China and US have reached a new trade agreement for films, opening up the Chinese market significantly to overseas films by allowing 14 additional Imax, 3D or animation films into the market but retaining the 20-film a year quota for revenue sharing titles. In addition, studios and other overseas rights holders will receive nearly twice as much of the revenues.
When China joined the WTO in 2001 removal of tariff barriers and opening up to overseas investment was key to entry. In August 2009 the WTO ruled that China was not upholding these agreements with regard to the distribution of foreign media products in mainland China. In January 2010 the WTO rejected a Chinese appeal against the ruling, and China was given until 19 March 2011 to respond, which did not happen. This deal, which will be reviewed in five years, is intended to end that dispute as the US and China also issued a joint statement saying they had 'reached agreement on the terms of a Memorandum of Understanding resolving the WTO-related issues'.
In 2011, six of the Top 10 films in China were in 3D, which shows how significant this deal could be in opening up the market to new films. There will now be space for 34 foreign films under the revenue-sharing quota, of which 14 will be primarily 3D or Imax releases and 20 will be 2D-only releases of major films. In 2011, the top 34 films in the US grossed $5.53bn, which is over 50 per cent of the total market. Due to increased depth of films allowed in, there is more chance that independent producers and non-US producers will also benefit from the Chinese market. The potential for 3D revenues in China also helps underpin 3D production levels over the next few years. These new measures liberalise the market further than it was and will at first sight increase the market share for US films, putting pressure on local films to increase quality and the marketing efforts.
Currently, overseas film companies receive a cut of between 13.5 and 17.5 per cent of the Chinese box office revenues. Under the new agreement, overseas film companies can take a straight 25 per cent of a film's revenues. This is in a market that is now worth $2.09bn a year (third largest cinema market in the world after US and Japan) and where a successful title can take upwards of $100m. If China had the equivalent 'screens per million head' ratio to the USA, there would be over 133,000 cinema screens in China. There has been rapid growth of new screens, which now exceed 10,000 and give China the second-largest screen count after USA, but there is still more growth to come.
The stipulation that the new releases are specifically for 3D and Imax titles is a major coup for the giant screen film company. China is a huge market for Imax, with 217 screens open or contracted to open and in 2011, the leading local film was Flowers of War, the first 2D Chinese-language film to be released on Imax screens (59 screens). Imax also believes that this deal will help open up Chinese films to release on Imax screens outside China.
Additional measures in the trade agreement include allowing new local companies to become film distributors, effectively breaking China Film Group's hold over this activity, and more transparent import and censorship decision-making. While the agreement does not specifically mention the home entertainment market, which is not subject to official quotas, the hope is that the new market structure will reduce the opportunity for online and physical piracy of US products, as more will be available legally in a growing number of cinema screens ahead of their video release.
It is not clear how much the agreement will help Chinese producers access the US market. There were 588 films produced in China in 2011, less than half of which will receive a theatrical release in their domestic market. In addition, data from Chinese box office monitoring outfit ENT group underlines the need for more effective global presence from China. In 2011, overseas box office for Chinese films (including co-productions) was down 40 per cent to RMB 2.046bn ($324.9m). Asian markets were not immune, with revenues from Chinese films in Taiwan posting a 47 per cent drop over a year and in Singapore a 15 per cent fall. The lack of successful co-productions was the given reason behind this drop.