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China cries ‘Wolf!’ Should Hollywood worry?

Over the past decade, China has emerged as the world’s No. 1 consumer in a slew of important product categories: autos, mobile phones, semiconductors, industrial robots, elevators, luxury goods, beer, soy beans, online games and men’s skin care. Hollywood has long salivated over the prospect that films, too, would be added to that list.

The breakneck growth of China’s box office between 2010 and 2015—when ticket sales soared from $1.51 billion to $6.8 billion—led many US film industry analysts to predict that 2017 would be the year China finally overtook the United States as the world’s No. 1 movie market. Alas, a shock slump in 2016, when China’s movie box office actually declined in dollar terms to $6.58 billion, forced an industry-wide reassessment. Some experts warned China’s ascendence as No. 1 might not happen until well into the next decade.

Well, the 2017 box office numbers are finally in. China’s media regulator—the State Administration of Press, Publication, Radio, Film and Television (a.k.a. SARFT)—reported last week that in 2017 China had total ticket sales of $8.59 billion. That fell well short of North American box office for 2017, estimated by comScore at $11.12 billion. Even so, analysts cheered the results as a healthy recovery for China.

China’s box office rebound should give Hollywood reason to rejoice. Since 1994, when China’s communist rulers eased a long-standing ban on all foreign films, growth in China’s box office has translated into hefty profits for US studios and distributors. Beijing replaced the ban with a quota system that at first limited the number of foreign films that could be screened to 10 per year. China also imposed strict rules on content, and restricted foreign distributors’ share of China ticket sales. U.S. filmmakers complained, but eventually learned to live with the proscriptions because American movies proved so more popular (and profitable) than films produced in China. Blockbusters like Avatar and Titanic became smash hits in China, raking in hundreds of millions of dollars. Many titles—including Pacific Rim, Transformers: Age of Extinction and Furious 7—earned far more money in China than they did in North America. Even films like Warcraft, which was pulled from American cinemas after less than a week, could hit the jackpot in China.

China raised the number of foreign films that can be imported on a revenue-sharing basis to 34 from 20 in 2012 (with 14 of the titles required to be 3D or large format), and in 2016 relaxed the quota a tad further to allow 38 films. In dollar terms, China’s ticket sales for 2017 grew 30% from the previous year. In North America, meanwhile, 2017 ticket sales dropped 2.3% from 2016’s record $11.4 billion. International films—most of them U.S.-made—claimed 46% of revenue in 2017, up from a 42% in 2016 and 38% in 2015.

And yet, there are clear signs Hollywood’s dominance of China’s film scene has begun to fade. No fewer than four of the five highest grossing movies in China last year were locally produced. By far the biggest blockbuster was Wolf Warrior 2, a jingoistic action film depicting the exploits of a Rambo-like former Peoples Liberation Army soldier who rushes to the rescue of Chinese nationals in Africa—pulverizing an American villain in the process. Wolf Warrior, which premiered in July, had taken in a record-shattering $854 million by yearend, which would make it one of the worldwide film industry’s top ten money-makers of all time. The New Yorker‘s Evan Osnos has penned a thoughtful essay on why such a nationalistic film seems to have struck such a powerful chord with Chinese audiences. (Beijing is so chuffed with Wolf Warrior that it has selected it for the best foreign-language film category of the 2018 Academy Awards.)

China’s second-most popular film in 2017 was The Fate of the Furious, which grossed less than half of Wolf Warrior. The next three most popular titles were all made in China: Never Say Die, about a boxer who magically switches bodies with a female reporter trying to expose him for taking bribes; Kung Fu Yoga, an action comedy starring Jacky Chan; and Journey to the West: Demons Strike Back, a fantasy adventure directed by Tsui Hark.

In recent weeks, despite a full scale marketing blitz by Disney, Star Wars: The Last Jedi, has left Chinese audiences underwhelmed. Instead, the hot ticket is Youth, a film depicting the triumphs and trevails of a group of young girls in a Chinese military performing arts troupe during the Cultural Revolution. Meanwhile, several recent films from countries other than the US have proved surprise hits in China, a development some film critics have interpreted as a sign Chinese audience are tiring of Hollywood’s formulaic blockbusters.

All of which suggests to me that the arc of China’s film industry may follow that of many other product categories in the country. As China’s economy matures and homegrown challengers come into their own, global players increasingly find themselves forced to scramble more frantically than ever to hang on to a shrinking share of a growing market.

More China news below.

