China Opens Door for Foreign Movie Theater Chains, But Will They Enter?

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Chinese President Xi Jinping

The country with the world's largest potential moviegoing audience appears to be inviting foreign investment right as growth in the sector finally begins to slow.

After years of restrictions on virtually every front of its massive film sector, China has cracked the door open to foreign movie theater chains.

On June 30, China’s National Development and Reform Commission (NDRC) issued an update to its so-called "Negative List," the official government document that outlines which industries are out of bounds for foreign investment. The number of sectors and sub-sectors on the list was cut from 2018's total of 48 to 40 this year. The new 2019 list removed investment restrictions on industries ranging from oil exploration to farming, as well as one significant change for the entertainment business: A restriction stipulating that "the construction and operation of cinemas must be controlled by a Chinese party" was dropped.

The timing of the changes — just days after President Donald Trump met with Chinese leader Xi Jinping at the G20 summit and pledged to back down from threatened tariff increases — struck many in the industry as an encouraging sign that Beijing's trade war retaliations wouldn't be engulfing Hollywood's vital China business anytime soon. (HBO Asia's Taiwanese original series The World Between Us received permission from Chinese regulators to stream on Tencent Video the same week, offering encouragement that Beijing may have lifted a recent freeze on U.S. video content approvals.)

"In the context of the trade war, there is a tendency for small concessions to be made here and there, and this is probably one of them," says Mathew Alderson, a partner at Harris Bricken Attorneys & Consultants in Beijing. "It's hard to imagine that they would have taken this step had that meeting resulted in an escalation of tensions."

Exactly what the new rules allow remains somewhat unclear, however. Although the "operation and construction" of cinemas by foreign firms appears to be permitted now, ambiguous wording retained elsewhere in the document leaves unresolved the question of whether movie theaters in China can be directly owned by international parties, or under what ownership structures. (Does the usual requirement of entering into a joint venture with a Chinese firm still hold, for example? And just how large can the foreign party's share of the business be in practice?)

"Flexibility in interpretation and implementation is a familiar strategy from Beijing," adds Alderson. "We won't fully know what's possible until some international companies actually try to work through this system and we see how it is applied."

How much opportunity for growth is left for foreign firms to capitalize on in China's massive exhibition sector is another question. "You certainly can't say that companies going into theater construction in China now will be getting in on the ground floor," points out Lindsay Conner, a partner at Manatt, Phelps & Phillips, who regularly represents Chinese studios in international deals.

Over the past two decades, China's theatrical exhibition footprint has exploded from hundreds of screens to a network totaling more than 64,000 — the largest and most state-of-the-art exhibition outlay of any country on the planet. Beijing-based Dalian Wanda Group, both China's and the world's largest exhibitor, already has a multiplex occupying prime real estate in virtually every major Chinese city.

Meanwhile, most indicators suggest China's great theater-building boom is finally reaching a leveling-off point — and that the sector could even be ailing. "It's significant that this announcement has come now, because what we see is that the Chinese industry is in transition," says Rance Pow, president of Shanghai-based cinema consulting firm Artisan Gateway.

In the first half of 2019, ticket sales revenue in China fell 2.7 percent compared to the same period last year, according to Artisan Gateway's data. Most observers have blamed the drop on a downturn in domestic film production caused by Beijing's tax crackdown and censorship uptick over the past year, along with other domestic financing challenges. But an increase in average ticket prices — from RMB 35.6 ($5.17) in 2018 to RMB 38.6 ($5.61) this year — has masked a more worrying trend: a 10.3 percent decline in total admissions in the first half of the year, and a 16.7 percent slip in the average box office revenue generated per movie screen.

"We're starting to see what looks like the beginnings of a consolidation stage in the Chinese exhibition industry, which would be led by the failure of some smaller companies, and at some point bigger failures of business," Pow says.

It's perhaps natural, then, that Beijing is suddenly more receptive to bringing in some international resources and operational best practices — especially since the domestic champions are already so well-entrenched.

Despite the difficulties — both those perennial to doing business in China, and the cyclical downturn — it's unlikely that the major international theater chains will eschew Beijing's invitation altogether, as ambiguous as it may still be. China may already have 50 percent more movie screens than North America (approximately 64,900, compared with 40,300), but its population is more than four times that of the U.S. (1.39 billion compared to 327 million). 

Adds Conner: "The Chinese market has been substantially serviced by the rapid rise of local theater companies, but it's still far too big a market to ignore. I suspect every major theater company will be giving this a very hard look."