A palpable sense of excitement is starting to build here in Beijing as the Third Beijing International Film Festival approaches. Taking place April 16 – 23, The Beijing International Film Festival (BIFF) is emerging as a natural focal point for Hollywood’s preoccupation with the Chinese film business and has already become a regular date on the international festival circuit. This is hardly surprising, given Chinese box office growth of 36% in 2011 — growth that allowed China to overtake Japan and become the second-biggest film market. Compare that to a flat performance at best in the US during the same period and you get some idea of what is driving Hollywood’s interest, if not its anxiety.

Tickets for the Sino-Foreign Film Co-Production Forum on April 21 will be red hot and places at the MPA’s Film Workshops on April 21 and 22 are already in great demand.

Though this is always a very busy period for us as clients and friends fly into Beijing from all over the world, I will try to provide some updates and observations as the Festival progresses.

The following are already hot topics:

  • Why did the Chinese censors pull Tarantino’s Django Unchained on its opening day in China?
  • Does the huge success of purely Chinese films such as Lost In Thailand and Journey to the West presage a new era in which Hollywood films are marginalized in China? (Hollywood certainly hopes not).
  • What will the recently-announced merger of SARFT and GAPP mean for foreign producers and distributors? What will the new “super-agency” even be called?
  • When pictures like Iron Man 3  reportedly opt out of official co-production status (and the larger share of box office that goes with it) does this mean that co-productions are just too hard?
  • Will the new national administration relax the de facto prohibition on co-production joint ventures (i.e. permanent legal entities with physical assets and ongoing operations in China) as opposed to the restrictions on co-productions (i.e. discrete pictures made in cooperation with a Chinese partner)?

If I find anyone with the answers I’ll be sure to let you know. What do you think?

One of the things we are always writing about and always trying to get a handle on is what the attitude is in China towards foreign investment.  That attitude is never static for long, always shifting with the economy and sometimes shifting due to other factors such as politics.

We are in the midst of forming a WFOE right now for a couple of companies in somewhat difficult businesses.  Our advice was that they first form a Hong Kong entity as that likely would make WFOE formation go more smoothly. We told these clients that we have in the last six months or so been seeing Chinese governmental authorities increasingly throw minor roadblocks in the way of American and European companies seeking to form a WFOE in China.  One of these clients said that they had talked with someone who claimed not to have noticed any such tightening by China’s governmental authorities. All I could say was that we are seeing otherwise. I also talked of how China is even making getting visas tougher.

I thought about this today after reading a Variety Magazine article, “China: Market loosens quotas, but still cautious.” The article quotes Mathew Alderson(our lead China entertainment lawyer) on how China’s State Administration of Radio, Film and Television (SARFT) has stepped up its reviews of Sino-foriegn co-productions in an effort to make sure there is adequate China content to constitute a co-production.

A purely foreign film entitled to share in box office revenue must be imported into China as part of China’s annual quota. An official Sino-foreign co-production will be regarded as a domestic Chinese film, to which the quota does not apply. The distinction between foreign imports and Sino-foreign co-productions is also significant because they yield different box office shares. When films are imported on a revenue-share basis, the foreign distributor now gets 25% of box office takings under the new deal announced earlier this year. In a Sino-foreign co-production, around 38% of box office is available to the producers. The share available in a co-production is the same as it is for a purely domestic production.

The Variety article highlights the Chinese government’s increased vigilance:

The country’s State Administration of Radio, Film, and Television recently highlighted that its rules for co-prods require at least one third of production funding coming from China, along with one third of the main cast, while scenes must also be shot in China.

Co-prods help boost China’s image overseas while benefitting from learning expertise.

“Co-productions were definitely not intended as de facto quota busters, which is how they are often regarded in Hollywood,” says Alderson. “The authorities are now more vigilant about what they call ‘stick-on’ productions in which the Chinese elements are contrived and insubstantial.”

