Red Carpet With Hurdles for Foreign Movies to China

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China has liberalised its market for theatrical release of foreign films to some degree, which kills two flies with one stone for foreign movie producers. On the one hand when Chinese are able to watch some popular foreign movie in Chinese cinemas, it decreases the incentive for Chinese consumers to download or buy counterfeit DVDs. On the other hand, the growth in movie tickets in the US and Europe have plateaued and China is with its soaring box office sales the promised land for foreign movies. However, importing movies to China is still highly challenging at different dimensions:

 

 

 

– the movie needs to be selected as one out of only 34 foreign movies;

– then the movie needs to be approved by SAPPRFT;

– there is a draft law that requires that two-thirds of the total movie run time consist of Chinese films;

– then there is a ban during Lunar New Year celebration and Summer holiday;

– domestic films are favoured and foreign movies sometimes have to compete against other foreign movies;

– domestic films can get a tax rebate.

 

Therefore, foreign movies can be screened in China, but many hurdles need to be taken.

 

34

The first foreign movie was screened in China in 1994. It was The Fugutive. Now, China’s box office sales have become an important part of the revenues for members of the Motion Picture Association of America’s. According to their 2015 Theatrical Market Statistics, China’s box office increased 49 percent in U.S. dollars to $6.8 billion. After China, the UK was the country where the six major Hollywood studios that comprise the MPAA, had the highest box office sales, but considerably lower: $1.9 billion.

The contours of the near sunrise future for the members of the MPAA became visible in February 2015, when the box office sales in China (US$650 million) surpassed that of the United States (US$640 million) for the first time. USCC p 7. China is already the second biggest market for MPAA members, and is projected to become the biggest market by 2018.

 

What is the MPAA?

The following companies comprise the MPAA:

  • Walt Disney Studios Motion Pictures
  • Paramount Pictures Corporation
  • Sony Pictures Entertainment
  • Twentieth Century Fox Film Corporation
  • Universal City Studios LLC
  • Warner Bros Entertainment.cinema

 

In 2007 the US brought a case to the WTO against China for measures that restrict the trading rights with respect to imported films for theatrical release, and discriminatory distribution rights. The Panel determined that, under China’s Accession Protocol to the WTO, a number of Chinese measures were inconsistent with China’s obligation to grant “trading rights”. About distribution rights, the Panel rejected the claim of the US. Both countries appealed in 2009. And 21 December 2009 the Appellate Body circulated its report in which it upheld the Panel’s determination about trading rights of imported films.

In 2010, China informed the Dispute Settlement Body (DSB) of its intention to implement its recommendations and rulings. Since the dispute involved many important regulations on culture products, China needed a reasonable period of time for implementation. China and the US agreed that this reasonable period of time was 14 months and would expire on 19 March 2011. Six days later, China reported that it had made efforts to implement recommendations and had completed amendments to most measures. However, given the complexity and sensitivity of the dispute, China hoped that Members would understand the difficulty it was facing in the implementation process. China wanted to resolve the matter through joint efforts and mutual co-operation of the relevant parties.

Memorandum of Understanding (MOU)

On 25 April 2012, the ambassadors to the WTO Yi Xiaozhun for China and Michael Punke (also known for his novel The Revenant, that made it into an Oscar winning film and which was screened in China and opened with $33 million in the first three days) for the US sign the MOU in Geneva.

On 9 May 2012, China and the US informed the DSB of key elements relating to films for theatrical release as set forth in the MOU mentioned at the DSB meeting on 22 February 2012.

At the DSB meeting on 24 May 2012, China said that it had taken all necessary steps and had thus complied with the DSB recommendations. The US said that the MOU represented significant progress but not a final resolution.

World Trade Organization, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, Dispute DS363, available here.

 

In the MOU China and the US agreed upon the following points:

  1. China confirmed that enhanced format films (such as 3D and IMAX films) are not subject to the 20-film commitment set forth in the Additional Commitments under Sector 2.D. of its GATS Schedule and agreed that China will allow the importation of at least 14 enhanced format revenue-sharing films per calendar year beginning in 2012. Therefore the total number of foreign films of 34.
  2. China agreed that the producer of the imported revenue-sharing film will be allocated 25 percent of gross box office receipts, and the Chinese side shall be responsible for the payment of all taxes, duties and expenses.
  3. In a contract for the distribution of an imported film other than a revenue-sharing film, where the two sides are not both private enterprises, China agreed that the contract will be based on commercial terms, consistent with the terms prevailing in countries whose markets are comparable to China’s market based on annual box office revenue, number of screens, annual admissions and admissions per screen.
  4. China confirmed that any Chinese enterprise is eligible to apply for and be granted a license to distribute imported films and that nothing in China’s laws, regulations or government rules prevents any eligible Chinese enterprise from applying for and receiving a license to distribute, and operating as a distributor of, these films. China further agreed that it will promote reform in the distribution of imported films and will actively encourage more Chinese enterprises, including private enterprises, to obtain licenses and to participate in the distribution of these films.
  5. China agreed that the licensing of distributors would be conducted in a nondiscretionary and non-discriminatory manner, that contracts for the distribution of imported films would reflect standard industry practices, and that other Chinese government policies or practices would not undermine the provisions of the MOU.
  6. After five years, thus in 2017, China and the US will engage in consultations regarding key elements of the MOU and to discuss the matter of China implementing the DSB’s recommendations and rulings with regard to films in DS363.

