The Chinese box office, currently the second largest international market behind Japan, will exceed the U.S. box office by 2020, according to a report issued Wednesday by Ernst & Young.

China’s entertainment market is growing even faster than anticipated, creating unprecedented opportunities for media investment, according to the Spotlight in China report, which comes out of the company’s Media & Entertainment Emerging Markets Executive Forum underway in Shanghai.

Chinese spending on entertainment and leisure activities rose 56% from 2010 to 2011 and that trend will continue, the report said. The annual growth rate for China’s media and entertainment industry between 2010 and 2015 is estimated to be 17%, which is significantly higher than the country’s overall economic growth rate, according to Ernst & Young.

The report advised the largest global entertainment companies to seize the opportunities.

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"Their global strategy has to have China front and center," said David McGregor, Asia-Pacific media & entertainment leader for the firm. “Between the impact of digital adoption and the government of China easing regulatory restrictions, both foreign and domestic media and entertainment companies are in a position to make new inroads into this extremely promising market.”

Last year, the Chinese box office grew by 35 percent, to $2 billion, according to the Motion Picture Assn. of America. In 2011, the U.S./Canada box office was $10.2 billion — more than five times that of China, but it was down 4 percent compared to 2010. Worldwide, the box office reached $32.6 billion in 2011, up 3 percent from 2010.

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With 1.3 billion people, China is the most populous nation and largest internet market in the world and its digital entertainment continues to grow exponentially.

Spotlight on China identified several trends driving growth in China’s media and entertainment economy, including an increasing disposable income among consumers; the convergence of networks, devices and content; the digitization of distribution infrastructure; advertising expansion; growth of second-tier cities; emerging business models and regulatory reform.

It also highlighted the challenges facing media and entertainment companies doing business in China, including changing consumer preferences in a diverse marketplace, an evolving and highly competitive digital landscape, price sensitivity, intellectual property rights infringement and government control and regulatory restrictions.

The report identified four key factors critical to success in China. These are building a strong brand, succeeding in digital, forming and operating successful partnerships and navigating the regulatory landscape.

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“The challenges for media and entertainment companies to penetrate China are still considerable, however the vast potential of the market makes it impossible to ignore,” said John Nendick, global media & entertainment leader for Ernst & Young. “Companies will need to understand that investing in China is a long-term proposition, and those who can make that commitment will be in a much better position to succeed.”

Cultural influences were cited as a key factor, too.

“Companies cannot underestimate the importance of culture in China,” said Peter YF Chan, Greater China media & entertainmentl leader for the firm. “An understanding of the cultural nuances across geography, age and income level is necessary to win the loyalty of Chinese consumers.”

The report comes out amid more evidence that the Chinese government is aggressively supporting the growth of its entertainment industry to rival Hollywood.

Two state-owned Chinese film studios are looking for listings on Shanghai's stock exchange, according to the Wall Street Jounal. Beijing-based China Film Co. and Shanghai-based Shanghai Film Group Co. have both applied for IPOs, which will require approval from the China Securities Regulatory Commission. No financial details and specifics about timing were disclosed.

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