitals.
The absolute values of the coefficient of real estate investment sum and the coefficient of GDP are
very small, thus they dont have significant relationship with the prices of artworks. The
coefficient of real estate investment is positive, which doesnt meet my hypothesis. It means that
the moving of investment in real estate market is align to the moving of art prices, and the
reduction of capital flows in real estate doesnt have too much impact on the increasing of art
prices. After the financial crisis, the growth rate of real estate market seems to slow down
comparing to the speed before financial crisis. A lot of economists in china said that speculators
and other investors transfer their capitals from real estate market to art market, thus the art bubbles
formed. From my regression model, we can see clearly that the viewpoint of them isnt verified.
The coefficient of GDP is the smallest, showing that economic background has less influence on
the prices of art. Although there are a lot of researches prove that the growth pattern of transaction
sum in art market is similar with the growth trend of GDP, we still cant prove that the GDP
growth drive the art prices upwards.
The Index of Chinese Modern Art Masters doesnt show too much influence on the prices of

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artworks. I think its because the selling volume of modern art is not big enough to dominate the
average prices of artworks, even though there are a lot of high prices of modern paintings in the
auction market. Nevertheless, I suppose the modern art will still play an important role in the
auction market in the long run, not because of the change of taste of investors, but also the art
value of Chinese modern art has reached a certain level.
From the coefficient of every variable, I cant find the significant evidence for the existence of
bubbles in chinas art market.

The research of art bubbles and findings

In accordance with the analysis of the influencing factors in the last part, we can see that the
possibility of economic bubbles in art market is under consideration. Thus I will test whether the
bubbles exist or not by explaining the standardized coefficient of certain variable. The
standardized coefficient can be acquired by the following equation:

j j

Sxj
, in which j is the Standardized coefficient of the value of j in the
Sy

regression, j is the unstandardized coefficient, and Sxj and Sy are the expected standard
deviation of explanatory variable and explained variable respectively. If the value of j is
decreasing while the volume of variables increase, the relationship between explanatory variable
and explained variable is negative or it is not that significant. I choose a respectively fundamental
factor, which is the asset of wealthy people, as the variable to test if the standardized coefficient is
decreasing with the adding of other variables. I got the result as the Table 6 bellow:

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Table 6
standardized coefficient analysis

variables

Model 1

model 2

model 3

model 4

model 5

WA

1.677355

1.801472

0.371914

0.246219

1.60022

Prob.

0.0476

0.0654

0.5401

0.6737

0.0126

St coff

0.711919

0.764598

0.157851

0.104503

0.679181

GDP

-9.69E-07

2.08E-07

1.60E-07

-1.39E-06

Prob.

0.6448

0.8575

0.8852

0.0331

AMTS

0.408138

0.574075

0.147382

Prob.

0.0201

0.0415

0.1233

RI

-0.003146

0.001986

Prob.

0.2992

0.1166

CPI

0.832485

Prob.

0.0122

R-squared

0.505211

0.525344

0.894281

0.931052

0.998340

As we can see, the standardized coefficients fluctuate without order. Therefore, I suppose the
economic bubbles in Chinese art market are not that significant, or the bubbles exist in some
districts but not all of the markets in china. With this guess, I calculated the average art prices in
Beijing area, Yangtze River area, and Hong Kong, Macau and Taiwan area respectively to see if
there are all bubbles exist in these regional markets. The results are included in Table 7. From the
table we can see that during the financial crisis, the art market in mainland china doesnt show
positive bubbles. The average prices of the Beijing area and Yangtze River area are lower than the
predicting prices from the end of 2008 to the middle of 2009. From the end of 2009, the average
prices of Beijing area started to show positive economic bubbles, especially in 2010, the average
price in Beijing area is 110 thousand more than the predicting price, indicating a dramatically
upward trend of art prices in that area. However, the average prices in Yangtze River area, which
includes Shanghai, Zhejiang and Jiangsu provinces, are under the average predicting price level
mostly in these years, and even in 2010. On the other hand, the art markets in Hong Kong, Macau
and Taiwan display a great harvest in these years, and the average prices in these areas are far
surpassing the predicting prices. Therefore, art bubbles exist in some places but not all of the
markets in China and the price levels in different districts are very different from each other.
Speculators use the price gaps to speculate in different regional auction markets, thus the prices of
the whole market would tend to be convergence in the future, and the art bubbles will expand in
the whole market.