U.S. State Department, Memorandum of Understanding between the People’s Republic of China and the United States of America Regarding Films for Theatrical Release, February 2012, see here.

In short: foreign movie producers can enter the Chinese market in three ways:

  1. revenue-sharing films (but limited to 34 films; 20 normal and 14 enhanced format films), of which the foreign studio takes 25 percent of the box office receipts (which is double in other parts of the world);
  2. flat-fee movies;
  3. Co-productions (the foreign studio receives about half of ticket sales). Hollywood can bypass quotas and receive about half of ticket sales.

See, Knowledge@Wharton, 17 February 2016, available here.

 

State Administration of Press, Publication, Radio, Film and Television (SAPPRFT)

Sean O’Connor and Nicholas Armstrong in ‘Directed by Hollywood, Edited by China’, argue that the SAPPRFT does not give clear guidelines about their wishes. It describes that many a foreign studio is practising self-censorship to get the approval of SAPPRFT. See website of SAPPRFT here (Chinese).

In 2014, the SAPPRFT banned screenings involving anybody who had engaged in criminal activity. China’s new film law stresses celebrity ethics, Xinhua (via Shanghai Daily), 29 August 2016, available here.

“According to SAPPRFT regulations, all films exported to China must adhere to the principles of the Chinese Constitution and maintain social morality. Therefore, any films depicting demons or supernaturalism, crime or any other illicit or illegal actions within China’s borders, disparagement of the People’s Liberation Army and police, and anything that could be perceived as anti-China—including merely damaging Chinese sites or monuments—are prohibited.”

See, Sean O’Connor and Nicholas Armstrong, ‘Directed by Hollywood, Edited by China: How China’s Censorship and Influence Affect Films Worldwide, US-China Economic and Security Review Commission, 28 October 2015, Fn 62, available here.

 

Two-thirds of total movie run time in Chinese cinemas needs to be domestic films

The second draft of a bill, that was originally presented in October 2015, has been just released. Lawmakers are making their second reading of the bill during the bimonthly session of the Standing Committee of the National People’s Congress this week. “The law contains a provision that domestic films should take up at least two-thirds of total movie run time in Chinese cinemas.”

See, Fergus Ryan, ‘Draft Film Law Favors Local Films over Hollywood Imports’, China Film Insider, 30 August 2016, available here.

 

Duration of screenings

Foreign films are often allowed to be screened for a month. “Studios can request an extension by applying to a branch of the China Film Group, which is directly under the State Administration of Press, Publication, Radio, Film and Television, or SAPPRFT, China’s top film regulator. In a twist, China Film Group is also involved in producing films: Together with Enlight Media, it is one of the studios behind “The Mermaid.””

See, Lilian Lin, with contributions by Laurie Burkitt, Making Waves: In Blow to Foreign Films, China Gives ‘Mermaid’ Three-Month Boost, WSJ, 4 March 2016, available here.

 

Not helpful for the box office sales is that foreign films are banned during the high season of movie watching: the Lunar New Year celebration and the Summer holiday.  USCC p 7.

 

Therefore, foreign film studios that want to launch their films globally simultaneous or near simultaneous between 30 April and 2 May 2003, 20th Century Fox launched X2: X-men United in 93 countries

Hubert Gatignon, John R. Kimberly, Robert E. Gunther, ‘The INSEAD-Wharton Alliance on Globalizing: Strategies for Building Successful Global Businesses’, Cambridge University Press, 20 Sep 2004, 207-208) might be wise to first get approval for the China launch from SAPPRFT.

 

Tax rebate

Foreign films have to compete with domestic films that are eligible for a tax rebate since April 2016, which seems not conducive for the level playing field that was promised by the WTO.

level playing field?

See, Patrick Brzeski, ‘China to Reward Cinemas for Favoring Local Films Over Hollywood Imports’, The Hollywood Reporter, 27 March 2016, available here.

 

Conclusion: there is room for improvement. Expect a push for structural change for 2017.


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