copyright 2007, Jump Cut: A Review of Contemporary Media
Jump Cut, No. 49, spring 2007

[Note: This essay is long and runs over two pages in the text only version, with the notes and works cited on the second page. Click here to go to open page two of text version in a new window now.]

Hollywood’s pre-WTO crusade in China

by Ting Wang

China’s contemporary fans of Hollywood movies and entertainment well remember being first invited to the fantasy world of exciting action and sleek glamour of Hollywood through The Fugitive in late 1994. The first U.S. blockbuster entering the Chinese market on a revenue-sharing basis set off a series of major encounters between China and Hollywood. Yet, little known to the fans was the fact that China had become a major target market for Hollywood even in the early 1900s, when China was still a semi-colony of the West.

Brief historical background
leading up to Hollywood’s re-entry
into China in the mid-1990s

"…it is virtually impossible to assess a national [film] industry in any given period without dealing with its attempt to counter American competition…."
— Kristin Thompson (1985, 168)

"The film is a silent salesman of great effectiveness, and by that method much trade is being diverted to America. Moreover, through American motion pictures, the ideals, culture, customs, and tradition of the United States are gradually undermining those of other countries. The film industry of these other countries must be built up as a barrier against this subtle Americanization process."
— C.J. North (Quoted in Thompson 1985, 122)[1]
[open notes in new window]

Film was first introduced to China on August 11, 1896, shortly after the Lumière Brothers invented the Cinématographe, when Chinese audiences saw the first film program brought by one of the Lumière cameramen-showmen at the Hsu Gardens in Shanghai. The program included episodes of magic and acrobatic performances alternating with vaudeville acts such as juggling and fireworks (Advertisements in Shen Bao).

In July 1897, James Ricalton, a U.S. film showman from Maplewood, New Jersey, arrived in Shanghai to screen a program of Edison films shot in the U.S. (Leyda 1972, 2). The exhibition was referred to by a local newspaper as an “American electric light shadow play," and was described as “marvelous and illusionary, all beyond expectations (“Guan meiguo”). Many believe that “Dianying (electric shadow)," the Chinese term for “film," may have derived from this moment. Those early episodes, featuring blondes dancing, Westerners wrestling, woman bathing, and bicycle racing, already demonstrated Hollywood’s principle of market appeal: “to entertain with novelty and sensuality” (Tan 2003, 11). It was not until 1903 that the first Chinese local exhibitor, Lin Zhushan, began to show short films he brought back from the U.S. and Europe in a tea house in Beijing. The first real movie theater in China, Pingan Cinema, was built in Beijing in 1907 by foreign merchants. But it only served foreign patrons under the strong colonial mentality of the time (Zhu 1998, 58).

The initial establishment of the Chinese film industry almost directly coincided with the classic Hollywood silent film era, from 1906 to 1927. The first Chinese film, Dingjun Mountain, was made between 1905 and 1908 by Ren Qingtai, owner of Feng Tai Photography Shop in Beijing. Shot with a French camera and film stocks brought from a German photography supply store in Beijing, the 30-minute-long film recorded episodes from a Beijing Opera classic, The Three Kingdoms. The hero in the film, General Huang Zhong, was played by Tan Xinpei, an eminent Beijing Opera performer patronized by the Empress Dowager (Leyda 1972, 10). The film was a classic implementation of a doctrine prevalent in the late Qing dynasty, namely, “[to treat] Chinese learning as the foundation and Western learning as utilities” (Tan 2003, 11).

In 1909, a U.S. merchant, Benjamin Polaski, founded the first production company in China, The Asian Film Company, first based in Hong Kong and then relocated to Shanghai in 1912 (Leyda 1972, 10-11). That venture inspired Chinese filmmakers to set up China’s own production companies in 1913, including Xingming and Huamei. The former was contracted by The Asian Film Company, which by then had been sold by Polaski to two U.S. managers of an insurance company. It relied heavily on local talents, engaging writers and performers mostly from Shanghai’s drama circle. The latter was formed by the wealthy Li brothers from Hong Kong. Zhuangzhi Tests His Wife, a narrative short of social satire, was produced by Huamei in 1913, with Polaski’s support in the form of capital and equipment supply. It soon became a popular hit in China and was the first Chinese film export introduced to the U.S. by Polaski (Leyda 1972, 16-7; Zhu 1998, 58). In fact, early Chinese domestic production depended heavily on foreign capital and technology. Hence, the nation’s film industry was largely confined to the treaty ports where such resources were most accessible (Zhu 1998, 59).