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Table 7
The Level of Art Bubbles In Different Area In China
Year

200806

200812

200906

200912

201012

Predicting

19.11

14.82

12.09

19.04

27.99

Bubble

Actual Prices/10thou

Prices/10thou

Level

Beijing area

19.59

0.48

Yangtze River area

20.11

Hong Kong, Macau and Taiwan

36.29

17.18

Beijing area

12.24

-2.58

Yangtze River area

7.28

-7.54

Hong Kong, Macau and Taiwan

37.34

22.52

Beijing area

10.17

-1.92

Yangtze River area

8.38

-3.71

Hong Kong, Macau and Taiwan

36.31

24.22

Beijing area

19.75

0.71

Yangtze River area

11.00

-8.04

Hong Kong, Macau and Taiwan

42.96

23.92

Beijing area

38.9

10.91

Yangtze River area

26.55

-1.44

Hong Kong, Macau and Taiwan

70.08

42.22

I cant prove that there are bubbles exist in the art market through the analysis of coefficients of
variables, however, most of the people suppose there are bubbles without any doubt. We always
treat it as a bubble when it has a stunning return rate, or when the price of it raises dramatically,
but we dont consider about one important thing which is called by the economists as money
illusion. Money illusion occurred when people ignore the inflation which would distort the
coming profits and economic calculation, thus they was convinced by the up surging prices that
they will get more profits in the future as the goods are worth more than they really are. The
investment favorites of investors like stocks, houses or artworks, are under the spotlights of people,
so the raise of prices are more clearly recorded by investors, while they ignore the prices of other
goods. With the distortion of the bubble perspective, investors will continue to invest in the
artworks and make the prices higher, and they believe that the bubbles will burst some day, so they
trade the artworks frequently, which change collection into speculation. With this assumption,
money illusion can turn the normal development of market into real bubbles. I use the raw data to
run a regression and get the coefficients as below.

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Table 8
Variable Coefficient And Test

Dependent Variable: PRICE

Method: Least Squares
Date: 06/25/11

Time: 03:58

Sample: 200706 201012

Included observations: 8
Variable

Coefficient

Std. Error

t-Statistic

Prob.

-82.6047

2.170379

-38.06

0.0167

GDP

0.011077

0.000498

22.23006

0.0286

AMTS

0.947223

0.0351

26.98632

0.0236

WA

0.001945

5.34E-05

36.42429

0.0175

RI

-0.07861

0.003562

-22.0687

0.0288

AI

0.000957

3.66E-05

26.18053

0.0243

CPI

0.087781

0.026606

3.299279

0.1874

R-squared

0.999972

Mean dependent var

18.58125

Adjusted R-squared

0.999806

S.D. dependent var

4.970853

S.E. of regression

0.069186

Akaike info criterion

-2.83348

Sum squared resid

0.004787

Schwarz criterion

-2.76397

Log likelihood

18.33392

F-statistic

6022.281

Durbin-Watson stat

2.30355

Prob(F-statistic)

0.009864

The largest coefficient is art market transaction sum. The large amount of capitals shows a great
demand of art in the market, which also induce the speculation. The second largest coefficient is
CPI, explaining the influence of financial crisis on economic bubbles. The coefficient of real estate
investment is negative, it means that the moving of investment in real estate market is opposite to
the moving of art prices, and the reduction of capital flows in real estate induces the increasing of
art prices. After the financial crisis, the growth rate of real estate market seems to slow down
comparing to the speed before financial crisis. A lot of economists in china said that speculators
and other investors transfer their capitals from real estate market to art market, thus the art bubbles
formed. In this regression model, the viewpoint of them is possible. GDP also has a considerable
influence on the price of art. However, the wealthy peoples asset doesnt show too much impact
on it. According to this regression model, it shows adequate evidence to support the assumption of
art bubbles, which also means under the money illusion, people have enough confidence to believe
the overvalue of art in the market. After I deflated all of the data, economic bubbles are not that
significant on the basis of the coefficients of variables.

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6 GLOBAL ART INVESTMENT FUNDS

