How Big Formula bought China

By Alexandra Harney

A family looks at foreign imported milk powder products at a supermarket in Beijing in this July 3, 2013 file photo.

SHANGHAI -- In the two days after Lucy Yang gave birth at Peking University Third Hospital in August 2012, doctors and nurses told the 33-year-old technology executive that while breast milk was the best food for her son, she hadn't produced enough. 

They advised her instead to start him on infant formula made by Nestle.
"They support only this brand, and they don't let your baby drink other brands," Yang recalled. 

"The nurses told us not to use our own formula. They told us if we did, and something happened to the child, they wouldn't take any responsibility."
For Nestle and other infant formula producers, there is one significant complication for their China business: a 1995 Chinese regulation designed to ensure the impartiality of physicians and protect the health of newborns. It bars hospital personnel from promoting infant formula to the families of babies younger than six months, except in the rare cases when a woman has insufficient breast milk or cannot breastfeed for medical reasons. Nestle told Reuters it supports this code and has tried to strengthen its implementation. 

Peking University Third Hospital declined repeated requests for comment.
Most women have enough breast milk to feed their infants, scientific studies show. 

The World Health Organization advocates exclusive breastfeeding for the first six months of life, starting within an hour of delivery. 

Breastfeeding leads to better health for babies and mothers, including protection against infection for infants and lower rates of breast and ovarian cancer for women, WHO says.
A Reuters examination reveals that global infant formula companies have found ways to skirt and violate the 1995 code, which they support publicly. 

Reuters interviewed nearly two dozen Chinese women who have delivered babies at hospitals around China over the last two years. 

Like Lucy Yang, most experienced the aggressive tactics of formula makers.
Until very recently, enforcement of China's 1995 regulation had been rare. 

Neither WHO nor UNICEF can point to a single instance where fines had been imposed since it was introduced. 

Reuters contacted five prominent Chinese law firms and -- underlining the regulation's obscurity in Chinese legal circles -- not one was familiar with it.
The National Health and Family Planning Commission, one of the government bodies charged with enforcing the regulation, did not respond to a question about its enforcement. 

Neither did the State Administration for Industry and Commerce, which also has enforcement authority.
But the enforcement climate may be changing. 

The new Chinese government that took office this year is in the midst of a widespread crackdown on corruption, and the practices of big formula appear to be in its cross-hairs. 

On October 14, Paris-based Danone Corp said it would replace managers in China after state-owned CCTV broadcast a report that the company's formula unit — Dumex — had bribed doctors in the northern city of Tianjin to gain better access for its product.
Dumex China expressed "deep regret" over what it called "lapses" and promised "full accountability."
The same day, local officials said 13 medical workers in Tianjin had been dealt a range of punishments from warnings to dismissals.
Big formula's practices in China have also caught the attention of U.S. regulators. 

In August 2012, Pfizer Inc and its unit Wyeth agreed to pay more than $45 million combined as part of separate settlements with the U.S. Securities and Exchange Commission (SEC) over violations of the Foreign Corrupt Practices Act (FCPA).
In its complaint, the SEC charged that between 2005 and 2010, Wyeth paid bribes to officials outside the United States, including those in Chinese state-owned hospitals, to encourage them to recommend Wyeth's nutritional products and to gain access to records of new births that could be used for marketing, and then disguised these payments as expense claims. 

Under the terms of the settlement, Wyeth neither admitted nor denied the allegations.

GLOBAL BOYCOTT
Infant formula is controversial in many countries, and China is no exception. 

In the 1970s, growing concern that formula marketed to mothers in developing countries was contributing to malnutrition led to a global boycott of Nestle products. 

It prompted the World Health Assembly, the WHO's decision-making body, to pass a code curbing the marketing of baby formula. 

Since then, 103 countries, including China, have introduced legislation to implement parts of this code.
While campaigns promoting the benefits of breastfeeding have tainted formula's image in the West, in China, public debate about formula is mostly about safety. 

In 2004, at least 50 children died from malnutrition after drinking fake infant formula with little nutritive value. Four years later, formula sold by local brand Sanlu -- laced with the industrial chemical melamine -- sickened nearly 300,000 infants and killed six, fueling national outrage over government food safety controls.
The stain of Sanlu has proven hard to erase. 

Because many Chinese parents still doubt the quality of domestic brands, international formula makers can charge a premium to domestic brands. 

Foreign formula firms now control about a third of the Chinese market, according to consultancy Euromonitor International. 

In 2012, two of the three best-selling brands were foreign. 

Mead Johnson has a 14 percent market share, Danone controls 9 percent and Nestle 7.5 percent.
China is fertile ground for formula makers. 

A traditional Chinese belief that women should rest for the first month after delivery gives older family members greater say in the feeding and care of newborns. 

Relatives often prefer formula as it helps babies sleep for longer stretches. 

Many families, moreover, prize pudgy babies, who are seen as healthier. 

Formula-fed infants gain weight more quickly, studies show.
China's high rate of cesarean sections -- the world's second highest at 46 percent of all deliveries -- leads more mothers to start their babies on formula. 

Mothers fear drugs used in the operation will affect their breast milk. 

There is also a common belief that China's chronic air pollution is harming mothers' milk supply.
Government surveys show a low breastfeeding rate -- just 28 percent of Chinese women were exclusively breastfeeding at six months as of 2008, down from 51 percent in 2003. 

Independent researchers suggest the real figure is much lower. 

One study published in the Journal of Health, Population and Nutrition in 2010 found exclusive breastfeeding rates at six months in parts of China were as low as 0.2 percent.
With infant formula sales in the United States declining because of a falling birth rate and a rise in breastfeeding, developing nations -- China foremost among them -- are formula companies' biggest opportunity.
In 2008, China surpassed the United States to become the world's largest formula market. 

Euromonitor expects sales of infant formula in China to double from $12 billion last year to $25 billion in 2017.

FREE SAMPLES
Under China's 1995 code, companies may not distribute free formula or samples to pregnant women, their families and hospitals. 

They can't sell products at a discount. 

Nor may they offer hospitals funding, equipment or information in order to promote their product.
The regulation bars hospitals and academic institutions from accepting gifts or help from formula companies or promoting infant formula products. 

It requires medical institutions to "actively advocate" the advantages of breastfeeding.
Penalties for violations, however, are lenient -- the maximum fine is 30,000 yuan ($4,900). 

