Despite an unprecedentedly difficult year, the Chinese film industry has come roaring back. In August 2020, China became the first country in the world to achieve “full box office recovery,” according to the U.K.-based industry analytics firm Gower Street.

Remarkably, Chinese box office data as of mid-June 2021 is tracking an enormous 1,175% ahead of the same point in time in 2020 amidst the pandemic, and is running just 1% below the average box office of the three pre-pandemic years (2017-2019), Gower Street notes. China achieved this despite cinemas operating at 75% capacity and a dearth of Hollywood content. No other market has even come close to reaching its pre-COVID scale. The U.S. is still 85% behind its pre-pandemic numbers.

In 2020, the Chinese market was bolstered by militantly patriotic films like “My People, My Homeland,” “The Sacrifice” and “The Eight Hundred” — which became the highest-grossing film in the world last year thanks to its $460 million local box office.

So far in 2021, the country’s box office recovery has been driven by record-high sales over the February Chinese New Year, April Tomb-Sweeping and May 1 Labor Day holidays, propelled by crowd-pleasers like “Detective Chinatown 3,” “Hi, Mom,” “Sister,” and Zhang Yimou’s “Cliff Walkers.”

The Lunar New Year brought in $1.22 billion (RMB7.82 billion) in seven days, a 33% increase over 2019. The April festival weekend marked a new holiday record of $128 million (RMB817 million), while the most competitive Labor Day weekend of all time raked in unprecedented sales of $265 million (RMB1.7 billion).

It hasn’t all been smooth sailing, however, especially for theater-owning concerns. Thousands of exhibitors were pushed to the brink due to six months of cinema closures, catalyzing consolidation in the sector, as demand fell due to stay-at-home orders pushing viewers away from theatrical and towards new digital content consumption habits.

Although more than 95% of Chinese cinemas were back in operation by last September, box office receipts for the last four months of 2020 were down 25%, 23%, 48%, and 8%, respectively, year-on-year. The total annual box office of $3.13 billion marked a decline of 68% year-on-year.

COVID-19 has backlogged Hollywood releases and created potential gaps in the supply of new local content due to production delays and financing troubles. Currently, exhibitors face the challenge of keeping numbers up despite an uneven and unpredictable pipeline of films. It doesn’t help their bottom line that concessions remain banned, too.

“Some cinemas are definitely doing good business, but most are still not yet back to 2019 levels,” Zhang Jia, a cinema manager in Shenzhen, told a local financial outlet. “The box office now mainly relies on domestic (Chinese) films, and the supply of imported films has not returned to normal. If it could, our annual box office would be more secure.”

A Bubble of Excess Supply

Even before the pandemic, China’s theater industry had become a bubble heading towards an eventual burst.

The main problem is that the country’s screen count has grown at a faster rate than its box office, Tsinghua University economics researcher Liu Deliang told the local press. Furthermore, the number of total attendances is stagnating, meaning that ticket sales per screen has fallen. Per screen revenues dropped from $211,000 (RMB1.35 million) in 2018 to $133,000 (RMB850,000) in 2019.

Financial reports show that in the first three quarters of 2020, China’s nine leading cinema companies incurred aggregate net losses of more than $703 million (RMB4.5 billion).

Thousands of theaters nationwide had numerous consecutive days with sales of just a few hundred yuan a day ($15-$150) — hardly enough to cover rent, water, electricity and labor costs, let alone deficits left by months of closures.

Particularly for small and mid-sized cinemas in lower-tier cities, many of which had already been struggling before the pandemic, half a year of COVID-19 closures was too much to bear.

At least 1,000 cinemas exited the market in 2020, Huaxi Securities analyst Zhao Lin estimated to state broadcaster CCTV in December. They either shuttered or were acquired by larger chains better able to withstand risks.

“We predict that in 2021, excess supply will continue to be cleared out,” he said.

High-flying industry newcomer Tahoe Cinemas was one notable smaller movie chain operator clobbered by COVID-19. It shuttered its 23 locations nationwide in mid-December so abruptly that customers were unable to refund their tickets. It still remains unclear if the theaters will ever reopen.

