Vulture has learned that Michael Bay’s rapidly coalescing but still-untitled fourth Transformers film, starring Mark Wahlberg, is likely to be set in mainland China. Is this because it makes sense dramatically for the battle to head to where the original toys were likely built? No, sources say that Bay and Paramount’s reasoning is more bottom-line: Filming in China and, even more ideally, working with a local production partner raises the odds that the fourth Transformers will get a wide release in China, a country with a massive potential box office. “By getting Chinese culture into it, there’s a better chance of getting it into China,” explained one insider briefed on the studio’s plans, “and less chance of getting frozen out.”

Unlike the U.S. market, where ticket sales have been falling for years, the Chinese box office has exploded recently, growing 35 percent last year to $2 billion. It’s now the second-largest international market in the world behind Japan, which it’s expected to overtake later this year. But to the Chinese government, Hollywood movies are a double-edged Twizzler: In February, the government lifted its annual quota of foreign movies able to be shown there from 20 to 34, and officials have become nervous about how foreign blockbusters are working to the detriment of their homegrown films. “[M]ore foreign films in the Chinese market have dealt a blow to domestic films,” said Tian Jin, vice minister of the state’s Administration of Radio, Film and Television, at last week’s China’s 18th Communist Party Congress, adding that China’s film industry was “shaken.” This year, Chinese films only accounted for 40 percent of the country’s box office, and that is expected to drop to 35 percent next year. As a result, the government has been handicapping many of America’s biggest blockbusters.

This past summer, protectionist trade officials in China insisted that two of the year’s hugest films — Warner Bros.’ The Dark Knight Rises and Sony’s The Amazing Spider-Man — would both be released in the final week of August. The resulting collision was calamitous, says one rival Hollywood studio distribution chief. While both films made about the same amount in their opening weekends — Spider-Man about $32 million, Dark Knight about $31 million — they could have made much more had they not been pitted against each other, according to this expert. “The Chinese Film Commission got what they wanted, which is to suppress box office,” said this distribution capo, adding, “If you have two openings of similar size, you gotta assume they left at least 50 percent of their potential take on the table — maybe more, given the size and scope of those movies.” China’s position is strong, though, and the studios can’t do anything about it: Though Sony and MGM’s Skyfall has generated more than half a billion dollars around the globe in box office so far, just this week, China forced the studios to postpone its release there until early 2013.

Meanwhile, MGM’s remake of Red Dawn originally posited that the Chinese were invading America because our country had defaulted on its debt, but when the film went into limbo because of MGM’s financial meltdown, the script leaked, and the Chinese government was not happy at news of their country’s portrayal. And so, at their behest — and the very real threat that this plot would cause the film to be barred from the valuable country — the movie was reshot to make North Korea the insurgent enemy, and the repo story line was removed. As a result, Red Dawn has recently been cleared by a Chinese minister of culture for exhibition there. (It opens in the U.S. on Nov. 21.) “The Chinese don’t have a problem with American nationalism,” says Beau Flynn, one of the producers of the new Red Dawn, who, appropriately, was reached at a special screening of his film for U.S. servicemen at the U.S. Navy’s Construction Battalion Center in Port Hueneme, California. “They just don’t want China to be portrayed in a bad light, and that’s understandable — I understand that. Even America does that.”

Studios have been looking at new ways to make sure they get full access to Chinese moviegoers. As we reported last April, Disney partnered with Chinese media company DMG to make Iron Man 3 and to film part of it in China. Foreign films co-produced in China are counted as domestic films, and so Iron Man 3 is much more likely to get an advantageous release date there, a game plan that Transformers seems to be following: While a spokesman for DMG declined to comment, insiders say Paramount and DMG have been in talks for months about Transformers.

A spokeswoman for Paramount, Katie Martin Kelley, declined to say if the studio planned to shoot Transformers 4 in China, noting that “the script to the movie is still being written.” When asked if the studio had interest in making the film a Chinese co-production, Martin Kelley added, “All I can say is, ‘It is not a Chinese co-production,’ and that’s where things stand right now.” A call placed to Michael Bay’s office was not returned at deadline.

(As for today’s story by the Hollywood Reporter that a Transformers location scout had just visited Thailand to explore shooting there: That country could be an additional location, or the visit could possibly be a negotiating tactic to let the Chinese know Paramount has other options. But either way, we are assured by our sources that China is the first choice for the production and that Bay has been contemplating ways to make the film with a Chinese partner.)

A second source close to the Transformers sequel, who verifies the plan to shoot in China, says that cultural censors there will closely consult on the still-evolving Transformers script. “They want to make sure that the Chinese military are depicted as a highly competent group of super-fighters,” said this production source, “not some third-world force.” (Ironically, last year, China’s state television news service, CCTV, aired footage that it claimed was of a training exercise by the Chinese Air Force’s J-10 fighter. Turns out it was actually footage from Top Gun, a movie made by Transformers’ studio, Paramount!)

This kind of governmental collaboration would not be new to Michael Bay, who has made a fine career out of wrangling unprecedented support from the American government to make his films: He worked extremely closely with NASA in the making of Armageddon, and had enormous technical assistance from the U.S. Navy in making Pearl Harbor, largely on the premise that nary a disparaging word about either would appear in his films.

But jingoists need not worry that this is a sign that Transformers 4 will be actively pushing Chinese propaganda: With Bay at the helm, it’s likely a moot point. Our source noted that while script reassurances to China’s communist overlords might be politically necessary by Bay and Paramount, they aren’t likely to add up to big concessions on this film. “It’s not Oliver Stone making this movie,” says our insider, “[Bay] is not going to make some political statement about [Chinese government] atrocities or oppression. He’s going to be more interested in showing how robots blow up some corner of the Great Wall of China.”