10 questions for China’s media and entertainment industry

By Steven Zhu, Global Law Office
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1. What sectors are covered by China’s media and entertainment industry?

China’s media and entertainment industry generally includes film, television, printing and publishing, music, sports, gaming and new media.

2. Are foreign investors permitted to produce or distribute films and TV programmes in China?

By and large, China’s media and entertainment industry is heavily regulated. Apart from a few sectors such as music, foreign investors are generally prohibited across the entire industry.

In accordance with the Special Management Measures for the Market Entry of Foreign Investment (Negative List) (2020 Version), foreign investments are prohibited in film production, distribution and cinema circuit companies, as well as film import businesses. Foreign investments are also generally banned in TV, radio, the internet and new media.

3. How can a foreign film company enter the Chinese film market?

朱志平,-Zhu-Zhiping,-Global-s
Steven Zhu
Partner
Global Law Office

Foreign film companies can enter China’s film market through “co-production”, which is an exception to the prohibition of foreign investment. In accordance with the Administrative Provisions on Sino-Foreign Co-operative Production of Films, film co-production refers to a form of a joint production by Chinese and foreign parties, with investments being jointly made, scenes being jointly shot, and profits and risks being jointly shared.

A co-produced film enjoys various benefits. First, it is considered a local Chinese film, and thus is not subject to China’s import quotas. Second, compared with an imported film, foreign investors can gain more share of the China box office revenue from a co-produced film. Because of these benefits, film co-production is subject to a strict licensing system and has to meet a variety of requirements. In addition, foreign investors may also invest in China’s film industry via a VIE, or variable interest entity structure.

4. How are foreign films imported and distributed in China?

China adopts a quota system for imported films. The most recent quota for imported films was 54, including 34 revenue-sharing movies (mainly major Hollywood studio productions) and 20 flat-fee films (mainly lower-budget movies that foreign companies sell to Chinese companies for a lump sum). Only China Film Group and Huaxia Film are licensed to import and distribute foreign films in China, and both often work together as partners.

5. How is a film investment project typically structured in China?

Unlike Hollywood film productions, where a single-purpose entity will typically be established for film production, most film investments in China are contract-based, and no separate legal entities will be set up.

In general, investors will enter into a joint investment contract where each of the investors’ “shareholding” percentages will be specified. Such a percentage will form the basis on which the film’s profits and losses are to be shared. In the absence of a legal entity, this investment mechanism imposes a high legal risk. Therefore, it is important for investors to negotiate a sound contract.

6. What is the basic procedure for film production in China?

The film production process in China typically includes pre-production, production and post-production. Under pre-production, a screenplay will be developed, a summary of which needs to be filed with the government authorities for record or approval.

Once the screenplay is completed and the casting confirmed, the production phase begins. Once a final cut is available and approved by the government authorities, a release permit for the film will be issued. With the release permit, the film can be shown to the public.

7. Who are the key players in China’s film market?

Unlike the “Big Six” in Hollywood, the major players in China’s film market are still evolving and changing. Nevertheless, the following are the big names dominating China’s film industry: China Film Group; Huayi Brothers; Bona Film Group; Penguin Pictures; and Alibaba Pictures. In addition, in the past decade, many cultural investment funds have been set up to invest in the industry.

8. How are China’s box office revenues shared?

Of a film’s gross takings, 3.3% goes to sales tax and 5% to the National Film Industry Development Special Fund. After these mandatory deductions, the remainder is split among the theatre owners, distributors and the production company, with around 55% for the theatre owners, 5% to 15% for the distributors, and 30% to 40% for the production company.

9. How is content censored?

China’s censorship system looks at both the screenplay and final cut. The Film Industry Promotion Law provides some general guidance on what type of content is prohibited and what is encouraged. For example, films advocating terrorism or distorting Chinese history are prohibited, while those advocating socialism’s core values or promoting healthy growth of minors are encouraged. However, these guidelines remain too ambiguous from a practical perspective.

10. Will China ease media and entertainment industry access in the near future?

Some sectors of the industry have been gradually opened up to foreign investors, such as movie theatres and performing arts groups (still subject to certain shareholding restrictions). In the recent 14th Five-Year Plan for China’s Film Development released by the China Film Administration, it appears that China is paying more attention to promoting domestic films, with no clear indication it is preparing to open the market to foreign investors. It remains uncertain whether China will loosen market access anytime soon.

Steven Zhu is a partner at Global Law Office. He can be contacted on +86 10 6584 6658 or by email at zhuzhiping@glo.com.cn.