The risks of art investment
According to the introduction of Chinese economic background and the findings from data
analysis, there are some risks that should be noticed by investors. Firstly, the risk comes from
Chinese economic condition at present and in the future as the vicissitude of art market is closely
connected to the macroeconomic. What we can see from the bubble economy in Japan is the
decline of art market after the burst of bubbles. The most representative example is a Japanese
insurance company cost 2,430 pound to by the most famous painting of Van Gogh, Sun flower.
However, after the burst of bubble economy, the painting was just worth half of that price. As
when the investors suffer a recession, they would always consider selling their collection first,
such as paintings, but not house or cars, thus the prices of artworks will decline dramatically.
Considering the economic condition in china, it seems that Chinas economy grows with a high
speed, but we can all see the economic bubbles are hiding under the flourish, from stock market to
real estate market, and now in art market, which was similar with the Japanese economic condition
before the burst of bubbles. Therefore, investors should consider about the mobility of artworks
during the recession period.
The second factor we need to notice is the price of artworks, as it could vary a lot with the
economic background, the current taste of collectors, and the speculative expectation. Lets set the
Japanese investors real experiments as example, during the 1980s, Japans economic bubbles
expanded constantly, Japanese companies acquired world-famous paintings wantonly without
considering about the irrational prices. On the New York action in 1990, a Japanese chairman of
the board expended spectacular $82.50 million and $78.10 million respectively for Van Goghs
Portrait of Doctor Gachet and Pierre-Auguste Renoirs Moulin rouge party, the price of one
painting is almost the same as a luxury hotel, but the chairman still though it was too cheap.
However, after a few years, he mortgaged those paintings to banks because of the serious loss by
his overinvestment. As the paintings were under mortgage, the bank was considering selling the
paintings, and there was an American investor wanted to offer $30 million for Moulin rouge party,
the bank didnt accepted at that time, but finally they sold it for $5 million, which was one third of
the original price. The same thing could be happen on the contemporary artworks in china as the
flourish of art market after the financial crisis is a dangerous signal that the asset bubbles in art
market are expanding.
Afterwards, the liquidity of artworks is a important factor that constitute the risk of investment. As
investors has their own tastes on artworks, and the assessment of artworks is very difficult because,
which doesnt like stocks, funds or houses, thus it is very hard to sell a artwork in a short time. It
means art investment is a long term investment, but not a short term activity. When you need to
sell an artwork to meet an emergency, it will always turn out to be a disposal with a very low
price.

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Due to the irregularity of art market in china, the whole market including collections exchange
market and auctions are filled with counterfeits. Set the collections exchange market as example,
stall keepers always make up a beautiful story, a tortuous experience to promote their things. Some
of the specialists think that most of the antiques in the market are all counterfeits, even though,
collectors still flock to it. Not only the collections market, but also the auction market is filled with
fake artworks. One of the rules of Chinese Auction Law is if the auctioneer and the client state
that they cannot guarantee the authenticity or the quality of auction objects before the auction,
they neednt to take the responsibility of flaws, Which means the auction market is not
responsible for the fake artworks, thus all of the risks are transferred to the buyers. One of the
interesting phenomenon in the Chinese art market is artists or the clients who want to sell their
artworks or belongings would rather go straightly to auction market but not galleries, which makes
the authenticate and evaluation more difficult.
With the development of trust bank in china, more and more individual investors entrust banks to
safe keep and trade their collections. Some people will not care about the gaining of their
collections after they give them to the trust bank, but actually there are so many risks they should
consider about. Such as the appraisal risk, the safekeeping risk, market risk, force majeure risk,
counterparty credit risk, investment funds operation risk, management risk, trust issue risk, the
termination or extending of trust time limit, no realization risk, the trust property registration risk
and other risk. All of the losses caused by these risks are the burden of investors and clients. In
addition, a general artworks trust plan will determine the value of the trust property according to
its cash flow conditions on accounting day, so its very possible to see that the final distribution of
the trust property is less than the delivered trust fund, and the final distribution of trust property is
zero. The more notable thing is the trust company is not responsible for the profits and loss from
the management, using and disposition of the trust property, and they will not give the investors
any commitment. This is a really important aspect needed to be considered by investors.

The normal ways to mitigate risks

As for an art investor, he or she should analyze and clear up the future investment systematically,
and choose the artwork which has the appreciation potential. To realize these, they should study
the specialized knowledge of investment to avoid risk rationally. For instance, if you will invest in
porcelain, you need to collect the related information about official Kiln, folk kiln, blue and white,
five-color, monochrome glaze, etc. with the understanding of these knowledge, you would know
official kiln has more appreciation space than folk kiln. Referring to painting and calligraphy, you
would know that the stock of them is very few, and the prices are higher than other kinds of
artworks, but its very difficult to counterfeit them. According to some financial statistic, painting
and calligraphy have the highest liquidity among those artworks, especially masterpieces. To
understand the value of paintings, you need to know different styles of different times, and collect
them according to the sequence of times, school, artist. If you are just starting out, you should start
from popular artworks as they are less expensive and less counterfeit. When you go to the
contemporary painting, you should authenticate it with the original authors or their families, and