Enforcement is complicated by its division across several government bodies: the National Health and Family Planning Commission (NHFPC), the State Administration for Industry and Commerce, the State Administration of Radio, Film and Television, and the General Administration of Press and Publication.
Public awareness of the regulation is low. 

Chinese research firm Beijing Shennong Kexin Agribusiness Consulting counts hospitals as one of the four primary channels for sales of infant formula, alongside supermarkets, baby product stores, and the Internet.
Doctors and their recommendations have the largest impact, it wrote in a November 2012 report. Consumers find "organizing activities inside hospitals around nutrition more scientific and persuasive."
Reuters found formula company advertising and promotion commonplace inside hospitals. 

In August, visitors to the maternity ward at Hangzhou Tianmushan Hospital in eastern China were greeted with banners from Mead Johnson that read: "Healthy babies, happy mothers" and "Give baby the best start in life!"
A picture of a baby drinking from a bottle and the Mead Johnson logo adorned the floor guide. 

On the VIP maternity wing, nurse Xia Lingling -- a new mother herself -- said Mead Johnson representatives regularly visited to drop off samples for new mothers and to give talks to the staff.
Xia explained that every patient who delivers at the hospital and stays on the VIP wing receives a free container of Mead Johnson upon the baby's birth. 

Mead Johnson "promotes their infant formula here . . . it's a form of advertising," said Zhang Yueqin, an obstetrician at the hospital.
A Hangzhou Tianmushan spokesman, who would only give his name as Fan, denied the hospital touted Mead Johnson formula to mothers. 

He said promotional materials were intended to improve the medical knowledge of expectant and new mothers. 

The hospital displayed no branded posters from Mead Johnson, he said. 

By late September, the posters had been taken down, Reuters confirmed.
In a statement emailed to Reuters, Mead Johnson said it does not provide formula directly to mothers in hospitals. 

It does give samples to health care professionals "for the purpose of professional evaluation or research, and all of them are clearly marked ‘For medical use only - Not for Resale' on the label," the statement said.
Mead Johnson said it provided posters and "other materials to display in or around maternity wings" if requested by hospital staff. 

These materials "fully comply with the laws and regulations in China," it said.

PUSHING FORMULA
Mothers whom Reuters interviewed said formula was pushed to them in myriad ways: doctors gave them discount cards for infant formula during prenatal checkups; hospital staff strapped identity bands branded by formula companies to their babies' limbs; formula representatives entered their hospital rooms to distribute samples as they recovered from giving birth.
At Beijing Tiantan Hospital, representatives from companies, including Nestle and Wyeth, visited with formula samples for mothers and presents for doctors, said Dr. Yang, who worked as an obstetrician there until 2009. 

"We weren't given a commission, just small gifts."
She declined to elaborate on the nature of the gifts, or be identified by her full name. 

Kuang Yuanshen, a hospital spokesman, said that without more detail, it was impossible to confirm Dr. Yang's allegations. 

Wyeth said by email that company representatives were "strictly forbidden" from visiting hospitals to distribute free samples.
Four former formula company representatives, however, confirmed these kinds of dealings take place. 

A former Nestle sales representative said she brought samples to doctors and took them to dinner. 

A former Nestle marketing executive said it was standard industry practice in China to provide financial incentives to doctors to recommend a certain brand of formula. 

Chinese doctors, she said, expect it.
In an emailed response to questions, Nestle confirmed it has "a medical-trained team who visits hospitals to provide factual information about our product features and up-to-date nutrition and health-related information to doctors." 

Nestle "does not provide any free supply to hospitals nor incentivize doctors to promote our products," it said.
Many underpaid and overworked doctors in China's state-dominated healthcare system have no choice but to rely on incentives from companies, however, says John Cai, director of the Centre for Healthcare Management and Policy at the China Europe International Business School in Shanghai. 

The official annual take-home pay for an obstetrician with nearly two decades' experience in a public hospital might be only $5,000, depending on the services she offers, doctors said.
"A company might approach you and say they'd like to support your work," says Qiu Liqian, an obstetrician and associate professor at the Women's Hospital at Zhejiang University Medical School. 

"If you're organizing an academic conference, or you're organizing an event on nutrition, or an event on preventing infection, they would offer their assistance." 

Formula companies pay for prominent Chinese doctors to attend academic conferences, which she called "free holidays".
Bribery to obtain an unfair business advantage is illegal under both China's Anti-Unfair Competition and Criminal Laws. 

Bribery can include paying for sponsorship, scientific research and travel expenses under the Anti-Unfair Competition Law; under an interpretation of the Criminal Law, paying travel costs is one of many recognized forms of bribery.

UNDERGROUND MARKET
Some formula companies also utilize a large underground market in hospital patient information. 

This gives them immediate access to the names, phone numbers and due dates of pregnant women and new mothers, according to a medical researcher and sales executive who have seen name lists of pregnant women for sale at hospitals in Beijing and Shanghai.
Under a 2009 amendment to China's Criminal Law, it is illegal for employees in the medical sector to sell patients' personal data. 

Stealing or acquiring such information illegally is also a crime.
Contacting mothers through prenatal classes is one way formula companies get access to expecting mothers. At one such class taught by Abbott at Shanghai East International Medical Center, participants received a 400-gram (15-oz) tub of Abbott formula, according to Gao Meng, a 33-year-old office manager from Shanghai who attended.
Shanghai East confirmed that Abbott representatives had trained their nurses in Lamaze breathing techniques and taught prenatal classes at the hospital between April and July this year, because of their "expertise" in Lamaze breathing. 

No infant formula was distributed at these classes, a spokeswoman said. 

A spokesman for Abbott declined to comment.
Hospitals and doctors sell access to prenatal classes to third-party companies, including formula manufacturers, said a sales executive who uses Shanghai hospitals as a marketing platform for his company's nanny services. 

That access allows companies to lead classes, distribute promotional materials or make an appearance to plug their products, he said.
Eighteen mothers in cities around China interviewed by Reuters said infant formula companies contacted them by phone or text message, both during their pregnancies and starting as soon as an hour after they had delivered their babies.
Yang Jing, a 33-year-old department store manager in Beijing who had a baby in 2011, said formula companies including Wyeth called her to ask about her son's development. 