The Chinese are sensitive to the idea that Hollywood might be cynically taking advantage of its booming film market. Zhang Peiming, deputy head of SARFT, accused “Looper” and “Cloud Atlas,” accusing them of making superficial attempts at co-prod status.

“These co-productions get around the quota system and take domestic investment away and threaten Chinese movies,” Zhang said at the time.

For more on China co-productions and the China movie business, check out the following:

For more on the pros and cons of using a Hong Kong entity to form your China WFOE, check out How To Form A China Company (WFOE or JV). Hong Kong Entities. They’re Baaaaack.
Are you seeing what we are seeing in terms of China getting tougher on foreign business?

 

By Steve Dickinson and Mathew Alderson

In the first part of this two part series, in a post entitled “China’s Film Industry Promotion Law. A Discussion Of The Discussion Draft,” we discussed the Discussion Draft of the China Film Industry Promotion Law. Concern has been expressed about a provision of the law that would prevent online film download sites from providing unlicensed foreign films on their websites. In fact, however, this provision of the discussion draft would simply clarify existing law. It therefore does not reflect a substantive change. Much of the current regulation of film in China is based on agency regulations rather than statute. One purpose of the new law would be to take these regulations and increase their authority by raising them to the level of statute. Thus, some parts of the law are merely a codification and clarification of existing practice. The controls on download sites falls into that category.

The discussion draft would establish a two tier licensing system. Under current rules, all films produced in China must obtain a Film Production License. The script for such films must be approved by Beijing SARFT. After completion, the completed film must be reviewed by SARFT. Films that survive such review receive a Film Public Screening License. No film can be “publicly screened” or “shown” in China without such a license. This includes foreign films imported into China for screening.

The discussion draft simply repeats this basic rule, with some clarification, as follows in draft Article 26:

Article 26, Par 2: 未取得《电影公映许可证》的电影,不得发行、放映、参加电影节(展),不得通过互联网、电信网、广播电视网等信息网络进行传播,不得制作音像制品;但是,法律、行政法规另有规定的,从其规定。
With respect to films that have not received a “Film Public Screening License”, such films (1) may not be distributed, shown, entered into film festivals (exhibitions), (2) may not be broadcast over the telecom networks, such as the internet, telecom networks or broadcast television, and (3) and may not be manufactured into audio-visual products.

The commentators focus on Provision (3) from Article 26. It is our understanding that a vast amount of the online content provided by Tudou, Youku and others does not have a Film Public Screening License. Much of this unlicensed content consists of movies and TV shows from Taiwan and Hong Kong. Another substantial portion of this unlicensed online content consists of foreign films from North America and Europe. If China were to begin enforcing its ban on unlicensed content, we would expect the revenue of Tudou, Youku, and others to be substantially reduced.

The important point though is this. Article 26 does not change current law. Current film regulation provides that no film can be “shown” (fang ying 放映) absent a license. No one in China has any doubt that “showing” a film on the internet or on TV is any different from “showing” that film in a theater. Thus no one in China has any doubt that the current practice of Tudou and Youku providing unlicensed films and TV shows for download violates the law. Video sites like Tudou and Youku might argue that they don’t “show” any films at all. Rather they provide films for download and people “show” them in their homes. If that is a sound argument, then Section 26 of the new law would not apply to Tudou or Youku or to other download services. However, this argument fails. Both current regulations and the proposed Section 26 clearly provide that distribution of unlicensed film is also prohibited. Thus, if Tudou and Youku (which are reportedly soon to merge) are not “showing” films, then they are at least certainly distributing films. The fact that they are distributing them over the internet is entirely irrelevant.

We do not know why the Chinese government has chosen not to enforce the existing law with respect to Tudou, Youku and the rest, but we assume the reason is money. Tudou and youku make money and the government presumably benefits from this via tax collection or in some other way. Thus they do not shut Tudou or Youku down. The same is true regarding the illegal production of DVDs. The government knows who most of the illegal DVD producers are and it could shut them down tomorrow. But the government does not do it.