Early film imports in China were mostly from France, as well as from Great Britain and Germany, while U.S. films did not have any competitive advantage in the country. It was not until after the outbreak of World War I that the U.S. replaced Europe as the major supplier of raw film stock for China’s movie production, and that Hollywood became the dominant player in the Chinese film market (Zhu 1998; Tan 2003). Once the early U.S. films brought to China by U.S. merchants proved profitable, their number in the Chinese market began to rise. Starting from the early 1920s, major Hollywood studios[2] began to release their films commercially in Shanghai, the birthplace of Chinese cinema, which played to the country’s largest movie audience and which gained the largest market share in history. Distribution was conducted mainly through sales agencies in Hong Kong or the mainland with the support of their representative offices in China.[3] Hollywood studios became the beneficiary of fierce competition among different sales agencies. Revenue-sharing was the most commonly used model of distribution, typically in combination with block-booking to sell less popular or less well-made films in the same package with likely money-makers to maximize profits. Though flat sales and exclusive booking contracts with certain studios were also resorted to, they occurred only in rare cases (Wang, Chaoguang 1998/9, 376-7).[4]

By the late 1920s, Hollywood achieved de-facto monopoly over China’s film distribution and exhibition sectors. Rapid expansion in the number of cinemas in China, from approximately 100 in 1927 up to 250 in 1930, was mostly driven by Hollywood imports. Chinese cinema operators were eager to embrace Hollywood films propelled by commercial motives. Of the 250 cinemas in 1930, only 50 to 60 screened Chinese films. All well-equipped, up-scale cinemas had exclusive contracts with Hollywood studios.[5] If these cinemas showed Chinese films, heavy fines would be imposed on them. Cinemas under revenue-sharing arrangements with Hollywood were forced to pay 30 to 50% of their box office revenues to U.S. distributors. The popularity of U.S. imports in big cities forced Chinese domestic films to submit to high exhibition fees and low ticket prices. The lack of exhibition opportunities and space for domestic films led to low capital availability for Chinese filmmakers, which in turn further eroded the production values and quality of domestic productions (Zhu 1998, 61).[6] Hence, from early 1920s up to the outbreak of the Pacific War in 1941, U.S. films dominated the Chinese film market, with films by D.W. Griffith and Charles Chaplin becoming quite familiar to Chinese audiences (Chen Mo 2002, 296).

U.S. films had an undeniable market appeal, derived from Hollywood’s production technology, its emphasis on spectacle and its star system, which already constituted the major comparative advantages of U.S. films in Hollywood’s classic studio era. Hollywood also benefited from U.S. economic prowess after WWI. In Hollywood's distribution abroad, much of U.S. dominance could also be attributed to the support of the U.S. government. In March 1927, a special report entitled “The Chinese Motion Picture Market”appeared in the U.S. Commerce Department’s publication, Trade Information Series. This report was compiled by C. J. North, the Motion Picture Section[7] Chief within the Bureau of Foreign and Domestic Commerce, and was based on contributions by Department trade officials and U.S. consular officers stationed in China. America’s longterm ambition in the Chinese market at the time was made very clear in the report’s foreword by Julius Klein, Director of the Bureau of Foreign and Domestic Commerce:

"The showing of American motion pictures in China has been steadily on the increase. Statistics show that whereas in 1913 only about 190,000 feet of American films were sent to China, this amount has increased to about 3,000,000 feet in 1926. Even so, the amount of revenue derived by the industry from China is small in comparison with the area and population of the country, and there is every reason to expect that with the clearing up of disturbed conditions and a consequent greater measure of prosperity the Chinese motion-picture market will offer very great opportunities indeed."

