Venice likes China, and China returns the compliment. Over the years, the Venice fest has amply rewarded the efforts of Sino filmmakers, and supported Chinese cinema in general, probably more than any other international film festival.

Last year’s Silver Lion director winner was Shangjun Cai for “Ren shan ren hai” (“People Mountain People Sea”), while the Coppa Volpi for actress went to Deanie Yip for her part in Hong Kong director Ann Hui’s “A Simple Life.” In 2006, Jia Zhangke took the Golden Lion for “Still Life,” while Zhang Yimou famously won the Golden Lion twice, in 1992 and 1999, and shared the Silver Lion in 1991.

This year Hong Kong helmer Peter Chan, of “Bodyguards and Assassins” and “Wu xia” fame, is one of the jurors to decide the main competition prizes at the Lido showcase.

China’s presence has always been strong in Venice, but over the years its film biz has emerged from a tiny market into a global force, recently overtaking Japan as the world’s second-biggest cinema market in terms of B.O.

In 2011, total revenues in China’s movie industry were 17.8 billion yuan ($2.8 billion), according to a report by the research org Entgroup — a rise of 16%, and it looks like this rise is continuing in the first half of 2012.

According to the government regulator, the State Administration of Radio, Film and TV data, total B.O. in China is up 40% over last year’s midpoint — to $1.26 billion for the first half of the year.

The proviso in this otherwise rosy scenario is that the take for domestic films is down 4.3%, which points to the big challenge facing the Chinese film biz — pushing local talent in the face of powerful competition from Hollywood, and combating intellectual property theft, which means most movies are unable to make any money beyond what they earn at the box office.

A breakdown of the figures shows B.O. was $2.08 billion of last year’s cume, while non-box office revenue was $410 million. Rampant piracy means that ancillary revenues like merchandising, DVD sales or legal online transaction are still small.

“This results in increased investment risk for those investing in movies,” Entgroup noted.

Another challenge for the Chinese biz is to boost exports of native productions. This figure fell last year, bringing in only$310 million).

One of China’s leading private shingles, Huayi Bros., will be attending Venice with “Tai Chi 0,” which will unspool in the midnight screening section.

Huayi is riding high right now with the success of “Painted Skin: The Resurrection,” the 3D sequel to “Painted Skin,” which during the summer became the highest-grossing Chinese film of all time, bringing in nearly $108 million. Huayi Bros. Media Corp. president James Wang says the increase in the country’s quota, which restricts foreign movies to 20 releases a year in China on a revenue-share basis, has been a shock to the market, but it is also a challenge.

“Definitely this has been a shock to the film market and we can see this how the January-to-June box office figures for domestic movies have been hit by the increased quotas,” Wang says. “The most efficient way to beat the problem is to promote our movies and make better movies. The government is trying to make a balance in the market.”

He argues the whole quota should be abolished, and that way the competition would be fairer since it would increase the variety of Hollywood movies that would be imported, not just the big blockbusters.

Although it is sometimes hard to see it, China is a centrally planned economy run by the Communist Party. This means that government policy has an important role to play, especially in areas like censorship, where local filmmakers feel they are being held back compared to their overseas brethren.

The government is keen to support the film biz these days, as part of broader efforts to boost “soft power,” China’s efforts to match its growing economic muscle with some kind of cultural importance.

In the 12th Five-Year Plan released last year, the government committed itself to “deepening reform of China’s cultural industries” — statements aimed at giving filmmakers a lift.

In this regard, Chinese film interests are trying to work out how a deal to ease quota requirements. The deal, which was brokered by Xi Jinping, the man set to become China’s next president, allows 14 additional enhanced-format, such as 3D and Imax, movies per year. The arrangement also increases the amount foreign studios can keep from movies distributed in China to 25% from about 13% of ticket sales. The biggest grossing films of all time in China to date are “Avatar” ($208 million), “Transformers: Dark of the Moon ” ($168 million) and “Titanic 3D” ($153 million).

By contrast, local movies this year are once more suffering badly at the hands of Hollywood tentpoles.

In another move aimed at limiting Hollywood’s take in China, authorities have restricted “The Amazing Spider-Man,” “The Dark Knight Rises” and “Prometheus” to opening within a week of each other.

“SARFT is making a series of transitional protection measures, which we hope can provide for the development and growth of Chinese films by supporting their roots, and increasing their ability to defend themselves against imported films,” says Zhang Hongsen, vice head of the Film Bureau.

Driving the expansion of the biz in China has been the rapid rise in the number of movie theaters and screens, which has been facilitated by the construction boom in China.

Last year shopping malls sprouted in virtually every city, and in every mall, a movie theater to bring the shoppers in. In 2011, there were 803 theaters and 3,030 screens added, which means an average of 8.3 new screens per day. By the end of 2011, there were 2,800 movie theaters and 9,200 screens across the country, and Entgroup estimates that in 2012, the number of screens will reach 11,800.

These figures are still way off the numbers in the United States, but they are getting there.

“There is a lot of space to develop the Chinese film business, especially in the second and third-tier cities in the western and central regions,” says Xue Lin, veep of the private shingle, Enlight Film. “In 2012, China is forecast to have 18 billion yuan ($2.83

billion) B.O. and it will be 30 billion yuan ($4.72 billion) inside of a couple of years.

“China has to improve the quality of domestic films. We produce a lot of films in China — there will be more than 600 films this year — but only one-fifth will be shown in the theaters, and very few can make money.

The output is enough but the quality is not enough. We need to focus on how to make high-quality films from production to post production.”

One area in which China is keen to expand is its high-tech abilities, such as special effects, 3D and Imax.

“Co-production is still at the early stage of developing and experimenting, but learning from overseas movies is how to develop talent and technique,” Xue says. “Meanwhile, it’s an opportunity to open Chinese movies to the world.”

For the future, greater cooperation between the domestic biz and the overseas industry looks like one step forward, attested by the swelling number of ties between China and Hollywood. In August, DreamWorks Animation said it would team up with its state-owned Chinese partners to co-produce the next installment in the “Kung Fu Panda” franchise in China in 2016.

DreamWorks’ rival Walt Disney Co. has also announced co-production deals in China. It said in April the third installment in its “Iron Man” franchise would be co-produced with Beijing-based DMG Entertainment. Disney is also building a theme park in Shanghai. For its part, News Corp. bought a 19.9% equity stake in one of the country’s leading private shingles, Bona.