With respect to Tudou and Youku and other download sites, the discussion draft would only make even more bluntly clear what is already the law: it is illegal to distribute, show, broadcast, provide for download or manufacture into a disc any film that is not licensed. All of this illegal activity is a huge and profitable industry in China. Part of the high profit is based on this very illegality.

Foreigners who want to invest in companies like Tudou (NASDAQ: TUDO) or Youku (NYSE: YOKU) should know that they are investing in businesses that make at least a portion of their revenues from illegal content. The risk with Tudou and Youku is not insubstantial as they both show unlicensed film, foreign copyrighted content (which is also illegal under Chinese law) and they both are VIEs.  How much more risk do you want? These risks cannot be eliminated since they are, at least to some extent, built into the system. What will be the result of all of these risks is unknown, but they should at least be factored into any investment decision and our conversations with Wall Street analysts suggest that is not being done.

Comments are always welcome for everyone, of course, but we would particularly like to hear from investors in Tudou and Yokou this time.

By: Steve Dickinson and Mathew Alderson

The China Film Industry Promotion Law (Discussion Draft) was issued for public comment by the State Council on December 15, 2011. This draft has been in process for many years. The plan was to have the law submitted for adoption at the most recent meeting of the National Peoples Congress that met in March 2012. This did not happen. No one has offered an explanation. The reason is do doubt that there is strong disagreement within China about the provisions of the draft. Major disagreement centers on the following two issues:

  • The main issue addressed in this law is the division of proceeds for film screening profits in China. As is typical, the central government wants all the profits. Local theaters want their share, distributors want their share, and the producers also want their share. These four groups are in a major battle over funds. As the amount of money at stake grows, the battle becomes more severe. This law attempts to resolve the issues entirely in the favor of the central government. This attempt to jam the other groups apparently failed. Nonetheless, the primary focus of the draft law is an attack on the theaters and the distribution of proceeds from screening films. This shows where the current interests of the Chinese government lie. Foreign players like to talk about the gross size of the Chinese box office. The more important issue is: who gets what share of that box office? For foreign investors this is the key issue and it should be addressed carefully.
  • The draft law gives SARFT’s Beijing office control over film the content. This move against independent creativity in film is out of line with recent trends and has been resisted by the creative film community. As many commentators have pointed out, the vast majority of recently popular films in China would be entirely banned by the standards proposed in the draft law. This is both a creative issue and a monetary issue. The creative people want to make what they want to make and the money people want to make films people will see. The Chinese public does not have any interest in paying money to view the boring pablum that would result under the standards in the draft. So the two groups (creative and commercial) have teamed up to oppose this backward looking law.

Though we hardly ever comment in detail on discussion drafts because you never know when these drafts will be adopted or the form they will take when they are.  Discussion in the abstract is therefore usually a waste of time. We have commented on this discussion draft because it reveals the current issues within the central government concerning film and other creative media arts in China.

For film, the government seems to seek the following:

  1. Increased control over film content.
  2. Force filmmakers into the role of propaganda tools for the party/government.
  3. Spread that propaganda by forcing theaters to show these propaganda films in the poor industrial areas and in the rural areas. The plan is to transform film from the current expensive, high class role it now plays, into an economical tool of the state. State funding for film is intended to fulfill this propaganda goal. The term “entertainment” does not appear anywhere in the discussion draft.
  4. Appropriate the majority of profits at the central government level.

Thus the draft is a giant step backwards to the Stalinist world of the 1950s. It is obvious why the government wants to do this. It is also obvious why the China film industry is opposed. The battle lines have been drawn.

In Part II of this series we will talk about how the draft Film Industry Promotion Law does little more than seek to clarify existing law.

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.

 

The following is a guest post by Robert Cain, who I met a few months ago at the US-China Film Co-Production Summit. Rob has worked for more than 20 years in Hollywood and in the global entertainment industry, primarily as a production, finance, strategy and creative development expert. He has been doing business in China since 1987, where his producing and entertainment management experience includes:

  • Production of the TV broadcast Three Tenors in the Forbidden City
  • Development and production executive on the 2008 Academy Award nominated film Mongol
  • Consulting Producer on the film Shanghai Kiss starring Kelly Hu and Hayden Panettiere
  • Consultant to Shanghai Media Group, CCTV, China Lion Films, and others

For more on Rob’s extensive film background, you can check out his full bio here. I also strongly urge anyone with an interest in China’s film industry to check out Rob’s Blog, ChinaFilmBiz.