Formula would help her son be stronger, they told her. 

Samples arrived at her home. 

She said she had never given a formula company her address.
Wyeth said it "has clear guidelines for our sales activities to exclude any sales or marketing activities relating to breast milk substitutes that would target consumers, either by phone or face to face contact." 

It promised an investigation into this case.

IT'S ACADEMIC
Most of the major infant formula companies have cultivated ties with the government in China — including departments affiliated with the National Health and Family Planning Commission (NHFPC), one of the agencies tasked with enforcing the 1995 regulation on formula marketing.
Companies fund hospital research and awards for doctors, sponsor conferences and train state medical personnel -- the same medical professionals who are supposed to be actively advocating breastfeeding.

Nestle has been among the most active in the government relations area, breastfeeding advocates say. 

It has sponsored training for officials from mother-and child clinics. 

It backed a Chinese academic study analyzing the composition of Chinese mothers' breast milk. 

Peking University Third, where Lucy Yang had her baby, was among the hospitals the Swiss food giant chose to conduct clinical trials on the use of breast milk "fortifier" for premature infants between 2010 and 2011.
Nestle said it "works with the Ministry of Health and healthcare institutions to promote public awareness and knowledge of health and nutrition."
Last year, Mead Johnson launched a three-year training program for medical personnel in the southwestern province of Yunnan, working with a Chinese foundation. 

The program focused on improving staff's understanding of nutrition and "scientific feeding" for children from birth to age three, according to company publicity materials.
Training of medical personnel that is intended as a gift is a clear violation of both the 1981 WHO code and China's 1995 regulation, said Beijing-based WHO technical officer Wen Chunmei.
In a statement, Mead Johnson described its training project as "philanthropic".

ACCESS TO POLICYMAKERS
Nestle and other foreign formula companies also enjoy direct access to Chinese policymakers. 

During discussions about revising the 1995 regulation that began in December 2011, the Ministry of Health (now the NHFPC) solicited opinions from big foreign formula brands as well as global health and children's organizations.
Nestle sought to weaken some of the proposed provisions, some of which were more stringent than the 1995 regulation and would have brought China closer in line with WHO regulations, according to a copy of its submission obtained by Reuters.
Despite publicly supporting the WHO code, Nestle objected to a proposed rule that formula packaging should display in a conspicuous way the wording "breastfeeding is recommended". 

The WHO code says formula containers should clearly and conspicuously display a statement on the superiority of breastfeeding.
Nestle told Reuters that the proposed labeling risked inconsistency with a Chinese infant food safety standard "which provides clear guidelines to ensure that messages on labels are displayed in a standardized manner".
Nestle further opposed a proposed ban in the revised code on formula companies funding hospital research into breast milk alternatives. 

In its statement to Reuters, Nestle said the research was "necessary for the development of science-based products that can save the lives of those infants who cannot have adequate breast feeding." 

Nestle also sought to limit the proposed code's application to formula for "full term, healthy babies", an exclusion not in the WHO code, though it says it did not try to make an exception for specialty formulas.
"Quite frankly," Nestle wrote Reuters, "all our recommendations were meant to introduce a stricter local code as well as implementation." 

Nestle added that it urged extending the curb on promoting formula from infants' first six months to their first 12.

SIGNS OF CHANGE
The Chinese government is showing signs of taking the 1995 regulation more seriously. 

After the Chinese television story about Dumex, the health ministry warned hospitals to strengthen enforcement of the code. 

Three government agencies jointly issued a notice reinforcing its main principles.
But while the 1995 regulation is getting more attention, the attempt to revise it remains in limbo. 

The NFPHC, in a faxed response to questions, said the number of government departments involved and the number of sectors the code covered, as well as the reorganization of government departments, had slowed the process of revision.
Wen, the WHO technical officer, said there may not have been sufficient public education about the 1995 code. 

But she stressed that infant feeding was an issue that "all of society" needed to address. 

"If training is confined to the medical system," she said, "it will only have a limited impact on raising the exclusive breastfeeding rate."

Read More

Forging an Art Market in China

By David Barboza, Graham Bowley and Amanda Cox

BEIJING -- When the hammer came down at an evening auction during China Guardian’s spring sale in May 2011, “Eagle Standing on a Pine Tree,” a 1946 ink painting by Qi Baishi, one of China’s 20th-century masters, had drawn a startling price: $65.4 million. 

No Chinese painting had ever fetched so much at auction, and, by the end of the year, the sale appeared to have global implications, helping China surpass the United States as the world’s biggest art and auction market.
But two years after the auction, Qi Baishi’s masterpiece is still languishing in a warehouse in Beijing. 

The winning bidder has refused to pay for the piece since doubts were raised about its authenticity.

Qi Baishi’s “Eagle Standing on a Pine Tree” has not been paid for.

“The market is in a very dubious stage,” said Alexander Zacke, an expert in Asian art who runs Auctionata, an international online auction house. 

“No one will take results in mainland China very seriously.”
Indeed, even as the art world marvels at China’s booming market, a six-month review by The New York Times found that many of the sales — transactions reported to have produced as much as a third of the country’s auction revenue in recent years — did not actually take place.
Just as problematic, the market is flooded with forgeries, often mass-produced, and has become a breeding ground for corruption, as business executives curry favor with officials by bribing them with art.
Fraud is certainly no stranger to the international art world, but experts warn that the market here is particularly vulnerable because, like many industries in China, it has expanded too fast for regulators to keep pace.
In fact, few areas of business offer as revealing a view of this socialist society’s lurch toward capitalism as the art market. 

Like many luxury businesses in China, the explosion of buyers for art here has been fueled by the pent-up consumerism of the newly rich. 

The demand is so great that last year, in a country that barely had an art market two decades ago, reported auction revenues were up 900 percent over 2003 — to $8.9 billion. (The United States auction market for 2012 was $8.1 billion.)
While the luxury-buying habits in China often mimic those in the West, the demand for art reflects uniquely Chinese tastes. 

While the rest of the world bids up Pollocks and Rothkos, Chinese buyers typically pursue traditional Chinese pieces, some by 15th-century masters, and others by modern artists, like Zhang Daqian, one of many who have chosen to work in that old style.

Ceramic vases and jugs dry before being fired in the kilns at the Xiong Jianjun factory, one of China’s best-known makers of reproductions, in Jingdezhen, the ancient center of porcelain making.

