SOME people in China have so much money that their quest for ever new, ever tantalizing investments has led to bubbles in markets such as garlic, ginger, apples and certain buffalo horn pills. Now market mania has moved to the more esoteric world of art.

In January, north China's Tianjin Municipality opened a new exchange that allows investors to buy shares in paintings, jewelry and other expensive artworks.

In the first two months of operation, shares in the first two pieces of art on offer surged 17-fold before recently dropping almost 10 percent. Eight other artworks that debuted a month ago have risen more than fourfold.

The Tianjin Cultural Artwork Exchange has announced that it will attempt to rein in unbridled investment with tighter restrictions on share prices. Will that be enough to shake off notions that the market is a scam?

"Trading shares of an artwork can add liquidity to the art market and promote art among a larger audience," said Mei Jianping, finance professor of the Cheung Kong Graduate School of Business and co-founder of Mei Moses Fine Art Index, a widely quoted measure of Western paintings. "But its transparency has to be enhanced."

The first two items to debut on the new exchange were traditional Chinese paintings - "The Yellow River" and "Autumn on the Fortress," by Bai Gengyan (1940-2007), a somewhat obscure Tianjin painter. The former was valued at 6 million yuan (US$914,000), and the latter 5 million yuan. Ownership was divided into 6 million shares for the first artwork and 5 million for the latter.

"The values of artwork are a very personal matter, and so are the share prices," said Cao Jianhai, a researcher at the Chinese Academy of Social Sciences.

Pink diamond

One month later, the exchange added another seven paintings by the same artist and a 4.34 carat natural pink diamond to the listings.

All the 10 items were committed by an art investment company in Tianjin, but the identity of the owners were not disclosed.

Data from the exchange website show that each of the first two paintings attracted more than 10 million yuan in investment when they were first listed. Two billion yuan was poured into the market with the addition of the eight pieces.

All shares more than doubled on their first day of trading and continued to grow more or less steadily until cracks appeared in the market.

Out of the blue, the Tianjin exchange recently fined two investors for manipulating the market in "Yellow River" and "Autumn" by ramping up the prices. Two days later, trading of the two paintings was suspended "according to orders from regulatory bodies." The measures were aimed at reducing investment risk and protecting investor rights, the exchange's official website said.

By then, the market value of the "Yellow River" had exceeded 100 million yuan and "Autumn" was fetching 80 million yuan - both more than 20 times the value of Bai's most expensive painting, which was auctioned in October in Beijing, according to data compiled by artron.net, a portal website of China's art market.

"Speculators can easily manipulate prices because the market value is small and share trading so thin," Cao said. "You could lift prices by 10 percent with several thousand yuan."

He said investors could easily fall prey to losses if no one is buying the shares. Unlike investments in stocks and houses, where profits can be gained through dividends or rents, artworks are only valuable when they are sold. Cao didn't rule out the possibility of insider trading.

When trading in the two paintings resumed last Thursday, their prices dropped.

The goings-on in Tianjin reminded some investors of the infamous tulip bubble that crashed so spectacularly in Holland in the 1630s. Or more recently, market mania harks back to the early days of Shanghai's stock market 20 years ago.

The first eight stocks listed on the Shanghai bourse skyrocketed because the market was too small to accommodate large inflows of capital. Shanghai's benchmark stock index jumped nearly 180 percent annually in 1991 and 1992.

What worries people is not so much the dramatic price fluctuations, but rather the ability of the Tianjin exchange to maintain a fair and open market.

"As a newly emerging market, China doesn't yet have a body to regulate art and finance at the same time," Mei said. "The problem is the lack of talented people who understand both."

Except for the official website of the Tianjin art exchange, which publishes statements and give guidance on how to open accounts, there are no tangible outlets where investors can make inquiries or make contact with other investors.

Always busy

The hotline of the exchange is always busy. The Tianjin Financial Affairs Office, which is supposed to be overseeing the exchange, declined to comment on the issue.

Like China's stock markets, the art exchange sets a limit of 10 percent on daily movement of shares in either direction. In addition, it added a monthly limit at 20 percent last Monday.

