The gravitational pull of China’s film market in 2014 is stronger than ever. China’s box office reached almost $3.7 billion last year — box office revenues surpassed a monthly record-setting Rmb 3 billion ($490 million) in February alone with $4.6 billion expected for 2014 — close to 30% market growth (about 4-times faster than the country’s economic growth rate as a whole). It’s been two years already since China surpassed Japan to become the second-largest film market in the world, and is expected to overtake the United States in another 5-8 years. Let’s also not forget that movie screens (a total now of approximately 18,200) are being constructed at even faster pace than last year, now about 10-12 each day, with a plateau not expected for another several years when China has about 30,000 screens. Almost everyone therefore is looking to carve out a piece of this seemingly lucrative market. But the road continues to be bumpier than many had hoped.

THE IMPORTS

Of course there are the foreign imports that, as a whole, continue to fare generally very well in China, earning about 50% of the overall China box office yearly. But there is still the quota of 34 films-per-year as revenue share imports (RSI), and talk of a recent increase in that number has now been put to rest as an official at China’s State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) told China’s official Xinhua Agency that the country has no plans to raise its film limits until the theater infrastructure grows to an even greater degree.  A yearly quota of about 30 also stands for those flat-fee imported (FFI) films – there were 26 allowed in last year, which included titles such as Escape Plan and Upside Down

THE CO-PRODUCTIONS

Another way to potentially reach that pot of gold at the end of the China film market rainbow is the co-production, which requires, according to certain regulations and statements issued by SAPPRFT, that at least 1/3 of the above-the-line talent (“main creative talent”)  must come from mainland China, ownership and risks need to be shared, at least 30% of the film budget must come from China, at least some production must take place in China, and that the film must include a certain amount of Chinese elements (although there is no precise definition provided). The benefits to overseas filmmakers to obtain official co-production status are substantial: films granted that status are treated as domestic films (i.e., do not fall under China’s import quota and generally have immunity from “black-out” periods), usually involve local investment in exchange for local distribution rights, and provide the producers a share of between 35-48% of the China box office (as opposed to the 25% offered to the foreign producer of a RSI).

There are also benefits for the Chinese side in a co-production: the gleaning of greater filmmaking expertise and technological prowess (a sentiment that has been echoed as recently as the PRC legislative body meetings held this March), the co-production can serve as yet another investment vehicle, but also can, ideally, allow for the “export” of Chinese culture – i.e., the idea of influence via soft power, a government-supported policy initiative.

The only problem is, though, that almost all of the Chinese co-productions with the West have been box-office flops. (Hong Kong-China co-productions, due ostensibly to the closer cultural/ethnic ties, typically fare must better, and there was even a Japanese-China co-production (“Say Yes”) and Korea-China co-production (A Wedding invitation, and Mr. Go) that did exceptionally well in China recently.) Examples include Snow Flower and the Secret Fan, The Painted Veil, Shanghai, Man of Tai Chi, and Kungfu Man. Other than The Karate Kid, no co-production has made significant money, and few have achieved anything close to critical success.

THE PITFALLS

The reasons for the continued dismal performance of the co-production stem from an unstable and unclear understanding of the China co-production relationship and the products that should emanate from it. And the factors that contribute to that instability and lack of understanding fall into two main categories, what one might term extrinsic and intrinsic. The extrinsic factors are those related mainly with the media regulatory authorities and the overall legal system of China, while the intrinsic factors are related more to the specific conditions among the parties themselves.

The extrinsic factors include:

• Rules on Co-Productions

As mentioned above, there are several requirements that must be met to qualify a film as a co-production; one of those being that the film must include Chinese elements. Many U.S.-China partnerships therefore simply add some superfluous Chinese content with the aim of creating films that appeal to audiences both inside and outside China. This turns out to be a tricky balancing act with most of these films seen as condescending by Chinese audiences and fizzling altogether with Western audiences.

• Censorship

To many filmmakers and producers from the West, the idea of censorship is anathema to what filmmaking should be. Nevertheless, wanting desperately to be able to share in the China market, most of those in the industry have now taken for granted that the Chinese censorship system is not going away anytime soon. This doesn’t mean, however, that those same filmmakers have a much better idea of how the system works or what generally will (or will not) be censored. The Film Administrative Regulations (State Council, 2001) provides in Article 25 nine broad-reaching stipulations regarding the type of content that will be held off-limits, including content that runs counter to the PRC Constitution, social morals or national cultural traditions; content that might jeopardize State secrets, security, and territorial sovereignty; content related to obscenity, gabling, violence, abetting crimes, cults and superstitions. But if that weren’t enough, Article 25 contains a tenth “catch-all” stipulation which deems as prohibited “other content banned by laws, regulations, and provisions of the State”.

What it mainly comes down to is that topics related to sex and violence, and story elements that are not rooted in scientific fact (e.g., time travel or ghosts), criticism of the Communist party or its legitimacy are prohibited.

