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China’s B.O. continues to storm ahead and is expected to top 13 billion yuan ($2.05 billion) this year, after exceeding $1.5 billion in 2010.

But senior Chinese biz figures are fretting that domestic movies are not doing well enough to hold their own against fierce competish from Hollywood, despite quotas on overseas pics and various other hurdles facing foreign movies.

“Avatar” made $210 million in China, while “Inception” did $69 million, and even though the studios’ cut of takings in China is half what it is elsewhere in the world, the figures are appealing enough for Hollywood to take notice. This, combined with the spectacular growth outlook in China, is the reason why China is so hot at American Film Market this year.

“The numbers are soaring, China has become hot and there is heat surging through the new market. Building movie theaters, making films, suddenly these are popular options for wealthy Chinese. However, 90% of domestic movies are losing money,” Gao Jun, veep of the exhibition circuit New Film Association, told local media.

All of the cinema chain operators are complaining about falling B.O. in recent months. Wanda in Guangzhou expected 14 million visitors during the National Day holiday, traditionally one of the busiest cinemagoing periods, but only sold 11 million tickets.

The manager of the Guangzhou Jinyi cinema said that during the National Day holiday, the number of people watching movies was down 30%.

This has been blamed on the less-than-stellar performances of local pics.

Domestic big-budget pics like “Shaolin,” “The Lost Bladesman” and “The Warring States” failed to match expectations at the box office. As in most markets in the world, they find it difficult to compete with tentpoles like “Transformers: Dark of the Moon,” but even when there are no foreign competitors around, as in September this year, the domestic pics failed to ignite passions.

The roughly 20 foreign pics that enter China each year on a revenue-sharing basis make up nearly half of total B.O., with 500 or so domestic movies competing for the rest. And a big percentage of the B.O. for those domestic movies came from Hong Kong co-productions.

“Of last year’s smaller movies, (Zhang Fanfan’s horror pic) ‘Lost in Panic Room’ is always quoted as a good example of how a small investment can make big returns. The investment was four million yuan ($630,000), but the B.O is about 25 million yuan ($3.94 million), which is six times the investment. Everyone presenting an investment plan now uses it as an example,” Wu Hehu, deputy chief manager of Shanghai’s SFG United Circuit, which accounts for 10% of the Chinese cinema market, told Xinmin News.

Between January and September this year, 630 new cinemas opened in China, which is seeing nearly two new cinemas every day, resulting in 2,563 new screens. It would appear that China is ripe for the plucking by domestic filmmakers, given the fact that there are so many restrictions on foreign movies coming in and so much effort goes in to boosting domestic product.

“But the reality is less beautiful. With Zhang Zhiliang’s ‘Rest on your Shoulder,’ investors put in more than 50 million yuan ($7.9 million), but it only took 15 million yuan ($2.4 million) or so at the box office,” said Wu.

Wu said that so many movies these days are financed by “day trippers,” or laymen working outside the biz.

Producer Yang Zi, who made “The Sorcerer and the White Snake,” said the investors are there, but they are impatient.

“To investors, this is not a gradual learning process, they want fast returns,” said Yang. Also the funding structure remains opaque in the absence of adequate regulation of how the industry works. It’s not just about the quality of the producers. The movies are also facing challenges from the censors. The country’s most bankable helmer, Feng Xiaogang, constantly complains that making good work is difficult because of the restrictions imposed by the censorship system.

Another major theme at AFM this year has been co-production, and perhaps this offers a way forward, combining local expertise at dealing with the regulatory hurdles and Hollywood’s experience. Hopes are high in China that this combination can help keep B.O. buoyant in 2012 and make sure that those plush new seats in the scores of multiplexes in Chinese cities don’t go empty.