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the representative artworks of an artist in a period have the best prospect. To conclude, investors
should learn professional knowledge, and identify the artworks through the experienced specialists,
using their latest information, excellent judgment and professional authentic ability. Dont be too
superstitious about the packages and the so-called sources.
Moreover, investors should choose appropriate investment period. In general, the period of art
investment should be medium term or long term, thus collectors should have enough patience and
dont invest the necessary capitals for daily life or the arranged capitals. Long term investment
needs to stand the transfer of investment hot spot and the fluctuation of prices.
Apart from these aspects, choose a regular purchase channel such as some brand strength
companies or galleries, which will maintain a service standard and honest to their customers. If it
is possible, investors should sign the return agreement with seller or try to get the authentic
recognizance from the author.
Not only the investors can help themselves to mitigate the risks, but also the government can help
to regulate and complete art market. As the Auction Law doesnt regulate the auction market with
the responsibility of authenticity, the risk of counterfeit seems to be extreme big in Chinese art
market. Therefore, strengthen the management of art investment market, regulate exchange market
and establish art investment consultant systems are beneficial to a fair, efficient and
well-organized operation of art market. To realize it, it is very necessary for the government to
establish a set of occupational moral and credit system which are abided by authentic specialists,
sellers, buyers and auction companies. On the other hand, auction companies should strengthen
the cultivation of valuation experts.
With the opening of Chinese financial field, the western art investment ideas are understood and
accepted by Chinese investors. A lot of rich people are not familiar with the rules of art market, so
they are eager to enter the art market through art funds with professional operation, expert
consultation and career management.

International art funds cases

A lot of fund managers always talk about the British Rail Pension Funds successful experience in
art investment field, but theres a few of funds really imitate it. Starting in 1974, the pension plan
invested in more than 2,400 works of impressionist works, medieval art and sculpture, old
masterpiece, books and manuscripts, and Chinese ceramics. What stimulated the British Rail
Pension Fund to start art funds was the special financial and economic condition. In 1974,
Englands inflation was 27%, to cope with the loss by the inflation, British Rail Pension Fund
carried out a new art investment plan under the instruction of professional statistic specialists, the
core members of the investment plan are Stonefrost and Edelstein. In addition, the British Rail
Pension Fund set up a very strict supervision mechanism, every purchase plan put forward by
Edelstein must be attached clear pictures of the artworks and detailed analysis report, and the plan
should be submitted to the subordinate works of art committee of British railway pension fund. To
mitigate to risk, they applied a diversified portfolio of artworks. To reduce the dependence on
Sothebys, they asked other agents to buy artworks from the market directly. Analyzing the

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operation details and the final investment results of British Railway Pension Fund, people found
that there were many valuable experiences for newcomers, especially the risk control system,
supervision mechanism and cash out mechanism. The cooperation with Sothebys was regarded as
a pioneering work in the art investment funds field. The first art investment fund in financial field
is Chase Art Fund which was managed by Chase Manhattan. In 1989, Chase Art Fund received $3
billion guaranty and started to invest in artworks through BNP Paribas Fund. However, as the
increase of collection expenditure, the cost was too high, and the original sales planning was not
adapted to the change of market environment, thus it suffered great losses which were 40% of its
asset.
Anyway, the development of art market stimulated funds managers desire of taking in enormous
profits. Approaching the new century, there were more than 50 mainstream banks put forward the
idea of establishing art investment funds or provided additional art investment services. Funds
managers were keen on the idea of art fund is because they have those reasons in mind that people
took delight in talking about the successful experience of the British Rail Pension Fund, the huge
scale of economic bubbles were creating more excess capitals to transfer to new investing fields,
and the desire for money and material reached a new summit in the end of last century. The funds
declared that individuals can diversity their own investment portfolio through the purchase of
artworks, so as to lower the risk of investment in shares, bonds and currencies, etc. In the long run,
art investment can increase the profits of portfolio.
Viewing from the Europe, ABN Amro was planning to establish an art investment funds which
was mainly for wealthy individual and institutional investors. It would provide the capitals
through large financing plan. This program can activate the banks originally internal art
consultant institution, and at the same time ABN Amro will compete with other banks art
consultant institutions as well as the mainstream auction houses, such as the citigroup, Deutsche
Bank AG, and Swiss Bank Corporation art consultant institution. ABN Amro organized an
art-investment advisory group and hired Seymour Management, however, only one of the funds
was actually buying and selling stuff. So they decided to abandon the advisory group while scale
back to concentrate on advising private clients in their art purchases. Even the internal specialists
doubted at the investment idea of funds managers. A senior consultant of ABN Amro said
ironically: we are not the machine of making money, and we are familiar with art management.
The failure of ABN Amro was not only because of the lack of experience of bank in the art field,
but also the difficulty of attracting customers. The same problems have happened on many other
funds.
The failure of BNP Paribas didnt deter the adventure of Socit Gnrale Asset Management in
art investment field. In 2007, it established an art fund with a total volume of $25 million, and
declared it as the first fund returning to bank. They hoped they could raise $150 million in the
next year and the 15% return rate was not a problem. Considering the specialization of art market,
the notion of Socit Gnrale Asset Management was invest in contemporary art with private
placement technology. The basic rule is the inverse movement principle of the art price with bond
and stock price, when the stock and bond markets are depressed, art market would remain stable
and even rise, and thus we can reduce the risk of investment through diversification.