"This bulletin is issued with the thought that publication of as much concrete information on motion pictures in China as is possible at the present time may be of service as a basis for the active extension of business with China whenever the time is ripe. The motion-picture section of the specialties division of the bureau has been created to supply information on the foreign-film situation and particularly the possibility of developing American trade in motion pictures, and this service it freely offers to all interested persons" (North 1927, II).

This first U.S. study of the Chinese film market, done by the U.S. government, provided meticulous data on Chinese film production, distribution methods, exhibition venues, as well as film censorship, tariff, internal taxes, advertising, equipment, and publications in China. It also specified Chinese audiences’ tastes in films and variant responses towards different film genres and themes from the United States.[8] Besides China's political instability and low standard of living, the report noted another major obstacle to wider penetration of U.S. films beyond treaty ports and major interior cities in China, that is, Chinese audiences’ “marked preference for films produced from Chinese scenarios and with Chinese actors," if such movies can be produced at all (North 1927, 2). The report predicted that with the removal of all the existing obstacles, the market for U.S. films in China would increase considerably, even though the ratio of U.S. imports to Chinese domestic productions would show a drop. With regard to U.S. films’ market standing in China, the report pointed out that U.S. movies constituted an average of about 75% of the motion pictures shown in China, and in major port cities such as Hong Kong and Shanghai, the figure could be as high as 90% (North 1927, 2).

Undoubtedly, the report gave considerable help to U.S. business operations and strategy development in the Chinese film market by providing comprehensive and detailed information about the market. More significantly, the report emphasized the prime importance of exhibiting in China certain U.S. industrial films that “had originally been taken by manufacturing concerns” of “a wide range of American industries." These films were loaned specifically to be distributed in China at the “inception of modern industrialism” for a particular objective.  As the report specified,

“Through the motion-picture film there can be impressed upon the Chinese methods, ideas, and materials of an essentially American character”(North 31).

In other words, the report's goal was to promote both U.S. industrial trade and American ideology.

Hollywood studios were forced to move out of China during Japan’s occupation of the country. After Japan was defeated during the Pacific War and conceded its territorial control over Shanghai and other Chinese cities, the Big Eight re-opened their Chinese businesses. This time they operated in a tight trust-like bond, as they did in other overseas markets, despite the U.S. government’s anti-trust rules against such practices domestically. The representative offices of all major U.S. studios in China formed an organization known as the Film Board to enhance their Chinese business interests in a unified manner. These interests included sharing industry information, helping each other to enforce exhibition contracts with local cinemas, coordinating and optimizing exhibition space and scheduling among themselves, arbitrating business disputes of various kinds, and so on (Wang, Chaoguang 1998/99, 380). This coordination further consolidated Hollywood’s monopolistic control over the Chinese film market.

The predominant position of Hollywood films in China prior to the founding of New China (the People’s Republic of China, PRC) is further demonstrated by the following statistics (Wang, Chaoguang 1998/99, 380).

After the end of World War II (WWII) in 1945, a bilateral business covenant was signed between the Chinese Nationalist government, then the ruling party of China, and the U.S. government. U.S. films continued to pour into the Chinese market. Within less than four years, from the victory over the Japanese in August 1945, to the liberation of Shanghai in May 1949, the U.S. films that entered Shanghai market totaled 1,896 (including 1,083 features and shorts). In 1946, 352 U.S. feature films were released in Shanghai’s first run movie theaters alone. These films accounted for 92% of the total number of 383 films released that year (including 15 films from Great Britain and 3 from Russia); whereas the 13 Chinese films shown that year accounted for only 3.4% of the total (Zhou, Tiedong 2002, 113).

Following the founding of the PRC on October 1, 1949, and particularly after the outbreak of the Korean War in July 1950, the Chinese market was closed to Hollywood films largely due to ideological and diplomatic barriers, as well as New China’s embrace of a national self-reliance ethos. Nevertheless, Hollywood’s interest in the Chinese market never faded away but remained expediently dormant. Up until the end of the 1970s, U.S. firms made some tentative inquiries about the possibility of re-launching their businesses in China, but they were turned down invariably by the state-run China Film Corporation (referred to as “China Film” hereafter) for the above-mentioned reasons. During those several decades, the only U.S. film that Chinese audiences were able to see was Salt of the Earth (Herbert J. Biberman, 1954)[9], a film about Mexican-American miners striking against the Empire Zinc Mine in New Mexico. The film was bought by China Film through a tortuous procedure via a sale agency in a third country (Zhou, Tiedong 2002, 117).