CLB has written frequently, as per the following posts, regarding China film co-productions and the benefits that foreign companies can secure from them, if done correctly:

So when I saw Rob’s post extolling the virtues of co-productions in China, from a business/operations (as opposed to legal) perspective, I requested that we be able to run his post here as a guest post. Rob graciously consented and so here it is:

By: Robert Cain

If you’re not making films in China already, it’s time to take a serious look at doing so.  Just as China has become a dominant international player in many other industries, it has also captured a steadily increasing share of the global theatrical revenue pie, mainly through the brisk growth of its domestic box office.

Assuming current trends continue, and chances are very good that they will, China will soon overtake the U.S. and become an increasingly influential force in the global film business.

Because China’s stringent import quotas and its rules regarding box office splits limit the share of the domestic pie that goes to foreign-made films, it is growing more and more economically attractive to work with Chinese partners and make films that can meaningfully participate in that market’s domestic revenues. The best way for a non-Chinese producer to do so is produce movies that qualify as official co-productions. Co-productions are the only type of film foreign producers can participate in that are not subject to import quotas and that return to the foreigner a “fair” share—that is, around 40 percent—of the box office receipts.

Co-productions are also the primary vehicle in which most Chinese investors wish to participate with foreign partners. Whereas there are few Chinese financiers who will even consider funding a wholly foreign production, many will gladly invest as much as 50 percent of the budget of a co-production.

There exists a common misperception in America that because so few U.S.-China co-production films have been made, that it must be difficult to make them.  Many in Hollywood seem to think that The Mummy 3The Karate Kid, and The Forbidden Kingdom are the only co-pros to have been completed. But in fact Japanese, German, Korean and Hong Kong producers are investing heavily in co-productions in China. In 2010, 95 films applied for co-production licenses and 63 were approved, and in 2011 at least 30 co-pros were released in Chinese theaters.

No, making co-production films isn’t necessarily difficult–I’ve done it myself–but there are quite a few steps involved so it’s important to be knowledgeable and well prepared. A good place to start is the State Administration of Radio Film and Television’s (SARFT’s) 2004 document, ”Administration of Sino-foreign Cooperation in the Production of Films Provisions.” To save you the trouble of wading through all 23 articles of that document, I’ve abstracted the key provisions below.

The first few articles state that a co-production is defined as one between a Chinese production company that has obtained a lawful Co-Production Permit and a foreign production company; that the provisions govern all films made between Chinese and foreign producers, whether those films are made inside or outside China; and that SARFT is the governing body that oversees co-productions (many of the duties of administering co-productions are actually handled by a SARFT division called China Film Co-Production Corporation).

The document goes on to define three types of co-productions: 1) “Joint” productions, in which both the Chinese and foreign partners invest capital, labor and other resources and “share the interests and bear the risks jointly”; 2) ”Coordinated” or “assisted” productions, whereby the foreign party contributes capital and carries out filming in China, and the Chinese Party assists by providing equipment, labor, etc. in exchange for compensation; and 3) ”Production by appointment,” whereby the foreign party appoints the Chinese party to carry out production in China on its behalf.

Since only the first type, joint productions, is exempted from import quotas and allowed to share meaningfully in theatrical revenues, we’ll only concern ourselves with that type here.

Co-productions must also conform to all the applicable laws and censorship rules that govern domestic Chinese films, and the producers must all be in good standing without any banned films to their names.

Now, the nitty-gritty of the application process.  Articles 9 and 10, which are reproduced below, delineate the required submission materials and procedures:

If and when a permit is issued, it is valid for two years.

