Written by Jian Zhang.

By examining how regulation has evolved to catch up with the burgeoning art scene in China, we can better understand the nature of law-making and regulation more generally in the world’s most populace country. On April 27, 2018, four government departments jointly issued the Guiding Opinions of the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange on Regulating the Asset Management Business of Financial Institutions (hereinafter referred to as the Guiding Opinions). This Guiding Opinions document was designed to strengthen the regulation of the artwork finance market in China.

1. The forms of integration of finance and artwork

In recent times, artworks have become the third major investment field in China, beyond the real estate, and finance and securities. Amid record-breaking auctions in Chinese artwork markets, artwork is increasingly treated as a financial asset. The forms of integration of finance and artwork are diversifying, manifesting in forms such as arts funds, artwork trusts, artwork pawns (pledges), artwork related banking, artwork related insurance, artwork securitisation, as well as artwork orientated financial products.

2. The rules and regulations of artwork related financial products in China

There are two kinds of entities involved in the business of artwork financial products: one is the financial institutions such as banking, trusts, securities, funds, futures, or insurance asset management institutions, financial asset investment companies, or any other financial institutions; the other is the non-financial institutions, such as various types of culture property trading venues.

The main rules and regulations on the culture property trading venues are stipulated in three departmental regulations:

In order to prevent the threat posed by the exchange’s weak trading mechanism to the long-term stable development of the artwork market, on November 11, 2011, the State Council issued the “Decision on Straightening out and Rectifying Various Types of Trading Venues and Effectively Preventing Financial Risks (State Council Document〔2011〕No. 38)”. This edict strengthened the supervision of the trading venues and required all governments at provincial level to rectify issues relating to various types of trading venues within their jurisdiction.

More closely related to the artwork shares trading, however, was the subsequent document, promulgated by five departments on December 30, 2011, entitled the Opinion on Implementing and Carrying Out the State Council Decision to Strengthen the Supervision of Cultural Property Rights Transactions and Trade in Artworks, (Zhongxuan fa〔2011〕No. 49), which was concerned with the definition of cultural assets exchange, clarifying the basic conditions for the establishment of the said cultural assets exchange, improving the process for approving and strengthening the supervision of the cultural assets exchange and setting up Shanghai and Shenzhen as the pilot artwork exchanges. In terms of artwork shares trading, however, there were no explicit provisions, so many exchanges were left in a state of uncertainty.

At the beginning of 2012, the General Office of the State Council released the Implementing Opinions of the General Office of the State Council on Straightening out and Rectifying Various Types of Trading Venues (Guobanfa〔2012〕No.37), which further specified the policy limitation, work requirements and supervisory responsibilities in the government’s clean-up and rectification campaign concerning the artwork share trading market. At this juncture the artwork share trading model was halted. At the end of 2013, apart from Tianjin and Yunnan province, the rectification of various types of trading venues in 34 provinces, regions and municipalities came to an end, and the artwork shares trading model in China effectively ceased.

As for financial institutions themselves, there are many more relevant laws, such as the Property Law of the People’s Republic of China, the Securities Law of the People’s Republic of China, the Company Law of the People’s Republic of China and many departmental rules and regulations, such as: Interim Measures for the Supervision and Administration of Privately Offered Investment Funds (Order of the China Securities Regulatory Commission No. 105. 2014), the Measures for the Administration of the Fundraising of Privately Offered Investment Funds (The Asset Management Association of China 2016). These laws and departmental rules regulate primarily the business of financial institutions.

3. The changes of the measures for the administration of the artwork finance

Let’s take privately offered fund management for example, comparing the present situation with the regulations as they stood before 2009. The situation has clearly become stricter in terms of the management of artwork financial business operations.

3.1 The privately offered fund management institutions and institutions engaged in the custody of privately offered funds (hereinafter referred to as “privately offered fund custodians”) must now have the corresponding qualification. Privately offered fund custodians that have registered in the Asset Management Association of China (“AMAC”) with the private fund manager can then raise their own private funds. The privately offered fund custodians registered in the China Securities Regulatory Commission (“CSRC”) which have obtained the qualifications relevant to fund sales and have become members of the AMAC can be entrusted by private fund managers to collect private funds. No other organisation or individual may engage in the collection activities of private equity funds, lest it be considered illegal fund-raising.

3.2. The business operation of the privately offered funds must be more standardised.

The privately offered fund custodians shall, according to regulations relating to the offering and selling of asset management products, adhere to the business concepts of “understanding the products” and “understanding clients,” strengthen the suitability management of investors, and sell investors asset management products commensurate with their capability to identify and assume risks. Selling investors that attempt to defraud or mislead potential customers shall be prohibited. A financial institution shall not sell, by splitting an asset management product or any other means, an asset management product to any investor whose capability of risk identification and risk tolerance is lower than the risk rating of the product.

3.3. The privately offered fund custodians must not guarantee capital gains.

The new regulation of asset management stipulates that privately offered fund custodians must not undertake to guarantee capital gains while carrying out asset management related business. When cash difficulties arise, the privately offered fund custodians may not pay cash in any form.

According to regulation, the privately offered fund custodians shall strengthen education for investors, constantly raise investors’ level of financial knowledge and awareness of risks, inform investors of the concept of “sellers fulfilling duties, and buyers bearing risks themselves,” as well as abstaining from rigid repayments.

Crucially, the privately offered fund custodians may not provide any direct or indirect, explicit or implicit guarantee, repurchase and other commitments to bear risks for non-standardised creditors and equity assets or equity assets invested in assets management products. Thus, we can observe a clear and measurable effort to step up regulation in this market of growing importance.

Zhang Jian is Associate Professor at the Law School of Zhejiang University of Finance & Economics. Dr Zhang was previously Honorary Visiting Scholar at Flinders Law School, Flinders University, South Australia, and at the University of Missouri-Kansas City, Missouri. Image Credit: CC by ILO in Asia and the Pacific/Flickr.