Following the release of the Joint Communiqué on the Establishment of Diplomatic Relations between the United States of America and the People’s Republic of China in December 1978, Sino-U.S. bilateral diplomatic relations were officially established on January 1, 1979. During that same year, Jack Valenti, then President of the MPAA, paid a visit to China and held tentative dialogues with the Ministry of Culture and Film Bureau of China about distributing U.S films in the country. The time when the diplomatic stalemate between the two countries was officially broken coincided with China’s epoch-making open-door and economic reform policy initiated by Deng Xiaoping, one of the most visionary leaders in Chinese history. The new policy, with the objective of building “socialism with Chinese characteristics," consisted of many bold yet pragmatic moves — including opening trade with the outside world and adopting principles of market economy that had been in wide use in capitalist countries. It enabled China to embark on a road towards modernization, and has brought the nation unprecedented development and transformation ever since.

In light of this new spirit of opening-up and market liberalization, China Film began to build initial contacts with the U.S. film sector. In 1980, the company sent a delegation to the U.S. to learn first hand about the U.S. film industry through visits and tours. The delegation met with Valenti and expressed its willingness to import U.S. films to China. Valenti insisted on making an “overall arrangement” for films of the Hollywood majors[10] to re-enter the Chinese market. In this case, that arrangement meant importing films through a uniform revenue-sharing formula, essentially rejecting the possibility of flat sales that China preferred at that time (Zhou, Tiedong 2002, 117).

Valenti and the Hollywood majors may have been stunned by cinema’s unprecedented popularity and the huge movie-going population in China at the time — in 1979, China’s total movie attendance was 29.3 billion, which meant that on average each Chinese citizen went to the movies 28 times a year. Yet however eager Hollywood producers were to seize the market, they would only re-enter the China market under terms that were both in their favor and that they could control. What the Hollywood strategists failed to understand were the reasons why Chinese cinema was not yet ready for a revenue-sharing import/distribution model that they insisted on.

As a matter of fact, in 1979, cinema in China was still officially positioned as a state-funded cultural institution and an important form of art for government propaganda as well as social enlightenment, aimed essentially at national cohesion and ideological unification. Cinema was also a primary format of social recreation enjoyed by the general public[11] in China. But it was subsidized as a major employee benefit from state enterprises through group ticket purchasing, rather than anything close to how a commercial industry operated for profit as was the case in the United States. In addition, the ideological messages borne in U.S. films that could make strong statements for U.S. culture, values and ways of life were still a big concern for high-level Chinese government officials at the time.

China’s Film Bureau, the primary government entity that regulates the Chinese film industry, was under the administrative umbrella of the Ministry of Culture until 1986, when it was placed under the leadership of the Ministry of Radio, Film & Television (MRFT, renamed in 1998 as SARFT — State Administration of Radio, Film & Television). It was at this point that film began to be gradually integrated into the nation’s audiovisual industry.[12] Hence, at that time there was insignificant box office income in the Chinese market, due to the unique cultural positioning of China’s film industry, essentially rendering revenue-sharing implausible. Moreover, having just adopted the open-door policy, China still had a closed currency policy. This meant that currency conversion was impossible and thus negated the prospect of revenues from the market for U.S. studios.[13]

As a result, the small number of U.S. films that China Film brought to the Chinese audiences over the 1980s were mostly low-budget U.S. independent productions from small distributors, such as First Blood (Ted Kotcheff, 1982)[14] and Harry’s War (Kieth Merrill, 1981)[15] — films that were fairly dated (up to ten years old) and certainly not among the first-rate U.S. productions. This trend continued into the early 1990s, when China Film bought an average of ten films annually from U.S. independents outright — about one third of China's total imported titles — at an incredibly low price of around $30,000 each.[16]

Meanwhile, starting from the mid-1980s, the institutional ills of the film sector, and diversified entertainment options, especially the rise of television, brought about a steady erosion of movie attendance in China. This trend came to a point of crisis by the early 1990s.

