The numbers always dazzle in China.

The country has more than 60,000 movie screens, the most of any nation on Earth, almost all built within the last 10 years. It boasts more paid subscribers to streaming-video services than the rest of the globe combined, and Netflix doesn’t even operate there. It’s home to the world’s largest number of internet users — at least 800 million, roughly two and a half times the entire U.S. population — and all but 2% of them access the web via mobile, making for the greatest penetration of mobile payment use. More than 90% of movie tickets are sold online.

The market potential of China’s 1.4 billion people has long held Western companies in thrall, leaving them drooling over even the smallest slice of the action. That includes the burgeoning entertainment sector, where Hollywood and rising local players are jockeying to attract Chinese consumers whose spending power and demand for quality continue to grow.

But beneath the market’s sparkling surface are riptides that have recently made the Middle Kingdom a trickier place to do business than it already was. International and domestic politics are roiling the waters now in ways whose outcome is difficult to predict.

Economic tensions across the Pacific are at their highest in years, as the trade war declared by the Trump administration drags on, with a new round of tariffs announced by the White House earlier this month. So far, entertainment has managed to escape the escalating conflict, though there have been reports of an unofficial ban on some U.S. content in China, particularly in the streaming space. Talks on further liberalizing the entertainment sector have ground to a halt.

At the same time, China’s internal censorship regime has kicked into high gear as the country gets ready to celebrate the 70th anniversary of the founding of the People’s Republic. Heavy-handed government intervention has embarrassed China abroad, with Chinese films abruptly yanked from high-profile festivals, and stifled creativity at home, with local content makers uncertain where the red lines are. Some observers ominously compare the tightening to the dark days of Mao Zedong’s Cultural Revolution, when the arts were shanghaied into serving as propaganda.

Yet for all that, China remains a highly dynamic and increasingly sophisticated market that carries potentially huge rewards. No serious international entertainment player can afford to ignore the Middle Kingdom and its rapidly expanding middle class — estimated now at up to 400 million people. Even if progress is two steps forward and one step back, the resulting single stride in the right direction can translate into millions of dollars, hundreds of jobs and countless happy shareholders.

Chinese productions like 2018’s “Operation Red Sea” (pictured), “Detective Chinatown 2” and 2019’s “The Wandering Earth” outnumber Hollywood fare such as 2019’s “Avengers: Endgame” on China’s all-time top 10 box office list.

Courtesy of Bona Film Group/Kobal/Shutterstock

Nowhere is that more evident than in the film industry. Despite a slowdown in local production, in the past six months alone China has notched its second-highest-grossing film ever, the sci-fi epic “The Wandering Earth” ($691 million at the local box office), and released “Nezha,” which hit Chinese theaters July 26 and took just nine days to become the country’s biggest-ever animated film ($510 million and counting). Hollywood tentpoles have done well, too, including “Avengers: Endgame” ($616 million) and “The Lion King” ($117 million so far). A recent PricewaterhouseCoopers study forecasts that next year, China will finally achieve the elusive goal of overtaking the U.S. as the world’s No. 1 film market.

But the relationship between the Chinese and U.S. industries has changed markedly over the past two years, entering a new phase that those who recall only the flashiness of the big-spending Wanda era will have to learn to navigate. Gone are the days of China simply buying up U.S. companies for silly prices, naively entering into often unfavorable slate-finance deals or partnering in collaborations like the ill-fated Matt Damon-starring co-production “The Great Wall.” The mainland is now looking to do things its own way, and has big ambitions to create works that can both tap into its huge local market and make waves overseas.

“We’re no longer merely worshipping or copying the West, since we’ve seen that Western strategies of production or content development aren’t guarantees of success. China now knows that it needs to stand up on its own,” says John Qu, president of Citic Guoan New Bridge Studios. “America’s attitude can’t be ‘I’m successful in Hollywood, so I’ll be successful in China.’ Just because you were once the emperor that everyone bowed down to doesn’t mean you’ll always be emperor.”

China’s film industry has been running full-bore to catch up to — and in some cases even surpass — international standards in recent years. Just look at the Wanda-built Qingdao Oriental Movie Metropolis, a studio complex that was developed Chinese style: at enormous scale and breathtaking speed. Globally, 20 soundstages would make for a large facility; QOMM, now run by real estate conglomerate Sunac China Holdings, has twice that number. One of the soundstages, at nearly 108,000 square feet, is the largest in the world. All were designed and accredited by Britain’s Pinewood Studios.

“It’s massive to go from zero to 40,” says Tommie Curran, QOMM’s former director of production. “Nowhere in the history of cinema has any company built a studio of that size from nothing into something in four to five years.”

