As more individuals are financing China's films, growth may be tricky

China’s film biz is awash with cash right now. The market is dominated by state-controlled giants and, increasingly, high net worth individuals who earned their money in coal mines or real estate and are now getting into the movies.

Cash for filmmaking in China is coming from every imaginable source, says Hong Kong producer Nansun Shi, who tops Film Workshop, as well as Asian pic sales outfit Distribution Workshop and is managing director of Irresistible Films, which promotes new filmmakers.

“TV companies, media groups, real estate developers, game companies, tobacco companies, individuals with wealth … you name it,” she says. “There have been quite a few film funds in Asia in the last few years, but I do not see them being very active. I think it’s quite difficult to find good projects, and many good directors and producers are already attached to some company or other. Film funds do not offer any unique selling point.”

Producers generally finance their films from a variety of sources, including their own cash flow and regional pre-sales.

Lana Peng, who is in charge of international sales and distribution office at Huayi Bros., one of China’s most important private shingles, says there is a lot of government support.

“The government has become very supportive in terms of financing film companies, improving the systems and laws of the film industry, helping qualified film companies get to the market, encouraging international development and corporation,” says Peng.

Producer Lorna Tee, who has worked at Variety as business development manager in the Asian region, is also seeing funding from high net worth investors.

“I don’t know how much hedge funds are affecting the film biz now as the cash seems to come from more newly rich individuals and corporations who are venturing into the entertainment business for the greater profile it can give them,” Tee says.

Many in this new group of investors are also putting money into the business with little information on the way recoupment for a film works; some don’t seem concerned with getting their money back as much as the glamour that such investments brings.

“This creates the boom but also can be detrimental to the growth as their lack of knowledge may result in quality of the filmmaking not being raised to more professional levels. When more bad films flood the marketplace, as when Hong Kong was overproducing in the 1980s, audiences turned their backs on local films and went for more predictable but reliable Hollywood fare,” says Tee.

Ricky Tse, head of distribution and sales at Media Asia, echoes that warning, pointing to the big influx of cash from non-film sources that hit Hong Kong in the 1980s and 1990s, causing film quality to suffer.

But it’s not a free-for-all of cash. In February, Standard Chartered Bank called an immediate halt to its film-lending business out of Hong Kong.

Others who dipped their toes in the film-funding market in Asia but have since withdrawn include Deutsche Bank, Dresdner Bank, Societe Generale and Royal Bank of Scotland.

A big problem the banks have found in Asia is getting Asian filmmakers to use U.S.- and European-style gap financing, a form of mezzanine debt bridging the gap between coin raised and the production costs, usually based on the potential value of the film in any territories that have not yet been pre-sold.

There have also been problems getting Chinese helmers and producers to work with completion bonds, even as the market gets more sophisticated and the size of the budgets continues to rise.

Producers say privately that while some recent successes have been scored by big-name Chinese helmers, they would have made a lot more money if they had been made with the kind of fiscal discipline demanded in Hollywood, such as hitting delivery dates and adhereing to the approved script.

Jessica Kam-Engle, producer of Zhang Meng’s “The Piano in a Factory,” says: “It’s not too difficult to get money from private sources right now. You just need to persuade one big boss to invest in your film and the deal is done, instead of going through endless projections and scrutiny by the banks or funding institution. Foreign film funds play even less role, due to the foreign currency restrictions in China.”

But the cash dash needs to be controlled.

“Cash is flooding the system. But the key is to have meaningful cash flow that stays within the system to fuel the long-term growth of the industry,” says Kam-Engle, adding that many new outside investors have no serious strategy to stay in the business and grow it.

“A real-estate tycoon might have millions to burn and he decides to make some films because the film market is hot,” she says. “If the films are successful, he may make more, or he may take the winnings out and not necessarily plow it back to make more films, as it’s just like gambling for him. If his films flop, then he gets burnt, and will not come back again.”

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