THE year 2012 was a year of deep adjustment for the Chinese art market, as contemporary art remained cool, auction sales slowed and the government cracked down on art tax evaders. Wang Jie reports.

The year 2012 will go down as a year of challenges in China's art market, though experts say the long-term prospects are bright.

Despite scandals about art tax evasion and faked art, the year also had a spectacular museum opening, notable exhibitions and one auction record for a sale of a modern ink-wash for 124 million yuan (US$19.9 million).

For Shanghai, the biggest news of 2012 was probably the relocation of the Shanghai Art Museum from People's Park area to the China National Pavilion at the former Shanghai World Expo site.

The majestic crimson pavilion opened on October 1 after remodeling to accommodate the museum and art-related activities. It now is known as the Shanghai China Art Museum.

The Power Station of Art, the first government-aided contemporary art museum in Shanghai, also opened in October for the Shanghai Biennale contemporary art exhibition, which runs through March 31 at venues around the city.

The most shocking news - and one with long-term implications - is probably the ongoing investigation into alleged art tariff evasion by some freight companies and major figures in the art world around China.

For many years, China's dauntingly high art import tariff of 12 percent was considered a hindrance to the market and an incentive to evade taxes by understating the value of imported art. Last January the tax was slashed to 6 percent on imported canvases, watercolor and sculpture - and the government began cracking down. Some air freight companies still falsified the value of imported artworks to help buyers avoid import duties and value-added tax.

Auction record

An auction record was set in May 2012 with the sale in Beijing of a traditional ink-wash painting by Li Keran (1907-1989). It was sold for 124 million yuan, among the world's top six sales at art auctions of the year.

However, despite this impressive sale, China's auction market as a whole faced a tough year.

According to a statement by the Guardian autumn auction, total sales dropped nearly 55 percent in the Chinese mainland auction market compared with 2011. Auction results were worse in the Hong Kong autumn 2012 sale. The collectors showed a strong trend toward modern over contemporary works at Christie's spring 2012 Hong Kong sale. The difficulties for the contemporary sector continued at the Sotheby's Hong Kong sale a week later. An enormous 35 percent of works went unsold, and blue-chip artists like Wang Guangyi and Zhang Huan under-performed. However, at the same auction, Japanese and Southeast Asian artwork sold very well, implying that the market downturn may be specific to China.

"The rebound in China's contemporary art still needs a long time, as the bubbles were too big in the past," says Zhan Hao, a renowned local art critic. "That's why more collectors are turning to China's modern artworks."

Although various data showed a downturn in the market in 2012, many insiders said it was a year of "adjustment" and said the market would improve.

In December, the art media group 99 Art Network hosted the Third China Art Market Summit Forum in Beijing. The forum covered various issues and concluded that the slowdown in Chinese galleries and auction houses was temporary.

"But I am not that optimistic," Zhan says. "The fact is that although industry insiders know the truth (overpricing), nobody wants to say so. It's like the traditional Chinese game - beating the drum and passing around the flower. (The one holding the flower when the drum stops loses.) When I pass along the flower, I let you believe that prices will go up and you are convinced, so you find the next one to accept the flower."

Zhan said he also was sceptical about the performance of many art funds. "They say that if winter comes, spring cannot be far away, but in fact, the winter in the art market will be quite a bit longer than expected."

While the mainland art market cooled and interest in contemporary art was lukewarm, the Hong Kong art fair (ArtHK) was a big hit. Many galleries, art dealers, buyers and media people flooded into Hong Kong, for what was said to be the biggest international art fair ever held in the territory. Hong Kong does not levy any art tariff.

In another highlight, or low point, in the year, a famous jade chair, said to date from the Han Dynasty (BC 206-220 AD), was exposed as a fake. It had sold for 220 million yuan in Beijing after two famous experts at the Palace Museum in Beijing had authenticated and appraised it.

A jade dealer in Jiangsu Province admitted he had faked it. People in the Han Dynasty rarely used chairs. The work itself became a joke on the Internet because it looked recently fabricated. The whole episode pointed to greed and collusion in another case of unrealistic, sky-high prices.