Another key provision deals with hiring: “Where it is necessary to employ overseas major crew personnel for a joint production, it shall be approved by SARFT, and the proportion of the major actors of the Foreign Party shall not exceed two-thirds of the total number of the major actors.”

This hiring provision is extremely vague—the term “major actors” is often interpreted to mean all personnel of any kind. There are no strict requirements regarding who must be employed on a co-production, nor whether Chinese talent or themes must be featured in the film. Likewise, there are no strict requirements regarding the percentage of the film that must be shot in China; SARFT has the authority to allow co-productions to shoot partly or even entirely outside China. Suffice it to say that the more Chinese cultural elements, featured actors, crew, facilities and locations are involved, the better the odds of obtaining approval.

After the film is completed it must be submitted to SARFT, either in Chinese language or with Chinese subtitles, for review to determine whether it will be approved for domestic exhibition in China and for export.

Given the complexity of the process and the subjectivity of many of the key rules, foreign producers ought to be careful to choose a local Chinese partner who is well connected with the relevant government authorities and who has the fortitude to help take a project all the way through to completion. The difference between an approved co-production versus  an imported quota film or one that receives no Chinese distribution at all can often be measured in millions of dollars of profits captured or lost.

One of the things we have learned in representing companies involved in China’s film industry is that it is the theater owners who seem to make the most money from films shown in China.

But Just last week China’s government film agency mandated that the share of film ticket sales be lowered for theater owners. In a post entitled, Beijing’s (Bloodless) Boxoffice Battle, Rob Cain (whom I had the pleasure to meet last month at the 2011 US-China Film Co-Production Summit), writes of this change and how it came about.

Producer Zhang Weiping had demanded that China’s theater owners raise their minimum ticket price from 35 y to 40 yuan and lower their after-tax share of ticket sales from 57 percent to 55. Cain described Zhang’s reasoning as follows:

Zhang was looking to protect the nearly $100 million that’s been invested in The Flowers of War, his latest collaboration with his mega-director partner Zhang Yimou. The film, which stars Christian Bale, is the costliest in Chinese history, and is set to open wide next week. Under the existing structure distributors receive only 39 percent of each dollar, or yuan, of ticket sales, and after the distributors’ cut producers get substantially less than that.

As Zhang Weiping put it, “For producers in China, the only way to get a return on investment is through ticket sales. Ancillary products do not sell well. Raising ticket rates could help keep movies from being fast food and junk food.”

China’s State Administration of Radio Film and Television (SARFT) quickly stepped in and issued a document “On Promoting the Coordinated Development of Movie Making, Publishing and Releasing,” mandating that “cinemas can get no more than 50% of the box-office revenues from a first run movie. Cain rightly describes this new mandate as “a major victory for film producers and distributors” and sees this “7 point bump in their share” as having the potential to “spell the difference between profit and loss for many Chinese films.”

If you are interested in China’s film industry, I strongly recommend you check out Chinafilmbiz.

This is the third and final part of a series of posts relating to China film law, in which our Beijing-based attorney, Mathew Alderson, is interviewed by CMM-I as part of CMM-I’s sector report “Feature Film Co-production in China.” In this post, Mathew explores issues relating to the regulations governing foreign involvement in film production in China. Parts I and II of this series can be found here and here.

 

CMM-I:   What are China’s regulations governing Sino-foreign co-productions?

Alderson:   There are several layers of rules and regulations and they include the following:

  1. Guiding catalogue for Foreign-Invested Entities 外商投资单位指导目录
  2. The Regulations on the Administration of Movies 电影管理条例
  3. The State Administration of Radio, Film and Television Interim Provisions on Operation Qualification Access for Movie Enterprises 国家广播电影电视总局对电影企业经营资 格的暂行规定
  4. Any applicable treaty, such as The Australia-China Co-production Treaty 中澳合作条 约
  5. SARFT circulars 国家广播电影电视总局的通告
  6. China Movie Industry Promotion Law (not yet in force) 中国电影产业推广法

 

CMM-I:   How do current Chinese government regulations impact co-productions? Do they pose a serious barrier? If yes, which regulations pose the greatest barriers?