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Apart from the investment funds founded by mainstream financial institutions, there are more
investment funds with flexible form, diversified style and investor oriented. For instance, ArtVest,
which was founded by an Art dealer Daniella Luxembourg, set up the executive office in both
New York and London. Whats different from the other funds is that they raise the fund from a few
of the wealthy people by its own social relationship and reputation. Some of the funds were
founded by managers with a great of experiences in art marketing. What can we get from the
experience of these funds is that by establishing a professional specialists for management, it can
efficiently improve the credibility of art investment fund. The China Fund was founded by
Sothebys former director Julian Thompson, which was specializing in east artworks, especially
Chinese porcelain. Competitor Fine Art Fund was founded by the Christies former financial
manager Philip Hoffman, and it aimed at raising fund from institutional investors to invest in
blue-chip artworks with $3.5 billion capitals. Hoffman stated his investment notion as the dream
of fund investment is raising the art prices with a bit of capitals. Therefore, he applied a lot of
flexible ways to operate the funds. Apart from long term investment, he gained profits by renting
or borrowing collections to provide extra earnings for investors. In 2006, Competitor Fine Art
Funds total earning reached 40%, and most of the values of artworks were between $0.5 million
and $2 million, some of the classic price even reached $8 million. Another successful example is
the Art Trading Fund founded by Chris Carlson, who was the trader in Deutsche Bank and UBS.
Theres no doubt that he has abundant experiences on finance. The other members that have
certain backgrounds of art distribution and identification constitute the professional art fund team.
Whats noteworthy is the Art Trading Fund is the first art hedge fund across the world, which buys
and sells artworks through global agencies, well-known painters, auction companies and galleries.
It obtains artworks from collectors information database, sells them through buyers networks with
high liquidity, and then hedge or arbitrage from the price spread between districts and market
efficiency improvement. Whats amazed the market is they were developing a stable team of
contemporary artist, and treat them as special asset which may add 2.5 million pound to the fund
every year. In addition, the Art Trading Fund started to involve in more serious and highly
sophisticated research project. They try to buy the art works from dealers who was trapped in
divorce, death and debt or the liquidation asset from failed banks to cut cost, at the same time, they
keep tracking the sales records in 5 to 10 years to find out the most potential young artists, thus to
corporate with them.
Art funds are not only popular in America and Europe, but also other districts, especially in Asia
and Middle East. In India, the Osians Art Fund invests in 250 well-known artists in India, and
aims at 35% to 40% return rate. The mainstream art funds in India also include the Yatra Art Fund
and Crayon Capital and India Fine Art Fund. Yatra Art Fund emphasizes on rational investment
fund, and has no affectation propaganda. The fund custodian emphasized that art is one of the
riskiest investment, as theres no clear price adjustment mechanism and no authority management,
the prices seems to be decided subjectively. Im afraid this is the most valuable hint for investors.
Lets look to the art fund in china, China Minsheng Banking Corp. got the first permission to
found the first art fund in china in 2007, and started the NO.1 art investment plan at the same
time, which has a expectation of 18% return rate. It is not only the first bank involved in art field

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in china, but also the first fund that corporate with art museum. In two years time limit, they
handed over a satisfactory answer to the public with a net income after tax of 25%, which was far
more than the other normal funds, and it also successful went through the financial crisis. With the
pioneer of China Minsheng Bank, art funds started to grow and expand in china, even though the
capitals and customers resources are not that abundant, funds managers still have a faith on the
development of art market. What we should learn from the experiences of other art funds is the
constitution of professional team, elaborate risk control and supervision system, the corporation
with auctions and galleries, and the diversified investment ways to mitigate the risks.