A large number of film distribution and exhibition entities were forced to go into other business lines (Fang, Cheng 1997, 10).

Prompted by this dismal trend and by a central government rule that pushed for in-depth reform of state-run industrial enterprises in 1992, MRFT ordered a large-scale structural overhaul of the Chinese film industry in 1993. This overhaul included taking away both China Film’s long-standing national monopoly over the distribution of domestic films at home and its monopoly over film export, while retaining its state import monopoly. Meanwhile, a bold open-door policy for film at senior government levels was under deliberation, one that would shake up the entire film community and soon transform the landscape of the Chinese film market. During China’s annual national film distribution and exhibition convention in January 1994, Tian Congming, then Vice Minister of MRFT and China’s top film official, announced MRFT’s ground-breaking decision to delegate China Film to importing ten “excellent” foreign films that

“basically reflect the finest global cultural achievements and represent the latest artistic and technological accomplishments in contemporary world cinema” (Tian 1994, 1).

Wu Mengchen, then President of China Film, revealed the economic rationale behind the policy. He suggested that the market share of the ten imports, which should be worked on with earnest enterprise, would not only be considered as an issue of China Film’s financial well-being, but also as an issue of survival for the 500,000 people who were employed in the industry nationwide (“Wu Mengchen”).[17]

Focusing now more on the film import business and aided by an increasingly open policy environment, China Film actively approached Hong Kong’s heavyweight entertainment player, Golden Harvest Entertainment, which had set up a Shanghai office and had tried to cultivate the mainland market for two years. China Film sought to explore the possibility of distributing Golden Harvest films in the mainland on a revenue-sharing basis. The two partners came to a tentative agreement (Zhou, Tiedong 2002, 118; Groves 1994b, 4).

This unprecedented initiative on the part of China Film caused quite a stir among the Hollywood majors, who had long been craving a share of the Chinese market. Warner Bros. moved swiftly, sending representatives to Beijing to talk with China Film. After rounds of negotiations, in September 1994, the two sides reached an agreement of “mutual benefits” to import and distribute the Warner Bros. blockbuster The Fugitive (Andrew Davis, 1993) in China on revenue-sharing basis at the end of 1994 (Zhou, Tiedong 2002, 118). This historic deal between Warner Bros. and China Film was an epoch-making step not only in China’s film reform, and in Sino-U.S. film relations, but also in Hollywood’s global expansion. It opened up the Chinese market once again to Hollywood after the latter’s absence for 45 years, bringing the major Hollywood studios closer to realizing their long-awaited ambition of cracking the vast, largely untapped and potentially lucrative Chinese market, one of the few remaining distribution and exhibition gold mines in the world. Soon, other Hollywood major studios followed suit and reached similar agreements with China Film (Zhou, Tiedong 2002, 118).

Hollywood's big re-entry and
its repercussions in China

"Starting with The Fugitive, Chinese cinema itself has become the fugitive."
Nanfang Zhoumo [Southern Weekend] (“Zongshu”)

"The Chinese public finally stopped being 2nd-rate audiences."
— Zhang Jianya (Chinese 5th generation film director) (Quoted in Feng 2004)

On November 11, 1994, the very first Hollywood “blockbuster” import The Fugitive began to hit the screens of 57 movie theaters in six key Chinese cities. Moviegoers swarmed to those cinemas that had been much deserted before, even with inflated ticket prices that the general public regarded as a bit steep (Mao, Yu 1994b, 2). The film was a big success in China, grossing some US$820,000 in the first ten days, with an eventual total gross of about 25.8 million yuan RMB (US$3.15 million), despite the industry’s limited experience in marketing (Groves 1994c, 48).

