On October 30th, 2015, the Standing Committee of the National People’s Congress completed the first deliberation of the Film Industry Promotion Law of the People’s Republic of China (Draft) (the “Draft”), and circulated the Draft to the public for comments on November 6th.

Comparing with the Regulations on the Administration of Films (effective as of February 1st, 2002, the “Regulations”) currently in effect and the previous Film Industry Promotion Law of the People’s Republic of China (Exposure Draft) (the “Exposure Draft”) published by the Legislative Affairs Office of the State Council in 2011, the Draft has shown substantive changes on multiple problems of Chinese film industry demanding prompt solution. Will these changes vitalize the Chinese film industry as expected? Let’s take a close look at the current situation of Chinese film market and the most important reforms that the Draft introduces.

Highlight I: Cancel One-time Film Production Permit

Comments: lower market threshold, but fiercer competition

  1. A good news to film investors?

This reform is undoubtedly one of the biggest highlights of the Draft. Under current rules, in order for an enterprise to shoot a film for the first time, it shall apply for a “Permit for Film Production (for single film)” first, and only after producing at least two films with permission for public projection will it be entitled  to  apply for a “Permit for Film Production”. The  Draft completely cancels  the requirement for the one-time “Permit for Film Production (for single film)” and allows an enterprise with qualified personnel, funds and other conditions for film production to apply for a “Permit for Film Production” directly. Meanwhile, the Draft also delegates the power of examination and approval which currently belongs to the State Administration of Press, Publication, Radio, Film and Television (the “SARFT”) to its provincial counterparts, and reduces the time limit of examination and approval from 90 days to 20 days.

This will greatly lower the market access threshold and as a consequence, make it easier to obtain a “Permit for Film Production”. At present, it is widespread practice for investors in Chinese film industry to adopt the approach of co-production, for which the reasons can be various. By taking this approach, the lead producer probably aims at responding to its financing pressure, diversifying investment risks, and combining the industrial chain to ensure the film’s distribution and box office income (i.e., distributors and theaters may also co-invest); on the other hand, however, this approach is probably the last resort to some investors (especially those fresh players) before obtaining a “Permit for Film Production”. Therefore, it is anticipated that the “Permit for Film Production” will be no longer a scarce resource, and that more social capital which has sufficient finance strength but lacks legal qualification for the time being will flood into the film market.

  1. Intensified market competition

However, not all practitioners can benefit from the aforesaid reform because the market liberalization will simultaneously bring more intensive competition, particularly for the Chinese film-producing market which already presents a high elimination rate and a high investment risk. The following data would be helpful to understand such status:

According to a preliminary statistics of Chinese film industry collected by insiders, for the year to date, about 4000 film scripts have been filed or approved, around 1200 “Permit for Film Production” and 600 “Permit for Public Projection of Films” have been issued and only about 280 films have eventually been shown in cinemas. Assuming the investment amount per film is RMB 50 million, the aggregate investment of Chinese film market this year will exceed RMB 30 billion, while the aggregate estimated box office income will be only around RMB 43 billion, which means the remaining gross box office income distributable to the investors be as low as around RMB 14 billion. In other words, the whole industry will suffer a loss of at least RMB 16 billion, and only 10 percent of investments can be recovered or profitable.

It is foreseeable that, when the Draft turns into the final legislation, the Chinese film producing field would witness a more prosperous investment boom and consequently the fiercer competition and elimination, especially given the background that many Internet giants such as the “BAT” and Leshi and traditional industry leaders like Wanda are rushing into the film market one after another. Who will be the last winner of this upcoming war? No doubt that would be a dramatic and fantastic legend.

  1. Limitations of foreign investment remain

Although the Draft greatly lowers the market access threshold, a WFOE (wholly foreign-owned enterprise) is still prohibited from entering Chinese film market. Article 17 expressly provides that “foreign enterprises  and other organizations shall not engage  independently in  film-producing activities in China, and foreign individuals shall not engage in film-producing activities in China.” Under the current regulations, a foreign investor who desires to enter the Chinese film market evading the film import quota would, in practice, have no choice but to co-produce films jointly or collaboratively with a Chinese party or by commissioning a Chinese party (establishing a joint venture company with a Chinese party proves unfeasible). In addition, the above Article 17 also sets an explicit limit that “those enterprises or other organizations cooperated which have engaged in activities damaging China’s honor and interests, endangering social stability or hurting national feelings shall not be approved.”

Highlight II: Cancel Censorship of General Theme Script

Comments: less prior censorship, but possibly higher risk

Article 16 of the Draft divides film scripts into 2 categories: respectively, “the general theme” and “the special theme”. For the general theme script, instead of applying for approval, the only requirement is to file the script’s abstract, while for the special theme script, it is still necessary to submit the whole script to the State Council or provincial film authorities for approval.

However, as every coin has two sides, canceling of script censorship procedure may even to a certain extent increase the uncertainty of a completed film confronted with the pre-projection censorship, since a film shot based on an approved script may face a higher possibility of passing the pre-projection censorship.   For instance, even among commercial films, which typically put more emphasis on passing the review safely, the film No Man Land 无人区》) directed by Ning Hao was unable to release until 4 years after its completion of shooting due to modification for several times as required during the final censorship phase, and the film Gone With The Bullets had to postpone its premiere for the same reason as well.一步之遥》)

Nevertheless, there being a risk does not by itself justify maintaining the script censorship procedure. This reform undoubtedly deserves welcome and advocacy from the whole industry, as long as they fully understand and take appropriate measures to minimize the aforesaid risks.

Highlight III: Moderately Relax Pre-Projection Censorship

Comments: higher predictability and professionality, but implementation remains to be seen.

