China to Reward Cinemas for Favoring Local Films Over Hollywood Imports

Movie theater chains in China that ensure Hollywood films take no more than one-third of total box office will be granted a sizable tax rebate.

China is introducing another layer of protectionism to give its domestically produced movies an edge over Hollywood imports.

Last week, state regulators announced that Chinese theater chains that generate at least two-thirds of their box office receipts from local Chinese films will be able to keep half of a five percent tax they usually pay on ticket sales.

The China Film Bureau normally collects a five percent tax on all box-office revenue. The funds are channeled towards various government grants and initiatives designed to aid the development of the Chinese film sector.

Under the new rules, to qualify for the rebate Chinese theater groups must ensure that imported movies take no more than one-third of the box office for the full year, and the exhibitor must have a clean regulatory record, with no history of box office under-reporting or fraud. Throughout its recent, historic expansion, the Chinese film industry has been dogged by cases of box office embezzlement and manipulation, and Chinese regulators have repeatedly vowed to crack down on offenders.

China employs various measures to protect its fast-growing domestic film industry. The country's notorious quota system restricts foreign film imports to just 34 titles per year on revenue-sharing terms. The quota was raised from 20 titles to 34 in 2012, in a landmark deal that temporarily resolved a bitter dispute that had led the United States to file an official complaint with the World Trade Organization alleging that China was unfairly restricting access to its market.

In addition to the quota, Chinese regulators have employed subtler protectionist tactics, such as blackout periods on foreign film releases during popular summertime and holiday moviegoing periods, as well as strategic scheduling of release dates, whereby top local titles are given the best weekend opening windows.

It's not clear how much of an immediate effect the new tax break will have on exhibition patterns, given how successful the existing methods have already been. Over the past two years, Chinese blockbusters have made impressive gains. Stephen Chow's Hong Kong-China co-production The Mermaid, for example, grossed a record $520 million since its debut in mid February.

In 2015, Chinese films claimed 61.6 percent of the $6.78 billion box office total. So far this year, their share has climbed to about 70 percent, while Hollywood has dipped to a record low. As recently as 2014, Hollywood claimed some 45.5 percent of the Chinese theatrical market.

Nonetheless, China remains a rapidly growing market for the U.S. studios, due to the explosive growth of the Chinese box office overall, which expanded by 48 percent last year. The country is on course to surpass North America as the world's largest theatrical territory in 2017.