“Just because you were once the emperor that everyone bowed down to doesn’t mean you’ll always be emperor.”

John Qu Citic Guoan

New Bridge Studios president

Many thought QOMM was doomed when it became clear that Wanda’s grandiose claims of 30 Western films shooting there per year turned out to be hot air. What no one in China or abroad foresaw was the rise of big-budget Chinese blockbusters like Frant Gwo’s “The Wandering Earth,” which now fill the space instead.

“Even in 2017, everyone was very dismissive of Chinese productions,” says Curran, an Irishman who oversaw the studio from the soft opening of its first 2016 shoot (“Pacific Rim: Uprising”) until its April 2018 official launch. “The attitude was: Why are you having these ‘Wandering Earths’? Who’s this Gwo guy? Why don’t you have the Disneys or the big productions?”

Times have changed. Ten major local productions shot at QOMM before it was even formally open for business, including “The Island,” “Crazy Alien” and “The Wandering Earth,” which have together grossed a staggering $1.2 billion, almost entirely within China. The studio has operated at an average capacity of 70% this year. Current productions include the “Fengshen Trilogy,” a fantasy epic that even “The Lord of the Rings” producer Barrie Osborne, who was brought in as a consultant, says surpasses Peter Jackson’s saga in scale.

But while the mainland may be quickly gaining on the U.S. in moviemaking hardware, a talent and experience gap in screenwriting and production remains, creating a continuing need for Hollywood’s superior know-how.

On the “Fengshen Trilogy,” whose three parts are shooting back to back over 18 months, some of the department leads are Americans, including the head of VFX. Director Wuershan also brought in former Focus Features CEO and writer-producer James Schamus (“Crouching Tiger, Hidden Dragon”) as a script consultant on the films, which are a fantastical retelling of an ancient Chinese classic. “We know how the U.S. does production, and we want to do it that way, but we don’t have the talent necessary to do so,” says Wuershan, who goes by one name.

Veteran producer Eryong (“The Great Wall”) agrees. “China is still 20 to 30 years behind Hollywood when it comes to how to manage pacing and visual elements in big-budget blockbusters,” he says.

He tapped British helmer Simon West (“Lara Croft: Tomb Raider”) to co-direct his latest film, “The Legend Hunters,” because he didn’t think a Chinese candidate would be up to the task.

One area where China is leading the way, with world-beating technology and innovative products, is the digital space, despite heavy government restrictions. Much more reliant on mobile for all aspects of their lives, from summoning a cellphone repairman to buying toilet paper or paying rent, Chinese consumers are fast at adapting to new forms of interactive visual entertainment. Local companies have produced leading apps such as ByteDance’s TikTok; video games with crossover appeal like Chinese Parents and Auto Chess; and a few hit streaming series watched by hundreds of millions of viewers.

In fact, some industry watchers say that the wellspring of Chinese creativity no longer resides in traditional film studios dependent on box office returns, like the faltering Huayi Brothers, but in the internet streaming firms. These companies are increasingly cultivating their own IP derived from comics, games and short-form videos, whose audience appeal has already been confirmed by big data.

China’s top three streaming services are Tencent Video, Alibaba’s Youku and iQiyi, the last of which hit 100 million subscribers in June. Astonishingly, together they account for about 60% of all video-on-demand subscribers in the world, and dwarf broadcast TV in content spending. Though none is yet profitable, they have thrived in part because of protectionism — YouTube, Netflix and Amazon are all blocked in the Middle Kingdom — and because they can run losses for years on the backs of their parent companies’ other businesses, like gaming or e-commerce.

Last year, iQiyi’s “Story of Yanxi Palace” was the most Googled TV show in the world, even though Google is blocked in China. This summer’s breakout series is the Tang dynasty-set thriller “The Longest Day in Chang’an,” a 48-episode show on streaming service Youku that fans say offers “an excitement that used to only be possible in American TV series,” thanks to its slick production values. Each episode ranges between 30 and 50 minutes. Amazon Prime Video has picked up the series, which also stars Djimon Hounsou (“Amistad”), for international markets.

For years, Chinese television has been bogged down by the need to bring investors rapid returns, keeping shoots short and production values low. The lengthy, bothersome and unpredictable censorship process makes producers prone to “add water” to their shows — that is, stretch out a 20-episode script to 60 or 70 episodes with product placements and pointless digressions — in order to get their money’s worth.

That’s changing, says Liang Chao, a producer of “The Longest Day in Chang’an.” “Now the remaining investors have sobered up and realize that good content is the only path forward,” Liang says. “The industry can’t keep on feeding audiences crap, because then they’ll think that only crap tastes good and won’t know how to recognize a steak if you suddenly feed them one. We have to keep giving them steak so they’ll know to throw the crap away.”