Clay Chandler
@claychandler
clay.chandler@timeinc.com

Trade and Economy

China’s GDP revision. China has lowered its final 2016 gross domestic product figure to 74.36 trillion yuan ($11.47 trillion) from 54.2 billion yuan in initial estimates, due to a lower estimate in the services sector. The annual GDP growth rate remained unchanged at 6.7 percent. Reuters

Yes, we mind if you smoke: Growth in China’s manufacturing sector slowed in December thanks to  sharp crackdown on air pollution and a cooling property market. The purchasing managers’ index also dipped. The Guardian

Congress says Ant can’t: CFIUS has barred Ant Financial’s plan to acquire U.S. money transfer company MoneyGram International Inc due to national security concerns, making it the most high-profile Chinese deal to be blocked under the Trump administration. A $1.3 billion purchase of U.S. chip maker Lattice Semiconductor Corp by Chinese fund Canyon Bridge Capital Partners LLC was similarly shelved last year. Bloomberg

The call of home. Jia Yueting, the billionaire founder of LeEco, a troubled Chinese tech company once billed as the Netflix of China, has defied an order issued by the China Securities Regulatory Commission to return to China from the U.S. by the end of 2017 to sort out his mounting financial debt. The high-profile entrepreneur was placed onto an official list of debt defaulters in November, with official news agency Xinhua swiftly weighing in to publishing a stream of articles questioning Jia’s whereabouts and the firm’s financial health. BBC

Technology and Innovation

Party members wanted: News aggregation platform Jinri Toutiao says it plans to hire 2,000 content review editors to help scrub unwholesome and politically sensitive content from app. Toutiao and Phoenix News were rebuked by China’s regulators for disseminating pornography and publishing news without proper licenses. Toutiao says it’s looking for applicants with an interest in current affairs, a bachelor’s degree and a keen sense of what is (and is not) politically correct. The company says it will give preferential consideration to applicants who are members of the Communist Party. TechNode

Tencent, too. Tencent has put out a hiring ad for 200 content “patrollers”, who will find and delete illegal and inappropriate content across the firm’s multiple open content platforms. The new recruits, called the Penguin Patrol Unit after the firm’s mascot, will comprise veteran journalists, experienced writers and regular Internet users who have cybersecurity savvy, and will be paid in QQ Coins, Tencent’s virtual currency. TechNode

If at first you don’t succeed. Alphabet Inc’s Google has led a $120 million investment in Chushou, a Chinese live-stream mobile game platform Chushou, as the U.S. tech giant seeks new inroads into China despite a ban on its search engine services there. Chushou’s 8 million users make 250,000 live streams a day. Reuters

Thinkin’ park: China will build a $2.1 billion research park dedicated to developing artificial intelligence in Beijing’s Mentougou district. The campus will be constructed within five years, cover 55 hectares, and house 400 businesses focused on high-speed big data, cloud computing, biometrics and deep learning. CNBC

Pokemon Goes to China. Chinese games company Netease has inked a partnership with Pokémon Go developer Niantic to launch the Nintendo-backed game in China, the world’s largest mobile market. Neither party confirmed a launch date. Financial Times

A fresh look for JD. After archrival Alibaba’s entrance into the physical retail market with its Hema supermarkets, Chinese e-commerce giant JD.com, too, has launched its first offline supermarket 7Fresh. The 4,000 sq meter store in Beijing has served more than 10,000 daily customers and collected more than 1 million yuan ($150 million) in daily sales since its trial run started on Dec 29. More than 1,000 additional 7Fresh stores have been blueprinted to open across China over the next three to five years. China Money Network

In the driver’s seat. Chinese ride-hailing giant Didi Chuxing will acquire troubled bike-sharing startup Bluegogo to further drive its ambitions in the red-hot bike-sharing sector. Bluegogo halted operations last November, a year after its founding, due to a capital crunch amid stiff price wars. Didi, meanwhile, is currently the top investor in Ofo with a 25% stake and is said to be pushing for a merger between Ofo and archrival Mobike, together with Tencent, Mobike’s largest shareholder. Caixin Global

Digi-health. WeChat is working with local governments and hospitals across China to develop a digital ID card that allows citizens to access public health care records, make appointments and pay medical bills through their instant messaging accounts. Tencent, which runs the messaging service, said that pilot programs have helped to cut the average waiting time to see a doctor by 40 minutes. Caixin Global

In Case You Missed It

The cashless society has arrived—only it’s in China Wall Street Journal

China’s Great Firewall is rising Economist

Will 2018 be the year of protectionism? Trump alone will decide New York Times

China’s protectionism comes home to roost Financial Times

China hits back at Donald Trump’s ‘zero-sum mentality’ on trade, threatens retaliation South China Morning Post

Shares of Renren—China’s forgotten social network—just jumped after ICO announcement TechNode

4 take aways from 34 new Chinese unicorns in 2017 TechNode

Beijing Suburb to Host Capital’s First Autonomous-Car Testing Zone Caixin Global

Regulation and the Internet

Not on our watch: China’s central bank, the People’s Bank of China, has issued new regulations to curb the use of reserve funds held by payment firms such as Tencent and Alibaba affiliate Ant Financial. Under the new rules, firms must keep 42 to 50 percent of their total client funds in regulated interest-free reserve accounts by April, up from a current rate of 12 to 20 percent. The ratio will eventually be raised to 100 percent, said the bank, without giving a timeline. Reuters

Minding the miners. While China’s central bank won’t directly regulate bitcoin miners’ electricity usage, it could ask local authorities to do so, it said in a meeting at the end of 2017. Bitcoin miners feared they would be the next target after China last September ordered the shuttering of all cryptocurrency trading exchanges and banned initial coin offerings with the aim of reducing financial risks. Reuters

TMI: Chinese balk at using apps to snoop and snitch on their neighbors. Wall Street Journal

Summaries by Debbie Yong. @debyong
debbie.yong@timeinc.com

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