Chinese Companies Turn to Reset Relationship With Hollywood

Chinese companies talked about not wanting to be regarded as the latest in a series of foolish foreign investors in Hollywood. But it took the intervention of Chinese President Xi Jinping to bring to an end a 3½-year acquisition frenzy which saw Dalian Wanda and other players strike deals that raised eyebrows on both sides of the Pacific.

Last week’s official declaration by Beijing ruling out investments in overseas film, entertainment and sports properties marks a resetting of the relationship between Chinese and U.S. companies in those sectors, analysts say. Call it China-Hollywood 2.0.

“They mean business this time. This is not a policy that will change right after the [Communist] Party Congress this autumn,” Alex Wong, director of asset management at Ample Capital, told Radio Television Hong Kong.

The entertainment industries in both China and the U.S. must adjust to a new reality no longer based on acquisitions and asset values. Instead, the relationship is more likely to focus on quality rather than quantity and on more genuine cooperation.

“Too much focus has been put on capital as opposed to real industry activities. But going forward, working together on content generation – by which I don’t mean co-productions, which are a very narrow slice of the pie – and distribution should be more prevalent,” says Rong Chen, president of Perfect World Pictures.

The company, which has its roots in online games, beefed up its film business from local production and distribution into a $500 million slate deal with Universal in early 2016. The pact’s purpose goes beyond capital gain, Rong said; what he wants is a seat at the table that will allow his company to learn how Hollywood works from the inside.

Although new acquisitions and investments are now out, agreements and relationships established before the Chinese government began cracking down on big-ticket deals late last year are still valid. For example, Huayi Brothers, which in 2015 provided equity and slate financing for STX Entertainment, is still looking for ways to deepen that relationship. STX executives are in Asia this week to sound out investor interest in a possible Hong Kong IPO.

“For the most part, deals signed pre-2017 will continue,” said Rance Pow, head of cinema research and investment advisory firm Artisan Gateway. He added: “There is still significant interest between Chinese-Hollywood business parties to nurture and expand collaborations and relationships.”

Dominic Ng, chairman of East West Bank, the financier that has played a role in most of the Hollywood-China deals, said Chinese investors in the U.S. entertainment space are more likely to become more active participants instead of just silent funders.

“Slate financing deals like Bona’s or Huayi’s did not require them to be very active participants, but things have moved on. They have built up their local infrastructure. They are much more comfortable to be one of the players in Hollywood, instead of being just a passive equity investor,” Ng said, citing Huayi’s production partnership with the Russo brothers as an example.

Conversely, Ng sees increased activity by Hollywood studios in the local Chinese market. The current performance of Chinese action thriller “Wolf Warriors II,” which has earned $760 million in China in just 25 days, is a timely reminder that the Chinese box office, after a troubling 12 months, is far from moribund.

“In the next year or two you’ll find the U.S. studios will be dramatically more active,” Ng said. “Not just pushing their distribution agenda and complaining about the 34-film quota, but saying, ‘To hell with that quota. We’re going in and making Chinese content.’”

That process is already underway through ventures such as Village Roadshow Production Asia, an offshoot of Australian and Hollywood investor Village Roadshow. The Beijing-based company initially took a low-risk approach in boarding half a dozen Chinese indie projects, but in June, it stepped up its game by merging with Perfect World’s China business to form Perfect Village Entertainment.

Lionsgate, which was one of the first North American studios to strike a Chinese slate-financing arrangement, has also co-produced two Chinese films with TIK Films, a subsidiary of Hunan TV, to be released this year.

“We have used the experience to learn more about the China market and filmmaking process,” said Wendy Reeds, Lionsgate’s EVP of international sales. She added: “We have also been in negotiations with the television team at TIK about working on local television formats adapted from Lionsgate IP.”

However, a difficult factor to predict is the state of the Beijing-Washington relationship. After a brief Mar-a-Lago bromance between Xi and U.S. President Donald Trump in April, high-level China-U.S. trade relations have instead deteriorated. The Trump administration is expected to impose restrictions on Chinese steel. Last week, it launched a probe into China’s intellectual property policies.

In July, the U.S. blocked the $419 million joint venture between Harry Sloan and Jeff Sagansky’s Global Eagle Entertainment and China’s HNA conglomerate. The U.S. government’s Committee on Foreign Investment in the U.S. cited technology security grounds – strategic mistrust – for blocking the deal.

“With its foreign currency reserves stabilizing, China may relax its controls over foreign investment. However, the future of Hollywood’s relationship with China will also largely depend on the further development of relations between China and the Trump administration,” law firm Akin Gump said in a March note to clients.

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