During a visit to Los Angeles five years ago this month, China’s Xi Jinping gave Hollywood a much-needed shot in the arm. The incoming Chinese leader agreed to ease an almost 20-year-old quota on American films, nearly doubling both the number of U.S. movies imported to China and Hollywood studios’ share of the box office receipts—a deal that temporarily settled a World Trade Organization case the U.S. brought against China.
There was an understanding that in 2017 the two nations would return to the table to increase the compensation to U.S. moviemakers and for China to open its market further. But now President Trump’s rhetoric on China’s trade practices has some executives worried that the film industry won’t get its happy ending after all.
The Trump administration is creating uncertainty and “making everybody very, very nervous,” says Geetha Ranganathan, an analyst at Bloomberg Intelligence. The renegotiation “could be a casualty if he really wants to come down hard on it.”
That would be bad news for movie companies on both sides of the Pacific, which have become increasingly interdependent since the 2012 accord. Chinese money has financed Hollywood blockbusters including installments of the Transformers, Mission: Impossible, and Fast & Furious franchises. Chinese conglomerate Dalian Wanda Group went on a buying spree to become the largest theater operator in the U.S. and also paid $3.5 billion for its own American film production house, Legendary Entertainment. And while the U.S. box office is stagnating, China’s market has been growing at an unparalleled rate—boosting global receipts for the small number of American films shown there.
“The growth of China’s film industry is important to China, just as the box office in China is important to U.S. studios,” says Sanford Panitch, president of Sony’s Columbia Pictures, one of the six major Hollywood studios that stands to benefit from an eased quota. Last year it handled international distribution of China’s all-time highest-grossing movie, The Mermaid, and struck a co-financing and marketing deal with Wanda. “We will hopefully see more U.S. films get into China,” Panitch says.
It’s easy to understand why Hollywood loves detente. Comcast’s Universal Pictures, Sony Pictures, and Viacom’s Paramount Pictures are among those that have deals with Chinese entities to fund their films and help market movies in China. Others such as Warner Bros. Entertainment, in partnership with mainland companies, have started local-language productions. China since 2012 also has improved conditions for U.S. studios by cracking down on box office fraud.
China accounted for 19 percent of global box office sales in 2016, estimates IHS Markit, and has become a vital part of the success of the Hollywood blockbuster. Walt Disney’s Zootopia was the biggest-grossing international movie in China last year and the second-biggest release overall in the country, with $236 million in ticket sales—23 percent of its global theatrical receipts, according to researcher Box Office Mojo.
China’s meteoric box office growth slowed to below 3.7 percent in 2016, the first year of single-digit growth in a decade, according to researcher Artisan Gateway. The reasons include lower-quality local films and lack of discounting from online ticket sellers. Still, the market has averaged 35 percent annual growth from 2011 to 2016, says researcher EntGroup. That compares with a 2.2 percent average annual rate in the U.S., according to Motion Picture Association of America data. And China is still adding theater screens at a rapid rate—it averaged 26 a day in 2016—which allowed it to overtake the total in the U.S., says Artisan Gateway.
The number of American films released in China was more than expected in 2016, helping fuel a modest increase in China’s box office revenue. It rose to 45.7 billion yuan ($6.7 billion), from 44.1 billion yuan in 2015, according to Chinese government data.
“If the quota were to expand, it will benefit our distribution and exhibition business, because there will be more quality films to work on,” says Zhang Hui, board secretary of Shanghai Film, a subsidiary of state-owned Shanghai Film Group, which along with Huahua Media just signed a $1 billion film-financing agreement with Paramount. The money-losing U.S. studio says the deal will help it pursue Chinese co-productions. Such joint efforts allow U.S. studios to keep 43 percent of their ticket sales earned in China, more than the 25 percent box office share American studios typically get for their films in the mainland.
The chances of a deal to raise the quota looked promising last year. In October, Zhang Hongsen, head of China’s film bureau, said more foreign films would enter China starting in 2018 and that local titles would face more challenges, according to Chinese media reports.
But in recent months, a growing number of U.S. congressmen have called for greater scrutiny of Chinese companies’ interest in the media business and hunger for American media assets. A handful of planned congressional visits to China this year are oversubscribed, says Chris Fenton, who helps organize the trips as a trustee of the U.S.-Asia Institute. Interest is so strong that the institute may add a trip solely focused on media and entertainment industry issues, says Fenton, who’s also president of DMG Entertainment Motion Picture Group.
Under the previous agreement, if this year’s consultations fail to produce a deal by Jan. 1, 2018, the U.S. could pursue procedural action against China in the WTO—a step many in the industry want to avoid. “We look forward to working with the administration to continue building on this progress and supporting creativity,” Joanna McIntosh, an executive vice president at the MPAA, said in a statement.
It’s unknown just how high a priority Hollywood’s interests will be for the new administration. “There is a disconnect between what Trump and his appointees”—Robert Lighthizer, set to be U.S. trade representative, and Peter Navarro, head of the newly formed White House National Trade Council—“might want to do and what Hollywood wants them to do,” says Stanley Rosen, a University of Southern California political science professor who studies the relationship between the mainland and the U.S. film industry. “They don’t want the government to push China so much that Chinese investment in Hollywood dries up or is blocked. So it’s kind of a delicate dance.”
—With Jeanne Yang
The bottom line: China generates about 19 percent of the film industry’s global box office. That share could rise if its quota on U.S. films is loosened.