This very reverence for the cultural past is now contributing greatly to the surge in forgeries. 

Artists here are trained to imitate the old Chinese masters, and they routinely produce high-quality copies of paintings and other works, such as ceramics and jade artifacts. 

That tradition has intersected with the newly lucrative art market, in which reproductions that so many have the skills to create are often offered as the real thing. 

It would be hard to create a more fertile environment for the proliferation of fakes.
“This is the challenge right now,” said Wang Yannan, the president and director of China Guardian, the nation’s second-biggest auction house. 

“In the mind of every Chinese, the first question is whether it’s fake.”
For years, much of the forgery went unnoticed as works passed from buyer to buyer, their prices spiraling up. 

But, increasingly, high-profile scandals are exposing the extent of the fakery and sowing doubts about the larger market. 

In one case, three years ago, an oil painting attributed to the 20th-century artist Xu Beihong, which sold at auction for more than $10 million, turned out to have been produced 30 years after the artist’s death by a student during a class exercise at one of China’s leading arts academies.
Even more embarrassing was the government’s decision last July to close a private museum in Hebei because of suspicions that nearly everything in it — all 40,000 artifacts, including a Tang dynasty porcelain vase — were fake.
“There’s always been forgers on the market, but it’s a matter of proportion,” said Robert D. Mowry, a former curator of Asian art at Harvard who is now a consultant for Christie’s.
Concern about fraud and a cooling economy seem to have tempered enthusiasm in the Chinese art market. After peaking in 2011, reported revenues dropped off 24 percent last year, according to Arts Economics, a research company that studies the international market. 

This year is expected to be modestly better than 2012.
The Chinese auction industry and the government have taken notice, and say they are looking to clean up the abuses and stem further damage to consumer confidence, especially since the art market is actually perceived by many as one of the safer places to invest.
“A majority of Chinese people do not trust the Chinese stock market,” said Melanie Ouyang Lum, a consultant on Chinese art. 

“The housing boom has slowed tremendously. A lot of people are looking to art for investment.”
In fact, Zhang Daqian, a 20th-century artist known for his landscapes, is one of several Chinese painters who have joined Picasso and Warhol as the best-selling artists in the world even though their names hardly register outside collecting circles.

China has identified culture as a core area for economic growth, and a vibrant art market as a useful tool of soft power, promoting a view of Chinese society as a center of aesthetics and beauty and deflecting the international focus from political and human rights issues. 

The Chinese are handicapped in cleaning up the art market, though, by a weakness in their laws, which absolve auction houses of any responsibility if a work turns out to be fake.
The forgery problem helps account for the soaring number of payment defaults. 

In the past three years, a study of sales at mainland auction houses by the China Association of Auctioneers found that about half the sales of artworks worth more than $1.5 million — a major portion of the market — were not completed because the buyer failed to pay what was owed. (For major auction houses in the United States, the default rate for works of the same value is negligible, several experts said.)
“It has something to do with the general environment in China,” said Zhang Yanhua, the association chairwoman. 

“As you know, China is still trying to build the rule of law in this country.”

Other explanations for the wave of defaults and late payments, experts say, include instances in which bidders got buyer’s remorse or just bid up a price to increase the value of works by a particular artist they collect.
Even when you factor in faulty revenue reporting, the rise in art buying over the past decade has been meteoric, with Chinese banks, state-owned companies and business tycoons continuing to invest in the boom. 

Art has become a kind of currency, and collecting is so popular in China now that auctions are often mobbed. 

On Chinese television, more than 20 programs offer tips on collecting and on identifying cultural relics, and late-night infomercials promise quick riches to viewers who purchase a $2,500 collection of works by former students of renowned masters. 

Purchase today, the ad declares, and you can immediately secure a profit of $100,000. 

With so much at stake, Chinese art dealers have rushed to Europe and America to buy back Chinese relics. There has also been a rash of museum thefts involving Chinese antiquities. 

And a black market in artifacts has emerged, with so-called tomb raiders digging up buried treasures that they can sell.

At a time when some other markets are drawing fewer investors, packaged collections of paintings in the traditional style are advertised on infomercials as having a huge potential returns.

The interest in addressing the market’s weaknesses may have played a role in China’s recent decision to loosen longstanding rules that restrict Western auction houses from access to the Chinese market.
Now Sotheby’s has a joint venture with a state-run company, and Christie’s won a license this year to become the first international auction house to operate independently in China — developments that may serve to foster competition and higher standards in the market. 

Ms. Zhang, the head of the auction association, said bringing in the Western auction houses was like putting a crocodile in a pond.
“It makes the fish swim faster,” she said.

The Rising Price of Culture
Less than a decade ago, the Chinese art market was still quite sleepy, a legacy of the Cultural Revolution when luxury items were viewed as bourgeois and the Red Guards raided homes, seizing and destroying art.
Ma Weidu, a major collector based in Beijing, recounted how easy it still was in the 1980s to secure small artifacts. 

People gave them to him for nothing, he said, or traded them for a few cigarettes. 

Occasionally, he would pay a small fee.

Ma Weidu, a major collector who picked up some pieces in exchange for cigarettes after the Cultural Revolution devalued art.

“They’d say: ‘Take it all. All I want is a washing machine,’” he recalled.
The auctioning of art remained rare until the early 1990s, when the government lifted restrictions on the sale of cultural relics. 

Still, the art market did not begin to take off until 2004, fueled by rising incomes.
Now there are more than 350 Chinese auction houses that deal in fine arts. 

The two largest — Poly International Auction company, and China Guardian — are billion-dollar enterprises with offices in several cities, including Tokyo and New York, and close ties to the country’s ruling elite.
But as the market has grown, so has its dark underbelly. 

Price manipulation is rampant, analysts say, as collectors and investors, perhaps an art investment fund with large holdings in a particular artist, bid up a work to boost the value of their entire inventory. 

Sometimes, experts say, auction houses themselves throw in fake bids. 

The Chinese have a name for the price-boosting process. 

They call it “stir frying.”

Qi Baishi’s Fish and Shrimp

While some collectors care deeply about their art, even exhibiting it in their own elaborate private museums, many buyers are primarily investors looking to flip a work for profit, experts say. 

Objects are sold and resold. 

