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Crack in China wall

Sino compliance with WTO distribution ruling

Hollywood has reasons for optimism in the news that China will comply with a key trade ruling to remove distribution barriers to movies, DVDs and music, but it doesn’t mean that there will be a sudden transformation of its massive marketplace.

China’s agreement with the U.S., announced by the World Trade Organization last week, still does not lift a quota that restricts the number of imported foreign films to just 20 per year.

But it is significant in that China has agreed to a deadline for compliance, March 19, rather than let the process stretch out over a long period of time.

The WTO ruled in 2009 that China was in violation of international trade rules for an array of entertainment products, including restrictions on the distribution of movies, DVDs, books and journals. Studios complained that they were forced to negotiate films for inclusion in the marketplace with the China Film Group, the state-run distributor, and the State Administration of Radio Film and Television, cutting them off from other Chinese distributors.

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“This doesn’t mean that in the third quarter or fourth quarter of next year we’re going to see a market like we see in the U.S. or other parts of the world,” said Greg Frazier, exec VP and chief policy officer of the Motion Picture Assn. of America. “But it is clear we are going down a path where it will be more competitive and less restrictive in what is the largest consumer marketplace in the world. We are finally starting to see some light at the end of the tunnel.”

Since “Avatar” took more than $100 million at China’s theaters, the latest in a succession of foreign tentpoles to rake in significant B.O. in China, Hollywood has been keener than ever to get a foothold there.

The government keeps a tight grip on what entertainment content China’s 1.3 billion citizens get to see, and enforces this using tough censorship laws. These are unlikely to be affected by the WTO decision and import rights will remain with two state-run film companies to ensure no politically or morally dangerous content slips past the

censor.

“China will be allowed to preserve in part the right to censor foreign films, and has not been asked to raise the quota restricting the number of foreign films imports,” the state film group China Film said on its website.

However, senior film figures have said privately in recent months that the quota is not being applied as rigorously as in previous years because the domestic biz is in such good shape. Moreover, the hope is that some competition in the marketplace will put pressure on the Chinese to eventually raise the quota.

Jeffrey Chan, chief operations officer of the indie distrib Bona, told Daily Variety that more openness was the big trend in China and Bona is not afraid of competition.

“As a distributor, if there are more films abroad or at home, that is a good thing for Bona’s distribution business,” Chan said.

Chinese B.O. is expected to rise to around 30 billion yuan ($4.4 billion) in the next five years, while the number of screens would rise from 5,000 now to 10,000. B.O. rose 44% last year to $910 million.

“And we also run cinemas, so if we have more ‘software’ for releasing, that’s also good,” Chan said.

Chan said that as it stood, only one or two Hollywood movies did big biz every year in China.

“Other foreign films and domestic films compete in a pretty fair level, I think,” he said.

The ruling looks set to have more impact on the music biz. Song Ke, prexy of Taihe Rye Music, China’s biggest pop music company, told local media that the policy would stimulate the development of the international performing market in China. This would lead to healthy competition on the international performance market.

The WTO’s decision also requires China to lift some of the most onerous restrictions it places on foreign involvement in the online distribution of music. Those restrictions, as well as rampant piracy, are what record labels have long said impede the development of a music market there.

Neil Turkewitz, exec VP of international for the Recording Industry Assn. of America, said they are hoping it means China “will take whatever actions are necessary” to curb the search engine Baidu’s operation of a music service based on infringing content.

“Implementation of the WTO decision will be a seminal moment in defining how China will conform to international law, and how it will adapt its practices to the current environment,” Turkewitz said.

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