Related to the what of film censorship, is also the who. That is, filmmakers also need to be cognizant of the fact that certain actors/actresses may be blacklisted by the 37-person censorship committee for having starred in certain movies or played roles that were not held in high regard by the government (e.g., Brad Pitt for Seven Years in Tibet).

By the way, it should also be noted that it’s not just foreigners who find the censorship system a hindrance, during the legislative body meetings in Beijing this last week, Jackie Chan — a Hong Kong delegate to the CPPCC — spoke out, saying that while China may, within a matter of years, surpass the U.S. world’s biggest film market, home-grown films will be trumped by Hollywood imports if the censorship system does not change. And one of China’s most famous directors currently, Feng Xiaogang (Assembly, Aftershock, and Personal Tailor) added, “Don’t make directors tremble with fear every day like [they are] walking on thin ice….Is the patriotism, political judgment and artistic taste of the censors better than ours, the directors?”

• Legal System

Many Western filmmakers seem to be concerned that their rights will not be protected under Chinese laws, that (in the worst case) they may face impartial judges in a Chinese court, that Chinese copyright laws are ineffectual and that piracy is still rampant. In fact all of those views are to a greater or lesser degree rather inaccurate. Regarding entertainment (as well as other commercial) matters, studies have shown that foreign litigants or arbitral parties fare just as well as their Chinese counterparts. While copyright infringement was indeed rampant until only a few years ago, almost all of the content now found on the major online video portals is licensed and even bootleg DVDs are harder to come by (relegated nowadays mostly to pedestrian overpasses). Specialized intellectual property tribunals have also been set up in several of the larger China cities to help deal with the sometimes more complex nature of the arguments and issues.

• Box Office Receipt Recording

One reason that foreign parties to a co-production often agree to allow the China producer to have 100% of the producers’ share of the China box office (while the foreign side takes controls its own home territory) is that the foreign party is concerned that the box office receipts will be somehow …well, fudged. Again, until just recently (please see more in this issue below), the idea that cinema owners might manipulate revenue data or engage in various forms of fraud was quite commonplace. But with new rules issued in January by SAPPRFT requiring a new standard on the technicalities of managing cinema ticket sales – aimed at stopping tax avoidance and the cheating of filmmakers and distributors – such that ticketing software has to be upgraded to a national digital ticketing platform, the box office numbers that will be presented should be increasingly accurate.

• Tax and Repatriation

As China’s currency, the Renminbi (or RMB), is not freely convertible, there also often questions and time spent wondering how money earned in China will be transferred back to the US (or other country) in USD, and (relatedly) should a Hong Kong company (or other off-shore entity) be established to lower tax liability. In fact, these are less complicated issues than they may seem, for it is not difficult (let alone illegal) to transfer money out of China that is based on approved contractual transactions. Additionally, China will assess the same tax on profits to be distributed to a Hong Kong company versus any other foreign company, so the benefits for that particular purpose are limited.

As to the intrinsic factors:

• Staying on the Same Page

There is a lot of money these days in China, and many who are not (and have never been involved) in the film business have attempted to enter it simply by investing capital. But many of these ventures fail since the financiers lack the patience to see a film all the way through to completion and release. As China producer Shi Nansun said at a convention a few months ago, “It is very hard to turn down these moguls and their money, you have to show face. Just the other day I had to turn down a man who owned a huge chain of foot massage parlors. I don’t have anything against foot massages, but I just didn’t think it right for the film.”

• Trust and Experience

Related to the previous point, it is also in the foreign party’s best (read: vital) interest that the China producer have an intimate grasp of how the China film authorities work, that they possess a solid understanding and grasp of how to incorporate social media and other visual media into their marketing and distribution of a project, and that they know how to shepherd a project through all the hurdles that it must overcome to obtain that coveted Film Public Screening Release Permit to allow for mainland release. Without a proven track record of such projects, there is very little likelihood that film project can succeed, which also why foreign parties should allot a proper amount of time and effort in a due diligence process.

All of the issues mentioned above taken together seemingly create a rather challenging environment to produce a creative, acclaimed and profitable movie audiences in both co-producing countries (and beyond) may wish to view. But with the China market expanding as rapidly as it is, nobody seems to be giving up just yet. Furthermore, in statements made just recently in connection with new corporate tie-ups and joint ventures, it seems that many of the lessons of failed previous ventures may have been absorbed. SMG Pictures and Disney’s new venture aims to have U.S.-based writers team up with local writers and filmmakers to develop stories and scripts that incorporate Chinese themes in Disney movies. But it’s not just the Majors that can benefit from the experiences of previous ventures gone awry in the Middle Kingdom, for with a good story — not simply westernized Chinese fare or kungfu-style flics — and experienced partners, there’s very likely to be some great successes going forward, both commercially and culturally for both parties.