One painting by Qi Baishi, “Fish and Shrimp,” sold four times at auction in the 10 years ending last December, the price climbing to $794,000 from $30,000 in 2002, before trailing off last year to $552,000.
Resale opportunities are a priority for many buyers. 

At an auction in Beijing last month, four men from Guangzhou bought several paintings worth tens of thousands of dollars. 

“Most people you see here, we don’t have a real job, we are traders,” said one of the men, in a white bomber jacket. 

“We buy them and resell them to educated, wealthy people.”
Analysts say that flipping artwork contributes to the market’s nonpayment problem. 

Before an auction, a buyer might find a collector interested in a piece and bid successfully for it, but refuse to pay if the deal with the collector falls through.
And then there are the payment problems that arise because China’s art market is, economically speaking, so young, and its rich are so recently minted.
“There is still a big difference between East and West in understanding whether raising a paddle at an auction is actually a binding contract or not,” said Philip Tinari, director of the Ullens Center for Contemporary Art in Beijing. 

“Some young starlet buys a bunch of paintings at an auction, walks out and says, ‘Nos. 13, 11, 7, 6, 5 those are the ones I don’t want.’ It happens all the time.”
Auction houses have typically papered over the nonpayments, reporting aborted transactions as true sales, even posting record prices and seldom correcting the record. 

This has misleadingly burnished their revenues, making the market seem hotter and propping up prices, industry experts said.
The practice has so alarmed the Chinese authorities, who worry that it could undermine the credibility of the market, that the auction association and state bodies like the ministries of commerce and culture stepped in a few years ago.
As part of a larger program of reforms, the association now collects nonpayment data and publishes its findings in an effort to expose malefactors. 

It not only encourages auction houses to blacklist buyers with a history of not paying, but also recommends that the houses require steep deposits from potential bidders. 

The government has canceled or suspended the licenses of 150 auction houses between 2008 and 2011 for a variety of problems, including the sale of fake items.
Even with the fraud and fakery, many collectors and investors say there is too much excitement and profit in the market to warrant dropping out, especially when new money keeps showing up at auctions, ready to buy.
“In the newspapers, there are always stories of someone buying something for a dollar and selling it for a million,” said Rui Zhang, who runs the art market and management programs at Tsinghua University in Beijing. 

But Jiang Yinfeng, an artist, critic and curator, said that the people who suffer in such an overheated market are often those with little experience in such matters. 

“Some of my friends use their houses as collateral to buy art items,” he said. 

“Some of them take high-interest loans.”
One engine driving the Chinese art market has been the culture of gift-giving, which prompts provincial officials to arrive en masse in Beijing during the Mid-Autumn Festival in September, further clogging the congested streets as they ferry presents of art, alcohol and other items to senior government officials.
But art is also used in more elaborate bribery schemes. 

In some cases, an official will receive a work of art with instructions to put it up for auction; a businessman will use it as the currency for a bribe, purchasing the art at an inflated price and giving the official a tidy profit.
“Unlike cash, the value is less obvious,” said Zhang Pingjie, a curator at the Himalayas Art Museum in Shanghai.
Whether the given work is real often doesn’t matter, experts say, because the buyer intends to spend lavishly anyway. 

And were the scheme to be discovered, the minimal value of a fake would mean a lesser punishment.
The bribery of public officials with art is so widespread that the Chinese have coined a term to describe this kind of aesthetic corruption.
They call it “yahui” or “elegant bribery.”
One such bribery case occurred several years ago when the city of Chongqing cracked down on the gangsters who controlled its buses, taxis and gambling parlors.
In 2009, the authorities detained the man who had protected the criminals: the city’s own deputy police chief, Wen Qiang.
Searches of Mr. Wen’s properties turned up watches, wine and other items typical of graft around the world, including $3 million in cash wrapped in oil paper and submerged in a fish pond.
But investigators also discovered a surprisingly expansive and expensive collection of art at Mr. Wen’s mountainside villa and another home he kept at the Crabapple Moon Residences. 

He had been given, they said, more than 100 works, including fine ivory sculptures and a Buddha head carved from stone. 

Valuable calligraphy scrolls were stored in a ceramic container. 

A painting attributed to Zhang Daqian rested on a bookshelf.
Mr. Wen was executed for his crimes the next year.
“Who is in the auction market?” asked Li Yanjun, an art expert and authenticator at Beijing Oriental University.
“Government officials,” he said. 

“They hide and have people bid for them, or buy up their works.”

An ornate jade dressing table and stool, sold in 2011 as Han dynasty antiquities, later proved to have been made just a year earlier.

Brand New Antiquities

The stool and dressing table were a set, carved from jade and said to date from the Han dynasty, some 2,000 years ago. 

Their sale at auction in Beijing two years ago drew $33 million and lots of fanfare.
But then experts began pointing out that Chinese did not sit on chairs during the Han dynasty (206 B.C. to A.D. 220). 

They sat on the floor.

Eventually, a leader of the jade trade in Pizhou, a village in Jiangsu Province in eastern China, acknowledged that the pieces had been created by craftsmen there in 2010.
Wang Rumian, former president of the Pizhou Gemstone and Jade Industry Association, said in an interview last month that it had been the art dealers, not the craftsmen, who chose to pass off the set as ancient.
“It wasn’t made that well,” he insisted.
But it was good enough to fool the Chinese art market and draw a record price for jade that year.
The trail of phony “antiques,” bogus paintings and fake bronzes winds throughout China these days. 

In Jingdezhen, a city in the rugged mountains of southeast China, small workshops produce exquisite reproductions of Ming and Qing dynasty porcelain, the craftsmen going to some lengths to build the wood-fired kilns that help create the subtle textures and glazes.
In Yanjian, a dusty village in central Henan Province, they use ammonia on bronze to induce corrosion and produce that same greenish, oxidized patina that comes from exposure, allowing a bell or ritual wine vessel made a few days ago to pass for an artifact unearthed from a tomb.

And in Beijing, Tianjin, Suzhou and Nanjing, highly skilled painters and calligraphers are replicating the brush strokes of revered masters.
So-called traditional Chinese paintings typically depict the natural beauty of mountains, rivers and forests in an ancient style, and, together with calligraphy, are the workhorses of China’s art market, accounting for nearly half the money taken in at auction last year. 

