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Lights, Camera, Approval – China’s New Film Law

January 09, 2017
Young people watching a 3D movie in movie theatre
China’s new film law, coming into effect on March 1, 2017, will affect both Chinese and foreign films. (Photo credit):

What China's new film law means for movie makers.

China's new film law, set to come into effect on March 1, 2017, is the first piece of Chinese legislature to specifically target the country's burgeoning film industry. For overseas movie makers eager to take advantage of an increasingly lucrative market, its 60 articles represent both a challenge and an opportunity.

Despite ongoing development, the Chinese film industry still lags behind Hollywood on the technological and commercial curve. Aware of domestic deficiencies, Beijing wants to nurture its own aspiring creatives and piggyback on foreign movie-making expertise, while simultaneously protecting overseas investments and keeping a lid on potentially disruptive social influences at home. This new legislation is the Chinese government's attempt to square the cinematic circle.

As a set of broad policy statements, many of the new film law's articles are open to interpretation. Those looking for fine detail in areas such as intellectual property (IP) protection and financing will have to wait until the law's associated rules are implemented after March 1.

Yet the new film law can already be interpreted as a symptom of changing times. With the Chinese movie industry now maturing rapidly, the golden age of Hollywood in China may be on the wane.

But the new law also offers foreign movie makers hope. As China's film-related policies and processes move from an ad hoc system to a more permanent, professional framework, it reinforces the idea that China is an increasingly welcoming environment for those creating, marketing, distributing, and financing original, big-screen entertainment.

"Overall, I would say the new law offers encouragement to foreign filmmakers who want to work with Chinese partners," says Professor Andrew White, Director of the AHRC Centre for Digital Copyright and IP Research in China at the University of Nottingham in Ningbo. "In such a dynamic market, it codifies not only responsibilities, but expectations too."

How China New Film Law Benefits US Filmmakers infographic
Aspects of China's New Film Law that may benefit U.S. filmmakers

Bureaucratic boost

Under China's new film law, Sino-foreign co-produced films will continue to be treated as domestic productions (provided that certain creative input, investment and profit distribution criteria are satisfied). As such, the law will benefit both Chinese and co-production studios by making it easier to move projects from development, to production, and to distribution phases.

"Foreign producers can look forward to a certain streamlining of the official co-production process," says Mathew Alderson, an experienced, Beijing-based entertainment lawyer at Seattle-headquartered law firm Harris Bricken.

Chinese film companies currently need to be approved as "studios," or apply for permits on a film-by-film basis, before they can start making movies. By abolishing this requirement in the new law, Beijing clearly wants to encourage the creation of more Chinese film companies and help movie makers by shortening the overall time to market.

The abolition of production licenses will indirectly benefit foreign producers by increasing the number of potential Chinese partners looking to engage in co-production. It is also likely to see the increased use of special purpose vehicles, such as single-purpose corporations, that are already common in the U.S. film industry, thereby simplifying the way film financing transactions are structured.

By decentralizing the examination process and slashing turnaround times from 90 to 30 days, the new film law should also make it easier for films to receive final approval for market.

"We've seen the trend towards decentralization accelerate approvals in other industries," says Larry Sussman, a managing partner in the Beijing office of international law firm O'Melveny & Myers. "But this often takes time once the law is technically in place."

Trailer for “The Great Wall” - the biggest U.S.-China co-production to date
"Foreign producers can look forward to a certain streamlining of the official co-production process."

- Mathew Alderson

Clarified censorship

With its increased sensitivity toward national "dignity, honour and interests," China's film law has a reach that extends way beyond Chinese borders. Regardless of their geographical location, high-profile actors and film production companies who fall foul of the law are likely to have their access to the Chinese market swiftly curtailed.

Much has been made of the long list of subjects and content, which have now been formally prohibited by the new film law. Some experts have claimed it may dissuade U.S. investors from pumping cash into some co-productions, because of the uncertainty of gaining access to the Chinese market.

Yet those investors and producers with experience of the Chinese film industry will already have a good sense of where Beijing draws the line.

"Censorship is likely to tighten up in 2017," says Po Hou, Media Sector managing partner at Deloitte China. "But this is not a game changer. The nature of censorship is nothing new, and experienced players are familiar with the trend. Those who are well-prepared may even benefit from a less crowded market."

In reality, the film law is likely to clarify what was previously a gray area. By requiring the relevant government authorities to spell out censorship rules by formulating "concrete film examination standards" and making those standards open to the public, it should see censorship move toward a more transparent system, with objective expert opinions and formalized rights of appeal.

"In its general provisions, the law goes to great lengths to enshrine the concept that films are subject to strict state control," says Sussman. "In practice, we would expect censorship to remain the same for obvious subjects, and may possibly be a little more relaxed for others."

