China has become the largest foreign market for U.S. film producers, and now produces greater box office revenues than Japan – more than USD 2 billion last year alone. Hollywood producers are cashing in on this market, distributing U.S.-made films as fast as the Chinese authorities will allow – not exactly at breakneck speed, since until February, China allowed only 20 foreign films annually; now 34 will be allowed to be distributed throughout China. Hollywood producers are also working hand-in-hand (here, here and here) with Chinese production companies to co-produce blockbuster films. The success of “The Karate Kid,” which Sony Entertainment and its Chinese partner produced, has entertainment firms salivating.
Studios put a lot of effort into obtaining one of the coveted slots within the limited quota of films approved for import. The difference between potentially sky-high revenues (which the authorities have now raised to as much as 25% of box-office receipts) and the flat USD 1 million offered for distribution rights for films not admitted within the quota inspires companies to pursue every avenue in order to maximize their chances of obtaining a prized license.
The companies’ persuasive efforts are focused on the China Film Group Corporation, a state-owned enterprise that decides questions of censorship, co-production and distribution. It is headed by a well-known Chinese producer named Han Sanping, and controlled by SARFT, the State Administration of Radio, Film and Television (SARFT is an executive branch of the State Council).
But in recent months, U.S. entertainment companies, like their cosmetic, medical device (here, here, here) and pharmaceutical counterparts (here, here, here and here), have come under scrutiny for their dealings in China’s burgeoning market. In March, at least five film studios received letters from the SEC asking about potentially improper payments to Chinese officials. The letters follow tip-offs from a whistleblower; they are confidential, and the companies have remained silent as to their content – not mentioning the letters in their SEC filings dated May 2012. Apparently 20th Century Fox, Dream Works Animation, and Disney are involved, among others. And apparently the SEC is concerned about potential FCPA violations, possibly involving China Film Group. Chinese accounting regulations may complicate the process of obtaining company records.
It is too early to tell how the SEC’s inquiries will evolve. But the tension between an opaque government-dominated system, an increasingly affluent population hungry for consumer goods and Western entertainment, and Western and Chinese companies ready to turn a profit and willing to expend considerable effort in doing so, offers fertile ground for speculation. The breathtaking pace of economic expansion in China, the country’s new foreign anti-corruption provisions, and the seemingly selective enforcement of domestic anti-bribery laws – resulting, in some cases, in death sentences – magnify these speculations a hundred-fold.