So, throughout the country, painters work to copy masters like Qi Baishi and Fu Baoshi.
“I’ve seen 700 to 800 people in a painting workshop, with a clear division of labor, making the works of Qi Baishi,” says Zhang Jinfa, a professional arts authenticator based in Beijing.
A study last year by Artron, an art data company based in China, estimated that as many as 250,000 people in about 20 Chinese cities may be involved in producing and selling fakes. 

Visits to several of these cities in recent months documented that such production centers are thriving.
Thousands of people in Jingdezhen, the ancient center of porcelain making, are employed by its bustling workshops, where bare-chested craftsmen sit hunched over, spinning clay into ancient forms. 

Down the production line, painters dip their brushes in ink and copy the outlines of flowers or traditional Chinese patterns onto the pottery. 

Often, the images are taken directly from auction catalogs that are pressed open on a nearby table.
One of the best-known ceramic reproduction makers in Jingdezhen is Xiong Jianjun, who spent eight years making a copy of a Qianlong vase at the request of the National Museum in Beijing.
“You need to study the fundamentals and decipher what they did back then,” said Mr. Xiong, who said some of his reproductions have been sold without his consent as antiquities.

Workers recreating antique ceramics from clay at Xiong Jianjun’s factory, which specializes in such reproductions. Mr. Xiong spent eight years making a copy of a Qianlong vase at the request of the National Museum in Beijing. 

In China, the tradition of copying reflects more than a simple reverence for the past; it is an appreciation that beauty has been captured in a fashion worth emulating. 

Unlike the West, where “the shock of the new” is admired, China values tradition, and its best-selling works often pay homage to, and look like, those made hundreds of years earlier.
At prestigious art schools, students engage in what the Chinese refer to as “lin mo,” or imitating the masters. Forgery and fraud are not necessarily part of the tradition, experts say, though famous painters like Zhang Daqian, who died 30 years ago, took pleasure in fooling the experts.
“Zhang Daqian felt he was an equal to the old masters,” said Maxwell K. Hearn, chairman of the Asian art department at the Metropolitan Museum of Art in New York. 

“And so the true test was whether he could copy them. “
One story that illustrates Mr. Zhang’s playful approach to copying concerns his 1967 trip to review an exhibition of the works of Shitao, a 17th-century painter, at the University of Michigan Museum of Art. 

His tour guides were proud to show him the works of such a famous painter, who had died more than two centuries earlier. 

So they were surprised when Mr. Zhang began to laugh and point to various works on the wall, saying: “I did that! And that.”
“That is how Zhang Daqian talked,” said Marshall Wu, a retired professor at the University of Michigan who first met Mr. Zhang in the 1960s. 

“You never really knew if he was serious or kidding. But he did a lot of Shitao forgeries.”
Mr. Zhang’s work now serves as a model for a painter in Beijing, Liang Zhaojin, who studied with the master and now works in his own classical style that is based on that tradition.

Liang Zhaojin 

“I am honoring Master Zhang,” he said, “by inheriting and promoting his style.”
It is easier to detect fakes, of course, when the artists are still alive. 

Artron recently collected 100 works attributed to a popular painter, He Jiaying, and, with his help, determined that about 80 were fakes.
“Basically, everything is controlled by middlemen,” said Wu Shu, a writer who has posed as an art dealer and published three books on the subject, including, “Who Is Swindling China?”
“They generally divide the goods into three categories: the best-quality things go to the auction market; midlevel works go to the antiquity markets; and lower-level things go to flea markets,” Mr. Wu said.
Experts say some Chinese dealers and consignors slip works into auction by doctoring old sales catalogs to invent a provenance, and — if all else fails — paying an auction house specialist to include a suspect item.
Auction houses need impressive consignments to attract collectors, and experts say that, in their desperation for inventory, many have ordered forgeries.
“I would say 80 percent of the lots at small and medium-sized auction houses are replicas,” said Xiao Ping, a prominent painter who formerly worked as an authentication adviser to the Nanjing Museum.

Qi Baishi, an often imitated modern master of traditional Chinese painting, who died in 1957.

Immortal Creativity

Qi Baishi was a master of the ordinary. 

In the summer of 1957, with his health deteriorating, the painter went into the studio of his traditional courtyard residence in Beijing, dabbed his brush in ink and created a portrait of a flower, a long-stemmed raspberry-and-yellow peony.
Three months later, he was dead, at 93.
“That was the last work he completed,” said his grandson Qi Bingyi, who keeps the painting locked in a safe at his home in Beijing. 

“I have it right here. Do you want to see it?” he said before unrolling the work for visitors last month.
Death, however, seems to have done little to curb Qi Baishi’s productivity, according to auction records and interviews with experts and his family. 

They indicate that rising values and his popularity as one of China’s greatest modern painters have led to a flood of fake Qi Baishis on the market.
Liu Xilin, editor of “The Complete Works of Qi Baishi at the Beijing Fine Arts Academy,” said about half the Qi Baishi works that come up for auction in China are fake. 

“I can see that by just looking at their catalogs.”
In the past 20 years, works attributed to Qi Baishi have been put up for auction more than 27,000 times in China.
In one sign of the mania, 5,600 works attributed to Qi Baishi came on the market in 2011, up from 381 works in 2000.
Qi Baishi, born in 1864 into a peasant family, herded cows and worked as a carpenter’s apprentice before taking up painting at 27. 

Fame came a few decades later, after he moved to Beijing and adopted a fluid, almost calligraphylike style, using an ink wash.
He specialized in vivid landscapes and portraits of nature, documenting begonias, dragonflies, grasshoppers, frogs, chickens, crabs and shrimp, lots of shrimp.
Scholars say he was prolific and estimate he produced between 10,000 and 15,000 works in his lifetime. 

Of those, about 3,000 are in the collections of major museums and some are assumed to have been destroyed during the Japanese invasion in the 1930s or during the Cultural Revolution, when Red Guards looted and occupied his family’s home.
Auction records, though, show that more than 18,000 distinctive works by Qi Baishi have been offered for sale since 1993, an impossible number, if the expert estimates are right.
In a study this year, Artron said many of China’s leading modern artists are being counterfeited, but none more so than Qi Baishi. 