Comparing with the Exposure Draft, Article 21 of the Draft expressly delegates the authority of film censorship prior to its public projection and the issuance of a “Permit for Public Projection of Films” to the SARFT or its provincial counterparts.

Article 21 and 22 of the Draft also require the SARFT to establish specific criteria for the pre-projection censorship, consult the public for comments and organize experts to conduct feasibility studies during the criteria formulation process. Censorship authorities shall also organize experts to review the film during the censorship procedure, and the decision shall be made on the basis of the experts’ comments. With the establishment of the censorship criteria and the participation of experts, the predictability and professionality of the procedure will be greatly enhanced.

Notwithstanding the upcoming implementation of the aforesaid reform, given that the pre-projection censorship remains the last line of defense in the whole film censorship system after the relaxation of the production approval and script censorship phases, we have reasons to believe that the film authorities would tend to take a more cautious attitude towards relaxing the film censorship prior to its public projection.

Highlight IV: Cancel and Delegate Several Film-related Administration Approval and Examination Items

Comments: decentralized regulation and higher efficiency

As a part of the work to accelerate the transformation of government’s functions and decentralization, comparing with the current rules, the Draft sets no new approval items but instead cancels and delegates a number of approval items, which mainly include:

  1. canceling the “Permit for Film Production (for single film)”;
  2. canceling the censorship of the general theme script;
  3. delegating the authority of approving the “Permit for Film Production” from the SARFT to its provincial counterparts;
  4. delegating the authority of approving the special theme script from the SARFT to the SARFT and its provincial counterparts;
  5. delegating the authority of approving the “Permit for Public Projection of Films” from the SARFT to the SARFT and its provincial counterparts;
  6. delegating the authority of approving the “Permit for Film Projection and Operation” from the local film authority at the county or city divided into districts level to the local film authority at the county level;
  7. delegating the authority of approving holding foreign film festivals (exhibitions) from the SARFT to the SARFT and its provincial counterparts; and
  8. modifying the authority of approving films with “License for Public Projection of Films” to be taken to participate in foreign film festivals (exhibitions) from the SARFT to the SARFT or its provincial counterparts, and meanwhile clarifying that the films without “License for Public Projection of Films” are forbidden from being distributed, projected or taken to participate in any film festivals (exhibitions).

Highlight V: Watching Tips, No Advertisement Spots and Box Office Calculation

Comments: it will bring a better watching experience and a healthier consuming market

Article 32 of the Draft provides “if a film to be projected may cause physical or psychological discomfort in the audience, corresponding tips shall be given.” Article 33 provides “the cinema shall not play advertisements during the period from the express indicated start time of the film to its end. Cinemas shall install a computer ticketing system in line with the national standards, take accounting pursuant to the laws and calculate the sales income truthfully.” The Draft also provides the administrative penalties for violation of the foregoing requirements, which helps to improve the viewing experience as well as to give a severer blow to the phenomenon of box office evasion and concealment.

Highlight VI: Encouraging Financing, Insurance and Financing Guarantee Services in theFilm Industry

Comments: the poor environment of financing would be gradually improved

Before shooting a film, it is necessary to solve the financing problem. In addition to inviting other investors to share the financing pressure and risks (which is similar to equity financing), investors often seek debt financing as well, where bank loans would typically be the first consideration. Concerning about the prospectus of film investments, banks tend to demand a higher credit rating when assessing a film-related loan application.   For example, as a consideration for Bank of Nanjing to provide a loan of RMB 70 million to Leshi, the lead investor of the film Tiny Times 1.0 (  小 时代》), certain affiliate company and officer of Leshi have provided a joint and several liability guarantee as a credit improvement mechanism.   This pattern would be difficult for some producers with limited financing strength to follow. In addition to financing and financing guarantees, completion bond is also a prevailing mode in Hollywood which aims to warrant that the film will be completed within budget. In this regard, it has been repeatedly appealed by domestic film industry but never get any legislative support.

The Draft finally made a formal response to the aforesaid demand on the legislation level. Article 40 of the Draft provides that China encourages financial institutions to provide financing services for film activities and film infrastructure improvement, to carry out intellectual property pledge business relating to film, and to provide support to the development of film industry in aspects of credit and so forth; China encourages insurance agencies to legally develop insurance products as adaptable to the development of the film industry; China encourages financing guarantee institutions to legally provide financing guarantee services in the film industry, and to spread risks through ways of re-guarantees, joint guarantees and the combination of guarantee and insurance; for the film production permitted by the SARFT, its loan term and interest rate shall be reasonably determined under relevant regulations. Although Article 40 has merely stipulated no more than principle requirements, it will definitely attract high and enthusiastic attention of the market players, and with the joint efforts of the industry and the competent authorities, it is believed that the supporting mechanism will be gradually established and the corresponding market practice will accelerate as well.

Besides the abovementioned highlights, there are lots of other innovations in the Draft as well, including the emphasis on protection of intellectual property  in connection with  films, explicit prohibition of recording in the theater, increasing support in pro bono projection of films in rural areas and so forth.

Summary

While the Draft is still in the consultation stage (up to December 5th, 2015), we expect the final Film Industry Promotion Law will be formally promulgated in the near future, and we will continually pay close attention to relevant developments.

The core idea of the Draft is to lower the market access threshold, to simplify and loose the prior censorship, to introduce more market mechanism and release the vitality of the market, and to regulate the market order and industrial growth. We are looking forward to the unprecedented prosperity and increasing creativity and productivity to be brought by the Draft and the future Film Industry Promotion Law.  There is no doubt, with full of opportunities and challenges, the great time of Chinese film industry is coming.   Are you ready?