Following are highlights of 2012

Shanghai China Art Museum

On October 1, the China Art Museum opened in the iconic China National Pavilion from the Shanghai World Expo. Officials compared it with the Louvre in Paris, promising to build an art district in the area. Queues were long.

But moving the Shanghai Art Museum from its old site in the club of the old Shanghai Race Club to Pudong New Area was not immediately popular.

Supporters say its new home is spacious, almost six times the size of the Shanghai Art Museum and since the pavilion is famous, it will attract many visitors.

Detractors say it may be large but the venue and building itself were not designed as a professional museum. Museum experts also say the gigantic building can easily "swallow" art work inside. Further, the location is inconvenient; it's far from downtown and reservations are required. The same is true of the Power Station of Art. Visitors cannot simply stroll there.

Artful dodgers

The art market was rocked last spring after a number of prominent figures and representatives of freight companies were reportedly detained for police questioning into alleged tax evasion. The detentions late last March were reported by the Shanghai-based Oriental Morning Post.

The government has not made an announcement but the investigation is said to be continuing. Tax evasion is said to be rampant because of China's high art import tariff, as well as value-added tax. Though the import tax was cut from 12 percent to 6 percent on January 1, 6 percent is still very high and VAT must be paid.

There's powerful incentive to understate the value of imported art and the high cost of art is said to hold back development of the mainland's art market.

There's no import tax in Hong Kong and none in many countries.

"If the heavy taxes continue, it might force us to relocate to Hong Kong one day," said a gallery manager at Beijing 798 Art Zone, who spoke on condition of anonymity.

Sotheby's enters China

Last September Sotheby's auction house, one of the big two along with Christies, became the first international auction house to enter China. Operating in a joint venture with Beijing GeHua Art Co, a state-owned enterprise, Sotheby's has a small auction house branch in the tax-free-zone in Bejing.

For years Sotheby's and others wanted to enter the Chinese market but were turned down to protect domestic houses from competition.

The move demonstrates the attractiveness of the Chinese art market, which is dominated by domestic houses, and its increasing openness. Other international auction houses are lined up.

Everyone is watching the effect of competition from the new player with an international reputation.

Visual feasts

Shanghai art lovers were treated in 2012 to a Picasso exhibition, with works on loan from the Orsay Museum in Paris; an exhibition of blue and white porcelain from overseas and an exhibition of ink-wash paintings from the Song (AD 960-1279) and Yuan (1271-1368) dynasties, on loan from five major museums around the world.

Art lovers are thrilled and the government hopes these exhibitions will elevate public taste.

Critics say it's getting ever more costly to present high-quality exhibitions with overseas works on loan. Some overseas museums are overcharging and taking advantage of Shanghai's push to improve its cultural environment, some domestic museum staff have said.

ArtHK

ArtHK, purchased by Art Basel, opened with a splash in Hong Kong last May in a new art center. It's said to have been the most successful art fair in Hong Kong and aims to become the top fair in Asia. ArtHK and the Hong Kong International Antique and Art Expo have moved into the art center.

Beijing Poly Auction House and Guardian Auction House opened branches there and held successful autumn auctions there.

ArtHK has clearly overshadowed ShContemporary, which aimed to establish itself as a magnet for Asian art and boost Shanghai's reputation.

Faked jade chair

The scandal of faked jade chair that sold for 220 million yuan in Beijing raises issues about faked art, said to be abundant, as well as under-the-table deals between some experts, collectors and fabricators.

This particular piece was said to date from the Han Dynasty, when people seldom used chairs. It was appraised and authenticated by two experts from the Palace Museum in Beijing. The museum issued a disclaimer, saying the experts were working on their own time.

In fact, many ordinary Chinese thought the work was fake when they saw it on the Internet.

Because of the sky-high prices of traditional art, forgers and experts have plenty of incentive to create fakes, sell them at high prices and split the profit. Many investors are wary of buying Chinese art for that reason.