Arnold Chang, who ran Sotheby’s Chinese painting division in the 1980s, is equally emphatic.
“There is no doubt,” he said, “that there are far more works ascribed to Qi Baishi in the market than he could have possibly painted, even with an assembly line of assistants — which he supposedly had.”
Just about every major city in China has an art dealer who claims access to high-quality Qi Baishi fakes. They are often sold as reproductions, as are many of the elaborate counterfeits created here, but experts say many of them invariably end up at auction, rebranded as the real thing.
Qi Baishi’s own family, some of them painters, aggressively promote themselves as descendants of the famous artist in order to sell their works, done in his style.
“Some distant relatives can’t even draw very well, and they go out and claim they are Qi Baishi’s family,” said Qi Binghui, a granddaughter of the artist, who is based in Beijing.

“If you’re going to do something in your grandfather’s name, at least live up to his standard.”
Family members say they have been pressed to authenticate fakes, to pose for photos with pieces that might go to auction and even to mass-produce famous works by Qi Baishi.
“I can tell you I was once asked to go to Thailand to justify a batch of 20 fake paintings claimed to be my grandfather’s,” Qi Binghui said.

“That person was trying to sell those fake paintings in Thailand, and he wanted me to assure the buyers that they were real.”
Concern over fake Qi Baishis is now a challenge for auction houses. 

China Guardian, the big auction house, says it has an enviable record of spotting fakes, and most experts agree that its reputation stands above all others. 

But in the spring of 2011, China Guardian marketed “Eagle Standing on a Pine Tree” as the classic masterpiece the painter had created decades earlier to honor the birthday of Chiang Kai-shek, then president.
The work was put up for sale by Liu Yiqian, a former taxi driver turned wealthy financier, who has become one of China’s largest art collectors. 

He sold it as a set with a calligraphic couplet Qi Baishi wrote to accompany the painting, and the auction house estimated it could bring in as much as $20 million.
On a cool evening in May, bidding on the work went back and forth for more than 30 minutes as a collector in the room jousted with someone calling in bids by telephone. 

When the hammer fell at a record $65.4 million, the room burst into applause.
The euphoria did not last long, though. 

An art critic, Mou Jianping, soon suggested that the work might be fake, and the bidder decided not to pay. 

Two years later, the buyer has effectively defaulted on the item.
Mr. Liu declined to comment on the failed sale.
But in an interview last month, Kou Qin, director and vice president of China Guardian, described the nonpayment problem in the market as “a very bad phenomenon,” but one that will be fought. 

His company reduced its nonpayment rate for the most expensive items to 17 percent last year.
“Lack of honor,” he said. 

“It is a problem faced by the whole of society.”

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In China, parents bribe to get students into top schools

Everything, from admission to grades to teacher recommendations, is negotiable in Chinese schools if you know the right person or have enough cash
By William Wan
Everything is negotiable in Chinese schools, from admission to grades to teacher recommendations, so long as you know the right person or have enough cash, parents and teachers say.
Astronomy teacher Song Mengyuan poses for a portrait near the Beijing’s Jinshang School’s $326,000, one-story-high telescope for astronomy lessons, housed in a rotating room with retractable ceiling.
BEIJING — For years, Yang Jie’s friends warned her to save up for her daughter’s education.
Not for tuition or textbooks, but for the bribes needed to get into this city’s better public schools.
A strong-willed, self-made businesswoman, Yang largely ignored their advice.
“Success in life,” she told her daughter, “is achieved through hard work.”
But now, with her daughter entering the anxiety-filled application process for middle school, Yang is questioning that principle.
She has watched her friends shower teachers and school ­administrators with favors, ­presents and money. One friend bought a new elevator for a top school.
His child was admitted soon after.
Reining in corruption has been the main focus of China’s new president, Xi Jinping.
But such campaigns are barely making a dent, critics say, in a country where children are shown as early as elementary school how to game the system.
Everything, from admission to grades to teacher recommendations, is negotiable in Chinese schools if you know the right person or have enough cash, parents and teachers say.
As a result, many believe, the education system is worsening rather than mending the vast gap between the elite and everyone else in China.
As middle-class parents in Haidian, one of Beijing’s most competitive school districts, Yang, 42, and her husband had some money but few connections to help their daughter get into an elite school.
Then, this summer, a dance teacher pulled Yang aside.
He said he knew people at the middle school her daughter had been aiming all her efforts toward attending.
And suddenly, Yang admits, she started looking into how much savings she and her husband could cobble together if the dance teacher’s friends were to ask for compensation.
She still hasn’t decided what to do.
Their dilemma, she said, boils down to this: “If everyone else is playing the game, how can I refuse?”

Besting the competition
In Chinese cities, the best schools are the public ones.
Private schools are often aimed either at foreign expats or children barred from city schools, such as the offspring of low-income Chinese migrant workers.
Even by Western standards, the top public schools are often astounding.
During a recent tour of Beijing’s Jingshan School, administrators showed off a $326,000, one-story-high telescope for astronomy lessons, housed in a rotating room with retractable ceiling; flat-screen televisions in every class; pricey computer labs; an Olympic-size pool; and a state-of-the-art hydroponics garden.
The school recently began requiring doctoral degrees for all upper-grade teachers.
Meanwhile, just miles away, at a private school for migrant families, kids walked off a dirt road into a ramshackle facility with cracked walls, overcrowded classes and a single bathroom consisting of cement-lined holes in the ground.
An intense competition has developed among parents to win admission for their offspring to the best schools.
Academic performance still matters greatly.
And like many students, Yang’s 12-year-old daughter, Ma Qianyi, has spent every night over the past three years, even on weekends and vacations, attending expensive cram classes.
But Qianyi is the first to admit she doesn’t work hard, compared with her peers.

