« Back to Posts

Hong hai xing dong Operation Red Sea movie poster

As Trade War Intensifies, China Film Market May Not Need Hollywood to Keep Booming

As “Black Panther” claws its way atop box office records globally, little noticed is what’s happening right behind. Chances are, even the most ardent U.S. filmgoers know little about No. 2 (“Operation Red Sea”), No. 3 (“Detective Chinatown 2”) or No.  5 (“Monster Hunt 2”) among 2018’s biggest box office winners. All are massive hits in China.

Box office china global operation Red SeaTheir success in China amid near-complete U.S. anonymity says a lot about where  the global film industry is headed. That vector may only accelerate as China retaliated today against $60 billion in Trump Administration trade sanctions with tariffs on 128 U.S. products, mainly agricultural.  Trump’s tariffs already were complicating Hollywood efforts to persuade China to allow in more foreign films, one area where U.S. products actually run a trade surplus.

That film quota was set at 34 under a now-expired but continuing 2012 agreement, with what are effectively “blackout periods” around lucrative windows such as the Chinese New Year. The quota films, typically Hollywood blockbusters, can be distributed under revenue-sharing agreements that give studios a stake in a film’s Chinese success.

Another 30 to 40 films may be licensed by Chinese distributors on a flat-fee basis, which limits the potential profits if a film proves a hit. All face heavy censorship over issues such as nudity or sympathetic portrayals of what are considered antisocial, supernatural or even just antigovernment behaviors.

As the China film market has passed Japan to become the world’s second largest, Hollywood studios have been negotiating for a better, bigger share of the opportunity, seeking a wider array of allowed films, no blackout periods and perhaps other sweeteners.

The U.S. domestic market is effectively stagnant. Last year’s domestic gross rose slightly, to $11.2 billion, but only because of higher ticket prices. Once again, ticket sales dropped. So, Hollywood’s big growth opportunities in recent years have resided almost completely overseas, and especially in China, where theater construction and a growing middle class have helped drive large and rapid growth.

But talks have dragged for more than a year, and now look increasingly unlikely to produce a deal soon. It’s not clear the Chinese need to care, as their domestic market booms and homegrown talent sprouts in several parts of the country. And given Donald Trump’s Hollywood antipathies, it’s not clear he cares either.

Together, the three Chinese films at the top of BoxOfficeMojo’s global box office list have compiled just $4.3 million in U.S. (“domestic”) box office. But their international combined box office totals $20 million more than all of “Black Panther’s” takings of $1.274 billion. Just about all the tickets sales for those films occurred in China itself.

China film box office hits Operation Red Sea Hong Hai Xing DongThe most successful of the three, “Operation Red Sea,” has a simple enough (if probably poorly translated) log line in IMDB: “PLA (People’s Liberation Army) Navy Marine Corps launch a hostage rescue operation in Ihwea and undergo a fierce battle with rebellions and terrorism.”

The film, “Hong Hai Xing Dong” in Chinese, was released in China and a handful of other territories in mid-February. The U.S. version debuted a week later, in just 44 theaters. Five weeks later, it’s still playing in an AMC theater in the heavily Chinese community of Monterey Park, Calif., 8 miles east of downtown Los Angeles.

At current growth rates, China’s film market is projected to equal No. 1  North America by next year. And unlike the not-very-healthy theatrical exhibition business in the United States, China continues to post huge growth rates year over year.

More importantly, as the country’s film business continues to enjoy some protection from Western competition, and hones its own ability to create blockbusters that can thrive at home and  begin to travel overseas, the Chinese will  also begin enjoying  the “soft power” advantages that have accrued to American diplomacy for decades.

To be certain, China’s market girth is already shaping the U.S. film business. Hollywood blockbuster projects with ambitions for China now routinely shape their scripts and casts to accommodate both Chinese fans and its government censors.

Further accelerating those opportunities might be the rise of competitors to other U.S. film distribution outlets.

Just last week, Iqiyi.com, the so-called “Chinese Netflix,” raised $2.5 billion in an initial public offering as it spun out of Chinese media giant Baidu at a valuation of about $11 billion. Shares have dropped notably since the open, but at least some observers think that’s because American investors aren’t paying attention to the Chinese tech and entertainment business.

Regardless, though Iqiyi’s timing was poor, it’s hard to blame the company for U.S. stock market volatility of late.

Concern about the trade wars and possible government regulations sent the markets into negative territory for the balance of Q1 last week, and even more today. Chief among the losers was Amazon, with whom Trump is said to be “obsessed,” perhaps because Amazon owner Jeff Bezos also owns frequent Trump critic the Washington Post. Amazon, briefly the world’s second-most-valuable company, is down 11 percent since Trump started tweeting.

Even the “American Netflix,” known as Netflix, saw shares drop in a major way during the stock market stampede, down as much as 6.9 percent, despite a moderately positive analyst’s note. Given Netflix’s doubling  in value the past year, to pass $100 billion in market cap, a drop was perhaps inevitable. Now we’ll see what happens when Spotify hits the New York Stock Exchange Tuesday with its direct offering, set at a $132 per share “reference price.” In the meantime, China will keep churning out home-grown blockbusters and building its own entertainment universe far, far, far from Hollywood’s time-worn ways.