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7 DISCUSSION AND CONCLUSION

The purpose of this study was to improve our understanding of art market in china and find out the
factors that induce the forming of art bubbles in Chinese art market. With the booming of art
market in china, economists are heatedly discussing about the possibility of economic bubbles in it.
Thus I wanted to test if the bubbles exist in the art market and whats the main reason to drive the
prices upward substantially.
The chose of the fundamental data base turned out to be not that perfectly as the art auction market
survey report by Artron art market monitoring center just published since 2008, and the content of
the report is not that standardized, so I couldnt get all the data that I need for the analyzing of
influencing factors and art bubbles. There was a problem with the t-test of AMTS and RI in the
regression model, which I thought was the matter of the sample volume. In the bubble test, I
couldnt get the average regional prices in 2007 and the spring season of 2010. Although I can get
the general trend of price in three years, the specific price bubbles in the other year is still
obscured. The limited of data also restricted the adding of variables, such as the personal income,
the bank loans and so on. However, the data for Chinese art market is not that easy to find as the
art market in china was just on the spotlight in these years.
In the following section I will talk about the most important insights of the study.
First of all, the market situation and economic background have a deep influence on the price of
artworks. In china, the secondary market is the most popular market for the trading of artworks,
and there are a lot of individual agents for the trading of artworks which make the art market
irregular. As for the economic background, the up surging of inflation rate, the booming of real
estate market and the appreciation of Chinese currency are cultivating the economic bubbles. To
better understand the forming of economic bubbles and even bubble economy, I study the
economic background for the burst of economic bubble in Japan. From some literatures I learned
that the fast growing of investment and economy, the uncontrollable bank loans, the appreciation
of Japanese Yen, and the financial liberalization and internationalization constitute the serious
bubble economy.
Secondly, with the study of economic background, I chose six variables to find out the main
reasons of the dramatically increasing of art prices. As a result, the wealthy peoples asset,
transaction sum of art in auction market, and CPI were proved to be the top three reasons, while
the investment in real estate, GDP and the Index of Chinese modern art masters didnt show too
much influence on the price of artworks. With the three main reasons, we cant get that there are
economic bubbles hiding under the flourishing market.
Thirdly, I use the standardized coefficient of the wealthy peoples asset to test if there are bubbles
in the art market. According to the trend of standardized coefficient, I cant tell that there are really
bubbles in the market. However, I made a guess as there are bubbles in some districts but not all of
the markets in china. So I compare the average prices in Beijing area, Yangtze River area and
Hong Kong, Macau and Taiwan area with the predicting average prices. The result met my guess.
The prices of art in the main land china showed less or negative bubbles, while the prices in Hong

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Kong, Macau and Taiwan showed more positive bubbles. The speculation between different areas
would make the economic bubbles extending in the future.
Finally, the worry about the risks in art market induces more and more financial institution to
participate in the art investment funds. What I get from the experiences of art investment funds is
constitution of professional team, elaborate risk control and supervision system, the corporation
with auctions and galleries, and the diversified investment ways to mitigate the risks.

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Xingkui Wei 6262252

8 BIBLOGRAPHY
Abreu and Brunnermeier (2003) Bubbles and Crash, Econometrica, 71(1), pp. 173-204
Allen, F. and Gale, D. (1998) Bubbles and Crises, The Economic Journal, 1, pp.67-80
Baram, M (2005) Art funds starved for investors, The Wall Street Journal.
Barlevy, G. (2007) Economic theory and asset bubbles, Economic Perspectives Publisher: Federal
Reserve Bank of Chicago, 3 (31).
Bruno S. Frey and Reiner Eichenberger (1995) On the return of art investment return analyses.
Journal of Cultural Economics, 19(3), pp.4-5.
Brunnermeier, M.K. and Juliard C (2008) Money illusion and housing frenzies, Review of Finance
Studies, 21(1), pp.135-180.
Burmeister, E., R. P. Flood, and P. M. Carber.(1983) On the Equivalence of Solutions in Rational
Expectations Models, Journal of Economic Dynamics and Control, 5, p.311-321.
Chen, F (2007) The evolution of Japans Bubble Economy and its inspires, Master thesis, Chendu:
The Southwest Finance and Economics University.
Diba, B. and H. Grossman(1988) Rational inflationary bubbles, Journal of Monetary Economics,
21, pp.35-46.
DibaB. and H. Grossman (1988) The theory of rational bubbles in stock prices, Economic
Journal, 98, pp.746-754.
Eisenhardt KM. (1989) Building theories from case study research, Academy of management
Review, 14(4), pp.532-550.
Eubank, D (2011) Is the Chinese art bubble about to burst? [Online]. Available from:
http://davideubank.wordpress.com/2011/02/07/is-the-chinese-art-bubble-about-to-burst/.
[Accessed 6 May 2011].
Eubank, D (2011) Is the art market a safe haven for your money? [Online]. Available from:
http://davideubank.wordpress.com/2011/03/01/is-the-art-market-a-safe-haven-for-your-money-2-0
/. [Accessed 6 May 2011]

