The Import Rules Are Strict: Part 3 of the First CFI Guide

Welcome to the third installment in a 10-part series of practical tips that will make up the CFI Guide to Film Production in China. Publishing each Friday from now until just before the annual U.S. China Film Summit and the American Film Market in Los Angeles in early November, the CFI Guide is built upon wide-ranging research and reporting checked against specific case studies and available official documentation. It is for writers and producers, directors, actors, and members of the film marketing and distribution chain who believe that working with China is a part of their future. With Chinese ticket sales up nearly 50 percent in 2015, and likely to surpass U.S. sales inside the next year, it’s clear that this market is too big to be ignored. CFI is here to help you better understand China’s filmmaking process and industry. — Jonathan Landreth, Founding Editor

In the run-up to China’s joining the World Trade Organization (WTO) in 2001, negotiators did not get stuck on the sale of military hardware or grain purchases, nor on high-technology transfers or heavy machinery imports. Rather, they hit a wall over the number of international motion pictures China would allow inside its borders each year. Master propagandists, the leaders of the Chinese Communist Party must have known they had met their match in the Hollywood studio moguls. After all, James Cameron’s classic Titanic grossed an unheard of US$43 million in China in 1997, and proceeded to hold the crown of highest-grossing film for the next 12 years, a strong reminder to everybody that Hollywood was way ahead of the pack in an ability to tell stories that could sell a whole lifestyle to regular human beings wanting to be entertained, from Afghanistan to Argentina, from Africa to East Asia. Hollywood films have long served as the greatest calling card for the American Dream.

So, in 2001, China, the newest member of the WTO, set an import cap on movies: only 60 would be allowed in each year, and of those, only 20 would be so-called “revenue sharing imports” — films whose copyright holders (predominantly the Hollywood studios) would be entitled to between 13 and 17 percent of the gross box office as declared by their sole licensed importer, the state-run China Film Group Corporation (CFGC). The remaining 40 films could be imported, again by CFGC, its sister company Huaxia Film Distribution, or via the dedicated China Movie Channel of state-run broadcaster China Central Television, on a “flat fee” basis. Those flat fees often were so low that the cost of subtitling the films and making prints ensured they’d be loss-leaders—which was especially true since the Chinese business in pirated video discs costing $1 or less was rampant and unchecked.

As Chinese levels of disposable income grew, so did demand for a variety of filmed entertainment experiences—and the Hollywood studios, the Motion Picture Association of America and the U.S. Trade Representative’s office (USTR), were there. Or, rather, they were at the WTO, pushing China for greater market access, year after year.

Meanwhile, the cap on imported films served its purpose, allowing room in the evolving market for Chinese films to try to adapt to changing tastes without too much competition from the 800-pound gorillas of Hollywood. China’s film regulators recognized the power of Hollywood. After nine decades of Mickey Mouse, in 2008, the starburst of Kung Fu Panda was yet another wake-up call, co-opting as it did, one of the national symbols of China and turning it into a global entertainment icon lining the pockets of DreamWorks Animation’s shareholders. China’s media watchers were all too aware that not far away, South Korea’s film industry had been crushed when Seoul repealed its own import cap in 1987. It had taken a decade before South Korean movies could compete head-to-head with Hollywood imports. It is notable that in that 10-year interim, South Korea’s strict censorship laws were also repealed as its liberal democracy took root. The resulting artistic freedom gave South Korean filmmakers a boost that fostered the storied Korean Wave of pop culture exports that took much of Asia, and especially China, by storm starting in the late 1990s.

A decade of lobbying by the MPAA and the USTR at the WTO finally paid off, helped by the fact that China became eager to fill the cinemas that had mushroomed in a nationwide building boom and looked to imports for a box-office draw. In 2012, on a visit to Los Angeles by China’s then-Vice President Xi Jinping, the two sides announced that the U.S.-China Film Deal would open China’s doors to an additional 14 revenue-sharing films, as well as roughly double copyright holders’ rightful share of the gross box office receipts. Declared a win-win, the deal required that the newly-permitted tranche of films had to be either large-format movies from companies such as IMAX, or the increasingly popular 3-D films. In addition to being difficult to pirate, tickets to these large-format and 3-D movies could command a premium at the box office, which in turn would help theater developers recoup the cost of the country’s cinema infrastructure boom.

Today, the Hollywood studios and, occasionally, film companies from France, Japan, and elsewhere, compete vigorously for China’s 34 revenue-sharing import slots, often referred to as “quotas.”

Increasingly, the remaining 36 film import slots, for so-called “flat fee” films, are coveted by independent film studios and mini-majors working with a small group of secondary Chinese distributors that slowly have been allowed to offer points on the back-end to international copyright holders if the imported flat-fee film they are offering achieves a certain threshold of commercial success at the Chinese box office. As this loophole is little discussed and even less legislated, its future may be determined by these independent companies’ ability to stay on the right side of the state-run import giant CFGC, to whom it is assumed they are paying a cut for the privilege of a place at the table. — Jonathan Landreth

Read Part 4, “Blacklists Are Real, Both for Content and People.”