Alderson:   They don’t so much impact co-productions as mandate them. The regulations prohibit foreigners from producing films in China without some kind of Chinese co-production partner. You might say this is a barrier. Article 18 of the Movie Regulations provides: “No overseas organization or individual may be independently engaged in the activity of producing movies inside the territory of the People’s Republic of China.” 第十八条 “境外 组织或者个人不得在中华人民共和国境内独立从事电影片摄制活动。” .

        

CMM-I:   According to your understanding and experience, what factors influence SARFT’s decision on whether an approval is given or not?

Alderson:   There are stated and unstated factors in the decision-making process. The unstated factors are opaque and will relate to issues or topics periodically considered to be off-limits by higher authorities. Predicting these is impossible, although respecting the approval process and the people charged with implementing it always helps. The officially stated factors that influence decisions are clear enough when you read between the lines. Article 25 of the Movie Regulations prohibits the following kinds of content:

  1. That which defies the basic principles determined by the Constitution;
  2. That which endangers the unity of the nation, sovereignty or territorial integrity;
  3. That which divulges secrets of the State, endangers national security or damages the honor or beliefs of the State;
  4. That which incites national hatred or discrimination, undermines the solidarity of the nations, or infringes upon national customs or habits;
  5. That which propagates evil cults or superstition;
  6. That which disturbs the public order or destroys public stability;
  7. That which propagates obscenity, gambling, violence or instigates crimes;
  8. That which insults or slanders others, or infringes upon the lawful rights and interests of others;
  9. That which endangers public ethics or cultural traditions;
  10. Other content prohibited by the laws, regulations or provisions of the State.

This post was written by Mathew Alderson, a Beijing-based Australian attorney who joined us earlier this year after having worked with us on a number of matters involving the creative services industry. Since Mathew has considerable experience representing foreign companies involved in China’s film industry, I asked him to write this post setting out the basic rules for foreign companies doing film co-productions in China.

Foreigners engaging in film production in China need to comply with a set of rules administered by the State Administration of Radio Film & Television (SARFT) and China Film Co-Production Corporation (CFCC). CFCC is a subsidiary of China Film Group Company.  I have overall found both SARFT and CFCC quite accommodating to foreign film productions in China.

Though at first glance the rules for Sino-foreign film co-productions in China seem fairly clear, a closer review gives rise to a number of issues. Some of these issues and questions will be discussed in subsequent postings. The following summary of the rules is intended to provide a frame of reference for such a discussion while at the same time setting out the basics

1. No film can be co-produced in China without a co-production license. The license is granted by SARFT but processed by CFCC. Anyone engaging in film production in China without the required license is in violation of the law and subject to monetary penalty.

2. There are two types of co-productions of interest to foreign players. The first is “collaboration,” in which the Chinese side and the foreign side both invest cash in the project. The Chinese side provides both cash and infrastructure. In this case, the foreign and Chinese producers are co-owners of all the copyright and related intellectual property (IP) in the film. Contribution of assets and distribution of proceeds is flexible and is determined by contract. However, the whole arrangement is subject to approval by both CFCC and SARFT.

The second type of co-production is the “entrusted production,” in which the foreign side contributes all of the funds and hires the Chinese side to do the production in China. In this case, the foreign side owns the copyright and the related IP. This approach still requires the same approvals and reviews required for a collaboration.

3. The project must receive a co-operative production license from SARFT. Application is made through CFCC. CFCC reviews the script (which must be submitted in Chinese translation), the financial status of the foreign co-producer and the basic structure of the project, with particular emphasis on the percentage of Chinese actors in the film and the location of production work.

Matters such as capitalization and distribution are left primarily to the parties. However, the basic principle is distribution based on percentage of capital contributed. Initial review is done by CFCC and the regional (provincial) level of SARFT. Once approved at that level, approval by SARFT Beijing is also required. The regulations provide that SARFT Beijing must respond within 10 days. However, there is no rule on how long the lower level bureaus may take for their review.