The next year, six new revenue-sharing Hollywood movies were imported, including global runaway hits True Lies (James Cameron, 1994), Forrest Gump (Robert Zemeckis, 1994) and The Lion King (Roger Allers and Rob Minkoff, 1994). Except for Forrest Gump, which turned out to be a relative failure due to its socio-cultural-specific American theme that failed to resonate with the Chinese audience (Wang, Zhiqiang 1996, 203), the other five films caused a great sensation and led to a big surge in the country’s box office and movie attendance. The total box office receipts for the country in the first half of 1995 increased by 50% over the same period in the previous year. Total receipts from the Beijing market rose by 80%, and movie attendance in Beijing that summer increased by 70% over the level of the previous year (Fang, Cheng 1997, 10; Kuhn 1995, D7).

In particular, the film True Lies, which opened in April 1995, grossed 102 million yuan RMB (U.S$12.3 million) nationwide, setting a box office record in China that would be surpassed only by Titanic (James Cameron, 1997) in 1998. Films from Hong Kong such as Jackie Chan’s Drunken Master II (Chia-Liang Liu, 1994)and The Rumble in the Bronx (Stanley Tong, 1995)were another major source for revenue-sharing imports in China in 1994 and 1995 — second only to films from Hollywood. But by 1996, Hollywood mega-productions made up the entire list of ten imported revenue-sharing films. Engrossed appreciations of and zealous fascination with Hollywood blockbusters abounded at the outset, mostly for their special-effect-laden and visually stunning spectacles, fast-paced action sequences, as well as captivating plots, which were newly exposed to an all-curious Chinese audience. This appeal began to be somewhat tempered by the “junk movie” label given to the overly-empty-plotted Waterworld (Kevin Reynolds, 1995) in 1996, and the fact that two out of the fourteen Hollywood films imported in 1997 and 1998, Speed 2: Cruise Control (Jan de Bont, 1997) and Batman and Robin (Joel Schumacher, 1997), were on U.S. media’s 1997 “Bottom Ten” film list (Chang, Bin 2000, 3). Nevertheless, Chinese moviegoers’ overall enthusiasm for Hollywood blockbusters was well sustained. It came to its peak when Titanic swept the entire nation in 1998 with a magic box office of 360.1 million yuan RMB (US$43.5 million), a figure that more than tripled that of the second most successful film, True Lies, achieving a national box-office record still unmatched today.

One major objective for the government to introduce ten foreign blockbusters annually was to get the Chinese public back to movie theaters to lift domestic cinema from its deep crisis. However, it was the imported Hollywood mega-productions, rather than the Chinese domestic films, that benefited substantially from the increased flow of moviegoers, while the latter benefited only marginally. One survey showed that through much of the 1990s, of around one hundred Chinese home-produced films put into the Beijing market every year, on average 70% failed to recover their royalty and print costs, 15% broke even, and only 15% made a profit (Wang and Ren 1999, 9). Another survey indicated that the total national box office receipts in 1991 were 2.4 billion yuan RMB (US$290.9 million), which dropped to 1.44 billion yuan (US$173.9 million) in 1998, and further down to 810 million yuan (US$97.8 million) in 2000. From 1994 to 1999, the national box office gross fell by 65%, and was in further decline by 2001 (Chen, Kehong 2002).

On the other hand, the total box office receipts for Hollywood revenue-sharing films were almost 600 million yuan RMB (US$72.46 million) in 1998, which was nearly twice the level of 1995 and 1997 and more than 45% higher than in 1996, with Titanic alone taking over half of that year’s total receipts from imports (Mao, Qiang 1999, 6).

These figures became an alarming reminder of how far a cry the box office receipts of Chinese domestic films were from those of their imported counterparts. This fact becomes more salient when considering the following data: Up to the year 2000, on average ten imported revenue-sharing films each year accounted for over 2/3 of China’s annual total box office receipts, while the rest, comprising less than 1/3 of the revenue pie, went to some 100 Chinese domestic films (Zheng 2000, 5). In 1996, box office receipts from imported films in Beijing and Guangzhou accounted for 70 to 80% of the total box office receipts in the two markets (Fan, Mao and Yang 1997, 6).

Although the Chinese government allowed only ten imported films to enter China each year as a protective measure for the national film industry, it was the market share, not the physical number of Hollywood imports, which gave rise to growing apprehension and even a strong sense of crisis in the Chinese film community and in academic and media circles, as the decade of the 1990s was drawing to a close.