Tahoe Cinemas is a subsidiary of Tahoe Group, which deals primarily in real estate. The conglomerate entered the exhibition industry at a period of peak growth in 2016 and 2017. In Tahoe Cinemas’ first year in 2017, it was ranked 322nd nationally by box office earnings. By 2018, it had jumped to 120th place, and by 2019, 57th.

Mired in a debt crisis since 2018, Tahoe Group had to suspend cinema operations as box office earnings fell last year to the point where the company was unable to cover its costs.

The formerly Hong Kong-listed, Hong Kong-headquartered SMI Holdings, once one of the largest theater operators in China, ran into similar problems. It rapidly grew its network of cinemas from just three in 2009 to 83 in 2013 and 365 by the end of 2017, but also ran into debt troubles in 2018. Its shares were suspended from trading. Unable to bounce back from pandemic losses, it was finally delisted in December 2020.

“Although there is still room in the market to develop new cinemas in certain regions or cities, many new cinema companies have not rationally judged their market footholds,” film investor Zhou Xiang told the Beijing Business Daily.

The exit of smaller exhibitors has created new space and opportunities for larger ones, who are expanding and snapping up greater market share.

Wanda Group exemplifies this trend. In May, the Wanda Cinemas owner exited the U.S. exhibition business by dumping essentially all of its remaining stake in AMC Theaters, stating that it was following a new development strategy of “focusing on the local [Chinese] market.”

And so it has. Despite huge losses in the first three quarters of 2020, Wanda Cinemas raised an industry record sum of $458 million (RMB2.93 billion) in November through the private issuance of 196 million shares, $312 million (RMB2 billion) of which is earmarked for new theater projects.

In 2020, it closed 20 of its mainland cinemas with “poor operating efficiency” but opened at least 64 new ones and signed on 310 additional franchisees. With the success of its film “Detective Chinatown 3,” Wanda Cinemas actually notched a more profitable first quarter of 2021 than it did pre-pandemic in 2019. It built 12 additional cinemas in Q1, and plans to build 60-70 total this year.

“The pace of Wanda’s cinema expansion hasn’t actually changed due to the pandemic. [The firm] has judged that the pandemic’s impact will be short-term, making it a good choice to keep opening theaters due to lower rents and costs during the pandemic period,” Pan Helin, head of the digital economy institute at Zhongnan University of Economics and Law, told the China Business News. “It’s a long-term strategy.”

Wanda’s competitors have also continued their building sprees. Hengdian Entertainment opened 29 new theaters with 186 screens last year, and this year has plans for 60 new venues. Omnijoi Media built 30 cinemas with 131 screens last year, and opened nine cinemas with 41 screens in Q1, a portion of its 2021 year-end goal of 27 new venues. Guangzhou Jinyi Media opened 11 new venues last year.

A Shifting Balance of Power

Gower Street currently predicts that China’s 2021 box office total could hit $8 billion, which would likely make it the global No. 1 by a large margin. The consultancy estimates that the North American box office will come in at around $5.2 billion this year.

“That extraordinary Chinese New Year February period has almost certainly given China too strong a head start on 2021 for the [North American] domestic market to compete this year,” though future years may be up for grabs, said the firm’s director of theatrical insights Robert Mitchell.

In the near future, the biggest rival to Chinese theater companies may not be America but online streaming and other digital entertainment. Gaming, live-streaming and short video all fiercely compete with films for Chinese consumers’ attention, particularly among Gen Z consumers with no qualms about viewing content solely via smartphone.

The pandemic tilted the balance of power away from Chinese cinemas and towards streaming in likely permanent ways. Most notably, the typical 30-day theatrical release window has already started to shrink.

The shift began last January, when major Chinese New Year blockbuster “Lost in Russia” cancelled its theatrical release altogether in favor of premiering online for free via Bytedance’s platforms. The social media giant paid $91 million for the privilege, generating fervent opposition from film executives.

When cinemas first reopened last summer, two smaller titles hit streaming after just seven days in theaters. Two higher grossing December releases, “Soul Snatcher” and “Bath Buddies,” also went online after just 16 days and 20 days, respectively.

To compete, Chinese cinemas will have to increasingly shift from a retail mindset to a service mindset, dropping previously frequent money-saving practices like lowering projection brightness in favor of offering premium experiences.