"The experienced players all know which subjects are off limits," says Nan Sato, U.S. Counsel and Chief Representative of Shimin Law, a Shanghai-headquartered law firm that specializes in the entertainment industry. "For foreign film producers looking to enter the Chinese market, the new law just reinforces the need to find the right Chinese partner. By that, I mean one who can pull the right strings."

Tailoring to the trends

The ever-increasing importance of cracking the Chinese box office has seen many Hollywood studios revamp their entire production line, with films created specifically to appeal to audiences on both sides of the Pacific. But while the nature of taboo content is now fairly well-established, the vagaries of China's movie-consuming market mean that coming up with a Chinese blockbuster is not always a straightforward proposition.

Today, Chinese moviegoers are becoming more discerning in their tastes, with sophisticated visual effects and token Chinese actors no longer a guarantee of box office success. In recent times, low-budget domestic films covering topics from people's everyday lives have proved just as popular as big-budget Hollywood productions.

As in the West, many Chinese moviegoers are simply looking for a two-hour dose of uplifting escapism. The most successful Chinese movies of the last few years – “The Mermaid” and “Monster Hunt” – are both feel-good comedies. A semi-animated production featuring a baby ogre and handsome male lead, the latter rapidly became the highest-grossing Chinese film ever after its release last summer.

Catering to the cinematic tastes of Chinese women is increasingly important, both for domestic and foreign film producers. According to Beijing-based data provider iMiner, the opening week audience for “Monster Hunt” was overwhelmingly female. While the gender balance of Chinese moviegoers is currently about equal, figures from the China Film Association show that women increasingly outweigh men in the key millennial demographic.

This trend may partially explain the recent success of animated movies in the Chinese market, with Disney productions such as “The Jungle Book,” “Zootopia” and “Finding Dory” – all of which are easy to dub into Chinese – proving big hits.

"We've recently seen a big increase in the number of Chinese and Western clients looking to produce animated movies aimed at the Chinese market," says Sato. "They're generally non-controversial, and they can be hugely popular. The new film law is likely to accentuate this emphasis on the genre."

Box office revenue in China and the U.S. in the last 4 years infographic
Box office revenue in China and the U.S. since 2012

Millennial drivers

Compared to the United States, where the average age of those visiting cinemas is currently just over 30, China's moviegoing demographic is a lot younger (recent surveys put the average age at around 22). Chinese millennials typically view cinema outings as social activities, with groups of friends watching movies together in a highly communal experience.

Chinese moviegoers are also spending more each time they visit the cinema. A 2016 survey by FT Confidential Research found respondents spending an average of just under $10 per visit. Around three-quarters said that as much as 30 percent of their per-visit spending was on food, beverages or movie-themed merchandise.

Catering to China's tech-savvy millennials, the Chinese online ticketing industry is flourishing. According to a report from Beijing-based entertainment research outfit EntGroup, over half of the Chinese movie tickets sold in 2015 were bought online (compared to about 20 percent in the U.S.), while 90 percent of those were purchased with a smartphone.

Baidu, Alibaba and Tencent – the trio of Chinese tech giants collectively known as BAT – are already starting to dominate the Chinese online ticketing space. Each company now produces and distributes movies through its own channels.

While China's film industry currently makes most of its money from ticket sales - which are now projected to be worth more than $10 billion by the end of 2017 - ongoing development will see revenue streams such as merchandising and paid-streaming sites become increasingly important. The popularity of the BAT ticketing apps means these companies are well-placed to drive and leverage this commercial evolution.

Screen sprawl

Thanks to China's film law, Chinese moviegoers are soon likely to have a far wider choice of venues in which to indulge their passion. There are currently around 40,000 Chinese movie theaters (roughly the same as in the U.S.), with new screens opening daily. Lower-tier cities in central and western China, where per capita theater penetration is far lower, have typically witnessed the fastest growth.

China's new film law is likely to see the rate of theater proliferation increase. It promises increased state funding for the film industry, with a particular focus on rural screening, and "encourages financial institutions to provide financing services for those engaged in film activities and improving basic film facilities." The law also urges local governments to ensure adequate land supply for more theater construction.

While China's film law marks a key milestone in the development of the Chinese movie industry, a series of tax incentives, implemented in 2009, have already proved crucial for growth. Tax incentives introduced in 2016 – which allow theaters achieving two-thirds of their revenues from Chinese films to keep half of their tax – signal a shift in support from prodution and distribution toward screening.

"Going forward, I think both the new law and tax incentives will help theatre operators," says Sato. "Indirectly, this will help Western movie producers, because China's moviegoing audience and potential box office receipts will continue their upward trajectory."

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