The exchange also adopted a "special treatment" scheme for shares that increase or drop by the 10 percent limit for six days in a single month. The "special treatment" shares are subsequently allowed to fluctuate only 1 percent each day.

Everyday investors can view real-time share quotes by installing a software on their computers, but the market remains out of reach and somewhat shrouded in mystery.

According to media in Tianjin and nearby Beijing, an officer with the financial office, identified only by his surname Zhao, turned down requests for media interviews. He was quoted as saying: "The art exchange is still in its infancy and does not want too much media exposure."

The lobby of the office building where the Tianjin exchange is located is the only place where puzzled investors can go to possibly get questions answered and problems solved, according to media reports.

"I was there to inquire about trading procedures and regulatory issues because nobody was answering the hotline," Xu Jia, an investor from Jiangsu Province, told the China Economic Times. "But I was told to wait in the lobby for the exchange staff. I feel uneasy about opening an account based only on what a website says."

To his disappointment, Xu was finally told that he could open an account only through the website, the newspaper reported.

The mystery surrounding the market heightened last week when China Central Television reported that the major shareholders of the exchange have "disappeared."

According to registration information at Tianjin's Administration of Industry and Commerce, nine investors - three companies and six individuals - initiated and launched the exchange. The documents show they were backed by 135 million yuan. Two of the largest investors are private-run companies related to property investment.

A CCTV reporter said further investigations revealed that both companies had registered false addresses with the administration, and neither could be reached through the telephone numbers listed on the documents.

The report speculated that the exchange may be encouraging high prices of art to earn higher commission fees and to lift prices of artworks by the same artist when they go to auction, the report said.

The exchange was still operating yesterday. But it has suspended opening new accounts to "balance the value of artworks and market liquidity," a statement on its website said. It did not specify when the service will be restored.

For many art lovers, the financial market is distorting the value of artwork. Industry analysts said investment in art is no game for mugs.

"It's a good thing if people want to buy art," said Zhang Wei, 30, who runs a small gallery selling paintings by his father and friends in Shanghai. "But ultimately, a painting is made for displaying, not for making money."

Investment math

Unlike the art being sold in galleries and at auction, where a buyer can inspect pieces for sale, artworks traded on the Tianjin exchange are not visible when a bid was made. The value of art, which is essentially a sentimentally driven determination, has become an obscure piece of investment math.

"It's a disaster if people care about money more than art," Zhang said. "And people can be easily cheated if they do not know art."

China's art market has been suspected of nurturing bubbles since auction prices surged in late 2008, when China's benchmark stock index tumbled nearly 4,000 points from its peak in October 2007.

Last year, transaction volume in China's art auction market hit 57.3 billion yuan, more than 1.5 times up from 2009. That made China the world's second-largest art market after London, according to a Reuters report, citing the Europe Fine Art Foundation.

Mei, a firm supporter of combining art and finance, said ordinary investors shouldn't enter the market, even though he said he believes that more transparency in art financing may help create a healthier auction market in China.

He said he plans to introduce a Chinese Contemporary Art Index in the second quarter of this year. The index is designed to track auction prices of Chinese contemporary art and will indicate ups and downs of the art market in general.

"China's auction market is riddled with fake articles and price manipulation," Mei said. "Transparent auditing and more information may help regulate the industry from within, but currently, it's better if the Tianjin exchange could set a tougher threshold for entry."

He suggested that the exchange should limit investment to between 1 percent and 5 percent of an investor's assets because of the high risk.

Zhou Jianguo, secretary-general of Shanghai Trading Association of Auctioneers, shared that opinion.

"It's no longer a time when someone who doesn't know art can make a fortune overnight," he said.

How art shares are traded

1. Individual or institutional art collectors submit items for listing through an agency authorized by the Tianjin exchange.

2. The artwork is appraised and divided into shares valued at 1 yuan each. Ownership is divided between the original owner, the agency and market investors.

3. Investors apply online to buy shares when an artwork is listed. The process is similar to an initial public offering on the stock exchange.

4. Trading starts 10 days after an initial public offering. Investors are allowed to sell the shares they bought on the same date.

5. An Investor holding 67 percent of shares of a piece of art can submit an application to purchase total ownership of the artwork from the other shareholders.