Currying favor
The hyper-competitiveness has driven many parents to curry favor in any way possible — delivering organic rice to a teacher worried about food safety, bringing back lavish gifts from abroad.
When all else fails, store gift cards are always a safe bet.
“Sometimes, you open these cards on National Teacher’s Day and find crazy amounts inside,” one Beijing teacher said.
Such gifts, several parents explained, can lead to more attention for a struggling student, extra praise for gifted ones or even a seat closer to the front of the classroom.
“It’s human nature,” said one parent who regularly sends her son to school with gift cards.
Like many adults interviewed for this story, she asked for anonymity to talk frankly about school corruption. “If the teacher is choosing between two kids on equal footing, the effect of a gift may be small, but it could make all the difference.”
Yang used to send gift cards, too, worth $20 or $30 — modest in comparison to the $200 or $300 from other families.
But she eventually stopped even that.
“It didn’t seem to make a difference,” she said.
“I decided to save the money instead for things that actually contribute to my daughter’s education, like cram classes.”
The decision left her daughter uncomfortable and even bitter at times.
Her mother recalled the time in second grade when Qianyi lost out on a top award.
“My daughter said to me, ‘The teacher chose that girl because her mother was smart and gave medicine to the teacher when she was sick.’ She asked me, ‘Why didn’t you give any medicine?’ ”

Semi-legal or tolerated
The question has haunted Yang of late, with her daughter finishing elementary school in the spring.
Getting into a good middle school means a shot at Beijing’s top high schools.
A top high school means proper preparation for China’s infamously rigorous college admissions exam, called the gaokao.
A good gaokao score means a secure job, higher income, better housing, better marriage prospects.
Education in this communist country is supposedly free and funded by the government.
But elite schools benefit from hefty fees and donations.
These days, admission to a decent Beijing middle school often requires payments and bribes of upwards of $16,000, according to many parents.
Six-figure sums are not unheard of.
In theory, middle school admissions are guided by where children live, but independent studies have shown that only half the students at Beijing’s top public schools are chosen that way.
Instead, getting in often comes down to three things: talent, money and relationships, particularly ties with government or party officials.
“If you know someone, you pay a lot less,” said a mother in Beijing’s Chaoyang district.
Some payoffs have become semi-legal.
Many government ministries and state-owned companies reserve seats for children of their employees through large donations to schools.
And most top schools charge a “school choice fee” — ranging from $5,000 to $40,000 — for children living outside specific school districts.
The central government has repeatedly banned such fees.
But they have not only remained but risen in recent years.
Lacking the resources of wealthier, better-connected families, Yang and her daughter decided early on to target seats reserved at most top schools for those with “speciality skills.”
That’s why Qianyi took up dancing three years ago.
“It’s the only thing I’m good at,” she said matter-of-factly on a recent night, while wolfing down noodles before a lesson.

‘It’s all unfair’
The dance instruction has cost Yang $5,000 in the past six months alone — a huge strain for a woman who earns $20,000 a year and whose husband is unemployed.
But schools’ evaluations of such skills have proven susceptible to corruption.
A parent in Yang’s district who was approached for bribes by a coach explained it this way: “Just because your child wins first place in a race doesn’t mean he has the best chance. The school can choose the third- or even fourth-place runner and simply say they had more potential.”
Yang was shocked when her daughter’s dancing teacher offered to help.
Even now, she wonders whether his offer came from greed or genuine recognition of her daughter’s talent.
As she waited outside her daughter’s dance studio on a recent night, she weighed their options.
Neither Yang nor her husband attended college, but she did finish at a vocational high school.
She managed to start her own company with a friend, selling imported sensors.
Today’s China, however, is a different country from that of her youth, exponentially more competitive. Millions vie in megacities for limited jobs, housing and mates.
Yang said she has struggled to define guiding principles for herself even as she has tried to teach life lessons to her daughter.
“I want her to be able to see this society for what it is — one that is full of wolves,” Yang said.
“But I don’t necessarily want her to be either wolf or sheep.”
Yang said she is beginning to see the dancing teacher’s offer less as a moral dilemma and more as a purely practical decision.
“The system, the pressure, the bribes, it’s all unfair,” she said.

• “But in the end, the only thing I can do is what’s best for my daughter.”

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US Investigation Spotlights China's Princelings

by Yi Chen, Yinan Wang

The U.S. Securities and Exchange Commission (SEC) is investigating JP Morgan’s Hong Kong office for hiring the children of high-level Chinese officials. 

Observers say the hiring of these so-called “princelings” is to open business opportunities in mainland China. But could the practice, which dates back almost two decades, also be considered bribery?
The SEC has investigated at least seven cases of bribery of Chinese officials, involving major American firms, since 2010.
This SEC investigation is reportedly centered on two children of top Chinese officials who were hired by JP Morgan’s Hong Kong office. 

The New York Times reports that in 2007, the bank hired Zhang Xixi, the daughter of Zhang Shuguang, a senior official at the China Railway Group who is now on trial in Beijing for accepting millions in bribes.
Then in 2010, it hired Tang Xiaoning, the son of China Everbright Group Chairman Tang Shuangning. Both companies are state-run enterprises. 

After they were hired, these Groups became JP Morgan clients.
Gordon Chang, author of The Coming Collapse of China, says that these hirings have come to be known as "Elephant Hunting."
“What’s going on here is that there are elephants out there. They’re very important state officials. They have children and those children have gone to very good business schools around the world and if you want to hunt these elephants, if you want these big [contracts], you’re gonna go into the jungle, and that’s exactly what’s been going on here," said Chang.
Chang says this practice is universal in China, where people rely on guanxi, which literally means “connections” or “relationships,” and carries a sense of mutual obligation between the two parties.
Analysts say it is more common to see money, travel, and entertainment used to bribe officials rather than jobs for their children.
But some of the hiring cases involve massive salaries. 

UBS hired the son of Li Ruihuan, a former member of the elite standing committee of China’s Politburo, for a reported compensation package of $10 million.
A 1977 U.S. anti-corruption law prohibits U.S. companies from providing things of value to a foreign official to secure or retain business. 

While financial institutions are eager to hire princelings, they often don’t stay for long.
“If the children of China’s leaders stay in the U.S., one thing is that the U.S. is a mature market so there is no opportunity to break out," said Ming Xia, a political science professor at City University of New York. "Another aspect is if they hold a position in the U.S. for a long time, on the whole it is a middle-level management job, which doesn’t bring sudden huge profits."
Even though the decades-old practice of hiring princelings has been on the decline recently, the SEC decision to investigate is bringing new attention to the issue.
Ming Xia believes the investigation may reflect U.S. worries about China’s crony capitalist model.
“To some level the U.S. is aware, especially at the strategic level, that China’s model of capitalism can pose a huge threat to the global investment, business, and capital flows environments, capable of causing some kind of corrosion to the U.S. and Western way of life," he said.
The SEC investigation is ongoing and there has been no official word on its status.

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