Page 39

Master Thesis

Xingkui Wei 6262252

Froot, K. and M. obstfeld (1991) Intrinsic Bubble: The Case of Stock Prices,
American Economic Review, 81, pp.1189-1217.
GarberP. M. (1990) Famous First Bubbles, Journal of Economic Perspective, 2 (4), pp.35-54.
Ge, X. (2005) Bubble economic theory and model research .1st ed. Beijing: The publishing house
of economic science, pp.38-46.
Hiraki, T. Ito, A., Spieth, D. and Takezawa, N. (2009) How did Japanese Investments Influence
International Art Prices? .Journal of financial and quantitative analysis, 44, pp.6-9.
Jing, Z. (2007) The collection and investment of artworks. [handout]. The collection and
investment of artworks. Panjiayuan lecture room.3rd, mar.
LeRoy, S. and R.Porter (1981) The Present Value Relation, Test Based on Variance Bounds
Econometrica, 49, pp.555-574.
Mei, J. and Moses, M. (2002) Art as an Investment and the Underperformance of Masterpieces.
American Economic Review, 92 (5), pp.12-14.
Mei, J. and Moses, M. (2005) Vested interest and biased price estimates: evidence from an auction
market. The journal of finance, pp.8-11.
Taoyu. (2010) cases of global art investment funds [online].
http://culture.people.com.cn/GB/209261/209909/210228/210231/13513183.html.
Wood, C. (2005) The bubble economy: Japan's extraordinary speculative boom of the '80s and the
dramatic bust of the '90s.1st ed. Solstice publishing.
Wu, D. (2010) The bubbles in collecting market can be compared to the bubbles in stock and real
estate market. China Times.
Y, Dai (2001) The mechanism of stock bubbles and the deep thought initiated by the debate,
Economic Research Journal, 4, pp.41-50.
Artron art market monitoring center. (2008) Chinese art auction market survey report (2008
Spring)
Artron art market monitoring center. (2009) Chinese art auction market survey report (2008
autumn)

Page 40

Master Thesis

Xingkui Wei 6262252

Artron art market monitoring center (2009) Chinese art auction market survey report (2009 spring)
Artron art market monitoring center. (2009) Chinese art auction market survey report (2009
autumn)
Artron art market monitoring center. (2010) Chinese art auction market survey report (2010
spring)
(2009) Art reversion under financial crisis. The art newspaper.
(2009) Chinese art market: an investing opportunity of high rate of return [online]. Available
from:http://shop.huaxia.com/news/Article/szyl/zhzx/ppbd/200904/40867.html.[Accessed 14March
2011]

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Master Thesis

Xingkui Wei 6262252

9 REFERENCE
Abreu and Brunnermeier (2003) Bubbles and Crash, Econometrica, 71(1), pp. 173-204
Allen, F. and Gale, D. (1998) Bubbles and Crises, The Economic Journal, 1, pp.67-80
Baram, M (2005) Art funds starved for investors, The Wall Street Journal.
Barlevy, G. (2007) Economic theory and asset bubbles, Economic Perspectives Publisher: Federal
Reserve Bank of Chicago, 3 (31).
Bruno S. Frey and Reiner Eichenberger (1995) On the return of art investment return analyses,
Journal of Cultural Economics, 19(3), pp.4-5.
Brunnermeier, M.K. and Juliard C (2008) Money illusion and housing frenzies, Review of Finance
Studies, 21(1), pp.135-180.
Burmeister, E., R. P. Flood, and P. M. Carber.(1983) On the equivalence of solutions in rational
expectations models, Journal of Economic Dynamics and Control, 5, p.311-321.
Diba, B. and H. Grossman(1988) Rational inflationary bubbles, Journal of Monetary Economics,
21, pp.35-46.
DibaB. and H. Grossman (1988) The theory of rational bubbles in stock prices, Economic
Journal, 98, pp.746-754.
Eisenhardt KM. (1989) Building theories from case study research, Academy of management
Review, 14(4), pp.532-550.
Eubank, D (2011) Is the Chinese art bubble about to burst? [Online]. Available from:
http://davideubank.wordpress.com/2011/02/07/is-the-chinese-art-bubble-about-to-burst/.
[Accessed 6 May 2011].
Froot, K. and M. obstfeld (1991) Intrinsic Bubble: The Case of Stock Prices,
American Economic Review, 81, pp.1189-1217.
GarberP. M. (1990) Famous First Bubbles, Journal of Economic Perspective, 2 (4), pp.35-54.
Ge, X. (2005) Bubble economic theory and model research .1st ed. Beijing: The publishing house
of economic science, pp.38-46.

Page 42

Master Thesis

Xingkui Wei 6262252

Hiraki, T. Ito, A., Spieth, D. and Takezawa, N. (2009) How did Japanese Investments Influence
International Art Prices? .Journal of financial and quantitative analysis, 44, pp.6-9.
Jing, Z. (2007) The collection and investment of artworks. [handout]. The collection and
investment of artworks. Panjiayuan lecture room.3rd, mar.
LeRoy, S. and R.Porter (1981) The Present Value Relation, Test Based on Variance Bounds
Econometrica, 49, pp.555-574.
Mei, J. and Moses, M. (2002) Art as an Investment and the Underperformance of Masterpieces.
American Economic Review, 92 (5), pp.12-14.
Mei, J. and Moses, M. (2005) Vested interest and biased price estimates: evidence from an auction
market. The journal of finance, pp.8-11.
Taoyu. (2010) cases of global art investment funds [online].
http://culture.people.com.cn/GB/209261/209909/210228/210231/13513183.html.
Wood, C. (2005) The bubble economy: Japan's extraordinary speculative boom of the '80s and the
dramatic bust of the '90s.1st ed. Solstice publishing.
Wu, D. (2010) The bubbles in collecting market can be compared to the bubbles in stock and real
estate market. China Times.
Y, Dai (2001) The mechanism of stock bubbles and the deep thought initiated by the debate,
Economic Research Journal, 4, pp.41-50.
(2009)Art reversion under financial crisis. The art newspaper.
(2009) Chinese art market: an investing opportunity of high rate of return [online]. Available
from:http://shop.huaxia.com/news/Article/szyl/zhzx/ppbd/200904/40867.html.[Accessed 14March
2011]

