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A white jade Yubi seal from the Qianlong period inscribed with the characters "Taishanghuangdi", or "Overlord Emperor", is shown at a Sotheby's preview in Hong Kong on March 9, 2010.

BOBBY YIP/Reuters

The success of China's art market points to a broader financial failure. Sotheby's decision to start running auctions on the mainland through a joint venture shows the country's art market is working very well indeed. It's mainly a sign that other markets aren't working as they should.

Chinese buyers of art have two markets to choose from: offshore and onshore. Many have opted for the former – witness this month's strong sales at New York's Asian Art Week, which generated $91-million (U.S.) of proceeds through Sotheby's and rival Christie's. Those who buy offshore have an incentive to leave it there, since China imposes heavy taxes on works brought back into the country.

Onshore, it's different. Local auction houses such as Poly and Guardian rule. And even though the market is essentially closed to foreigners, volumes are huge. Poly handled sales worth $1.9-billion in 2011 – more than twice the amount processed by Christie's in Asia. Even though Chinese auctions are dogged with reports of fake bids and counterfeit artworks, Poly and Guardian are now the third– and fourth-biggest auction houses in the world.

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The offshore market may be a reflection of China's growing wealth and changing tastes, but the onshore boom is suggestive of something else. China's share of global GDP is around 11 per cent, yet its share of auction proceeds is 41 per cent, according to Artprice, which tracks global sales data. That's overwhelmingly skewed by the onshore market.

China's art market does what finance should do instead – provide a store of value and a return on investment. By contrast, property investments are restricted, interest rates low and stock markets shallow. The top 1,000 richest Chinese have doubled their wealth since 2008, according to the Hurun Report, but places to store wealth haven't grown nearly as rapidly.

The onshore/offshore divide remains: Sotheby's China venture will operate from a tax-exempt "free port" near Beijing. The risk is low, since Sotheby's is putting in just $1.2-million, and gets to unwind its joint venture if losses exceed twice the initial investment. For now, sellers of Chinese artworks are doing rather well, too. But if financial markets get more efficient, onshore art could get ugly.

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