China now has the second biggest box office market in the world and the third biggest film production industry in the world.
As you would expect, here in China we are seeing an upsurge in foreign interest in the domestic business of movie theaters or cinemas. This interest is driven by the sheer rate of growth in screen numbers, combined with the lingering expectation that the market is about to “open up.” Increasing interest in cinemas complements and encourages the corresponding jump in interest in Sino-foreign film co-productions.
But until such time, if any, as the entertainment industry in China truly does open up, we need a sober assessment of the regulatory environment. This post is part of a series aiming to assist with such an assessment.
Let’s start with how China looks at foreign investment in general.
The industries in which China will accept foreign investment or foreign business operations are limited. Foreign involvement in Chinese industries is categorized as “encouraged,” “permitted,” “restricted” or “prohibited.” Industries move between, or appear within, the various categories from time to time, depending on the changing requirements of the Chinese authorities and the economy they oversee.
Before making an investment or commencing operations in China, it is essential that foreigners understand where the relevant industry sits in the categorization scheme. This simple reality is often overlooked in the headlong rush to get into the Chinese market or to reach the Chinese consumer. An awareness of it not only assists foreigners to avoid illegal or unwise investments, but it also allows for an understanding of the level of regulation to be expected in a particular industry, as well as the business entity prescribed for that industry. In restricted industries, for instance, foreign involvement can only occur through a Sino-foreign joint venture.
Foreign involvement in the entertainment business in general, and the business of operating cinemas in particular, is “restricted” in China. It follows that there are substantial barriers to entry into the cinema business, that the business is heavily regulated, and that a joint venture is required in almost all cases. For more on China Joint Ventures, check out “How To Survive A China Joint Venture” and the posts cited within it.
The regulatory framework for foreign investment in cinemas is created by a series of Interim, Provisional and Supplementary Provisions promulgated by SARFT in 2000, 2004 and 2005, respectively. The salient features of the regulatory framework may be summarized as follows:
- With the exception of investors from Hong Kong and Macau, non-Mainland Chinese are not permitted to wholly own cinemas or cinema chains
- With the exception of investors from Hong Kong and Macau, non-Mainland Chinese must hold their investments through a Sino-foreign joint venture
- A cinema joint venture requires registered capital of not less than CNY 6 million ($950,000)
- The Chinese joint venture partner must generally have at least 51% of the decision-making power
- In Beijing, Shanghai, Guangzhou, Chengdu, Xi‘an, Wuhan and Nanjing, foreign investment in the joint venture may be as high as 75%. In all other places foreign investment in the joint venture must not be more than 49%
- No cinema joint venture can run for more than 30 years
- The joint venture requires a Film Screening Business Permit
In future posts I will look at the application of this regulatory framework in more detail and consider other aspects of the cinema business in China.