4. The script must be submitted in Chinese. The script is reviewed and approved by CFCC for compliance with China’s various censorship rules. After the film is completed, the film is again reviewed to ensure that it accords with the previously approved script. The project is not complete until after the final review and the issuance of a film public showing license. The rules contemplate that the film will primarily be done in Chinese and then translated into foreign languages. The rules have no provision for films that are in English or some other foreign language in their original form. Presumably this is a matter that is subject to the discretion of the CFCC.

5. After the film has been approved and licensed, the co-producers enter into a co-production agreement. SARFT has a standard form for that agreement. In its most basic form, the project is treated in almost exactly the same manner as an equity joint venture. The producers open a joint bank account for deposit of the capitalization funds. Both producers have control over that account. The accounting too is similar to that of an equity joint venture. The co-producers share in profits and losses based on their equity contribution. An annual audit is conducted, profits and losses are allocated, and taxes are paid. Though the regulations and form agreements are silent on this, proceeds of the foreign co-producer presumably can be remitted on an annual basis after payment of tax is confirmed. Details of when and how capitalization occurs and when and how profits are paid are flexible and are set out in exhibits to the main co-production agreement. However, all such arrangements are subject to review and approval by CFCC and SARFT.

6. CFCC remains involved in the project after production begins. For example, CFCC handles the visas for foreign workers and the customs for any imported production equipment.

7. In principle, all production work is done in China. Work can be done outside China, but only with CFCC approval.

In my next post(s), I will discuss the tax, international money transfer, collection agent and completion guarantor issues that often arise in the context of financing Sino-foreign film co-productions in China.

Rebecca MacKinnon, China internet guru and former CNN Beijing Bureau Chief just did a long and enlightening post, entitled (and about), “Bloggers, Innovation, and China’s Future.” Ms. MacKinnon concludes her post with this question:

Will the growing need for businesses to focus on playing politics with regulators — and scrambling to comply with constantly shifting, vague regulations —  sap the innovative energies of China’s entrepreneurs?

Asia Pundit answers this question much as I would have, by essentially saying government intervention must have at least some negative impact on innovation:

Will the growing need for businesses to focus on playing politics with regulators … sap the innovative energies of China’s entrepreneurs?

Simple answer: Yes.

The larger internet companies will play along with whatever regulations are put in place, the smaller ones will have more difficulty. Specialty services such as Toudou and Bokee will have more difficulty dealing with whatever ad hoc regulations are put in place than Sohu or Sina.

More complex answer: Yes, but not as much as some of the more Jurassic-era regulators would hope.

The more hopeful element is that China seems pretty incapable of following through on planned regulation. The proposed registering of video hosting sites by SARFT did not happen in September as they planned, I’m guessing that the ‘real name’ blog registration will also fail.

Bureaucratic infighting has stalled and will stall a lot of proposed regs (MII probably didn’t care for SARFT’s planned incursion into its territory, and you can be sure there were multiple interests opposed to Xinhua’s planned tariff on Bloomberg and Reuters terminals).

And, of course, supply will emerge to meet demand. If there is a desire for lots of groovy webby stuff there is little the government can do to stop it. SARFT may control the airwaves and cinemas but it doesn’t stop people from buying pirated DVDs, getting an illegal satellite hook-up, or getting material from P2P or streaming sites.

I’ve spoken with a couple of regulators who have been puzzled by western reports on various crackdowns. They don’t understand the outrage because they are fully aware that their crackdowns are ineffective (“Who cares if Skype is being blocked? I just use Google talk! — Yes we ban satellite dishes, but we can’t remove one from a private home unless it is poorly installed and looks like it will fall from its mounting. So what’s the problem?”)

Entrepreneurs will be frustrated but they won’t be stopped. (Getting vc [venture capital] funding will be difficult if they are forced into the grey market — so, yes, China is shooting itself in the foot.).

It makes for a terrific read, particularly for those considering doing business in China.