But looming over China’s content creators, whether in film, television or online, is the ever-lengthening shadow of the country’s censors.

The government views the entertainment industry as a tool to boost the country’s global image, encourage nationalism and promote “mainstream values” deemed appropriate by the Communist Party. One of the top slogans under President Xi Jinping has been an exhortation to content creators to “tell the Chinese story” to the world through positive narratives that don’t portray China as a global threat.

In March, authorities ordered filmmakers to turn the country from a “big film power” into a “strong film power” like the U.S. by 2035, and to develop 100 movies a year that earn more than $15 million each. “A country’s level of film development reflects its total national strength,” Wang Xiaohui, China’s top film official, said at the time.

The burden of having to be both politically correct and commercially successful puts Chinese films in an awkward position. “Movies here must be both rooster and hen at once,” a former executive with China Film tells Variety. “You’re required to know how to crow, but also how to lay eggs — that is, to both laud the party and also make money. It’s extremely hard.”

Last year, the government put film directly under the control of its propaganda bureau. The industry is now overseen by party apparatchiks who have no professional or personal understanding of the medium, and who have never had to face any sort of economic pressure in their work, the former China Film exec says. Already this year, censors have yanked four movies from top festivals and tried to pull a fifth from Cannes. Their aggressive approach has also made a hash of the summer movie lineup, with the cancellation of theatrical releases for at least four top local features.

“The Farewell” (above) has many local distribs concerned its characters won’t be relatable to moviegoers. “Crazy Rich Asians” and “Toy Story 4” underperformed in China.

Courtesy of A24

Ironically, that has benefited Hollywood by freeing up more slots for U.S. titles during a busy season usually reserved for local fare. But the ongoing trade war has helped put a freeze on what some in the industry had hoped would be even greater access to the Middle Kingdom. Since the 1990s, Beijing has capped the number of imported films allowed in on a revenue-sharing basis. The quota was most recently set, in 2012, at 34. Negotiations to raise that number, increase U.S. firms’ share of revenue, expand or abolish a separate quota for flat-fee imports and establish new distribution practices resumed in 2017, but stalled in spring of last year.

With U.S.-China relations at their lowest point in years, there’s been little progress since, though informal discussions continue. The possibility of abandoning the limit on flat-fee imports has been bandied about, as has a promise to raise the quota of revenue-sharing films to more than 40. There is also apparently language in the works that will address the issue of online streaming.

Dede Nickerson, a longtime China-based American producer who says she’s recently discussed the matter with officials on both sides, says the plan is to sign a “watered-down version” of a new film agreement alongside a broader U.S.-China trade deal, “so both sides can claim a victory.” After trade talks in Shanghai broke down in July, however, no clear date for that is in sight.

It can be hard to push for more when you have so little leverage, Nickerson says, given that the discussion is almost entirely about content flowing into China, not out. “The U.S. has a lot of money at stake in these negotiations, but China has nothing at stake. Zero,” she says.

There’s likely a natural ceiling to the number of U.S. films the Chinese market can take, even if quotas were abolished. Some believe that this tipping point is already nigh. Numerous U.S. titles released theatrically in China this year have underperformed against expectations, including “Toy Story 4” and “Dumbo.”

What works on Main Street, USA, doesn’t necessarily appeal in mainland China. For example, while “Crazy Rich Asians” was hailed as a landmark for representation in the States, it was met with derision in China for portraying Asians as backward stereotypes. Many Chinese distributors have also passed on Lulu Wang’s “The Farewell,” judging that it’s too American and not relatable enough for mainlanders.

Overall, Chinese audiences are an increasingly savvy bunch whose tastes in screened content are developing rapidly, whether that content is viewed in giant Imax cinemas or on tiny smartphones. While many Americans struggle to sit through foreign films with subtitles, even viewers in fourth-tier Chinese cities

now regularly lap up fare from India, Japan, Thailand and Lebanon, which means added competitive pressure on Hollywood.

Regardless of the Beijing regime’s ham-handed meddling and the Trump administration’s hardening line on trade, China’s entertainment market remains a coveted prize for local and international players alike. The content providers who can unlock the evolving tastes of Chinese consumers and who are nimble and smart enough to navigate the political waters are most likely to succeed in a country that has witnessed remarkable progress in a short time and is expected to make even more.

“Twenty years ago, the industry here was practically nonexistent, and 10 years ago, it was a fraction of what it is now,” says Curran, the former Qingdao studios production director. “You have to look at China holistically rather than at any single point in time. If you criticize them on something today, you need to realize that in three years’ time they’re going to rapidly improve, and that in seven years they’ll be even better.”

Patrick Frater contributed to this report.