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Master Thesis

Xingkui Wei 6262252

10 APPENDIXES

Appendix 1
The Comparing of Economic Growth of The Main Western Countries In
1950s
Country
Japan
west germany
Italy
France
America
England

1950-1960 annaully average

Investment Rate
Ranking
Economic Growth Rate
28.9
1
9.5
23.8
2
7.7
20.1
3
6
18.4
4
4.2
17.6
5
3.3
15.7
6
2.8

Page 44

Ranking
1
2
3
4
5
6

Master Thesis

Xingkui Wei 6262252

Appendix 2
The Comparing Between The Index of Land Price And The
National Index of The Bank Loans
Year
1955
1960
1965
1970
1972

Index of Land Price

100
283
776
1408
1845

National Index of The Bank Loans

100
256
601
1235
1927

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Master Thesis

Xingkui Wei 6262252

Appendix 3
Transaction Sum And Transaction Volume From 2007 To 2010
2007spring

2007autumn

2008spring

2008autumn

97

122

105

106

128

170

150

159

323

564

473

439

87,183

133,565

120,249

114,718

The Number of Sold Lots

51,999

78,737

67,172

53,662

The Rate of Deal

60%

59%

56%

47%

853,994

1,463,140

1,252,868

768,145

2009spring

2009autumn

2010spring

2010autumn

92

121

141

204

125

171

205

300

362

587

628

1066

95,475

143,740

162,580

259,381

The Number of Sold Lots

58,405

82,974

88,685

133,631

The Rate of Deal

61%

58%

55%

52%

688,508

1,564,616

2,014,063

3,721,097

The Number of Auction

Companies
The Number of Auctions
The Number of
Specialized Auctions
The Number of Auctioned
Lots

Total Transaction
Sum(Mln RMB)
The Number of Auction
Companies
The Number of Auctions
The Number of
Specialized Auctions
The Number of Auctioned
Lots

Total Transaction
Sum(Mln RMB)

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Master Thesis

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Appendix 4
The Index of Chinese Modern Art Masters

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Xingkui Wei 6262252

Appendix 5
Asia-Pacific Wealth Distribution chart in 2006

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Xingkui Wei 6262252

Appendix 6
Asia-Pacific Wealth Distribution chart in 2007

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Xingkui Wei 6262252

Appendix 7
Asia-Pacific Wealth Distribution chart in 2008

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Xingkui Wei 6262252

Appendix 8
Asia-Pacific Wealth Distribution chart in 2009

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Appendix 9
The example auction companies for the bubble test
Beijing area
Beijing poly

Beijing Cheng
Xuan

Beijing Hanhai

Sungari

Beijing Jiaxin

Rongbao

Chieftown
Zhong Ya Zheng
Tianqige
Auction
China Gardian

Royal Auction
Lantian
Auction
Soluxe

Beijing Tranthy

Beijing googut

Beijing Hongzheng

Beijing Huachen

Internaltional Auction Co. of

China
Chunqiu Auction
Pacific Auction

Beijing Forever
Council Auction
Tianjin Cultural
Relics

Yong He Jia Cheng

Zhongding

Jiangsu Jiaheng

Nanjing Zhengda

Dowming

Empama

Hosane

Shanghai Poly

Shanghai Sunran

Shanghai Tianheng

Xiling Yinshe

Art 100 Club

Zhejiang Zhongcai

Zhejiang Zheshang

Zhong Hong Xin

Yangtze River
area
Shanghai

Shanghai

Chongyuan

Duoyunxuan

Bohaish
Shanghai
Gongmei
Shanghai Jiatai
Shanghai
Zhongtian
Zhejiang Nanbei

Shanghai
Honghai
Shanghai State
Shanghai
Jinghua
Jiangsu Artall
Zhejiang
Qiantang

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Hong Kong, Macau and Taiwan area

Christies

Sothebys

Kingsleys

Ravenel

Art Number One

Taipei Zhongcheng

Page 53

Ching Shiun