The import of ten mega films did not come without resistance. Heated debates and controversies erupted in China’s media soon after the policy was publicized, especially with regard to the imported films potential impact on the national cinema and whether and how to protect the national film industry from them. Such debate further escalated with the big commercial success of most of the Hollywood imports. At the very beginning, some questioned the timing of opening the Chinese market to film imports, wondering whether foreign imports would soon engulf the deeply troubled, vulnerable national cinema. Others argued that the ten imported films would accelerate a long-overdue institutional reform of the Chinese film industry and enable Chinese cinema to be more open, adaptable and resilient in the new environment of competition with foreign films (Wu 1994, 3).

Many believed, however, that the new policy represented an invitation, not to alleged “foreign” quality films, but to top box office hits from Hollywood that would crush Chinese national cinema (Mao, Yu 1994a, 1). This view was echoed by still others who later challenged China Film’s biased practice of importing only big U.S. commercial productions, which created a monopoly of Hollywood blockbusters in China, while barring more refined works of art cinema from Europe and Asia (Wang and Ren 1999, 9). Nevertheless, some industry insiders defended the import pattern by pointing out that importing art films, strong in emotional sensitivity and subtlety but weak in spectacle and audiovisual stimulation, could attract only a very small audience to movie theaters, and therefore were not a feasible way out. They argued that the general audience’s relatively low viewing demand for these art films could be more easily met by the pirated videos prevalent in the Chinese film market. They pointed to the consistently less competitive box office records of imported art films as opposed to commercial blockbusters up to the year 2000 to support their argument (Chang, Bin 2000, 8).

Certainly, the cultivation of Chinese audiences’ viewing tastes predominantly by Hollywood blockbusters, along with the underdevelopment of a Chinese distribution and exhibition infrastructure for art films, complicated this issue. Fortunately, many in the Chinese film community, especially those involved in distributing relatively small-scale domestic films, maintained that the government should not exclude an option for importing art films solely on commercial grounds. They argued that art cinema deserved a better accommodation and in the long run would help cultivate audiences’ tastes for diverse cinematic styles.

Meanwhile, China has seen a deep divide among different film industry sectors since importing ten mega films was introduced, particularly at the early stage. On the one hand, China Film, the state-run distributor and the only film import license holder, still enjoyed a de facto monopoly over distribution of the ten imported blockbusters. The company, its local distribution arms, and cinema owners shared considerable profits from the imported mega films and had a strong incentive to screen and promote more of them. On the other hand, the filmmaking sector was increasingly squeezed out in a steadily shrinking market share for its productions. It faced a genuine fear that filmmaking businesses would be wiped out by the big imports. While distributors blamed poor box office results on the mediocrity of domestic productions, the filmmaking community accused imported blockbusters as causing domestic films to steadily lose ground, and also blamed distributors and exhibitors who favored imports. One major executive in Beijing Film Distribution Co., who had attached great emphasis to distributing domestic films, thus protested against China Film,

“Whoever allows U.S. films to occupy the ground belonging to Chinese films is feeding foreign film moguls with Chinese money (Real 1995).”

Having good screening space for domestic films was a paramount concern. As Han Sanping, then President of Beijing Film Studio, warned in early 1995, if one big import was booked for a 15-day run, ten films in the same theater would occupy 150 days out of 365 each year (Li, Hui 1995). Han’s projection was a gloomy scenario. But before long, reality turned out even worse. China’s eight major film studios, which produced the majority of domestic films each year and were already in serious financial crisis, issued a statement in April 1995 demanding that the government take necessary measures to curb the mega imports’ impact on their revenues and use of cinemas. They urged the government to limit the number of films imported and the length of time they were to be shown in cinemas, and to use part of the import revenues to subsidize the domestic film industry (Real 1995).

Hence, the policy to open up the market by injecting a heavy dose of foreign competition in order to boost the nation’s sluggish film business, especially its lackluster filmmaking sector, seemed to have backfired. This development left domestic filmmaking in a graver situation while largely benefiting distributors and exhibitors who relied increasingly on big imports. Yet some film directors saw the policy as a double-edged sword. They expressed their optimism that the negative impact of imported blockbusters on Chinese national cinema would be temporary. They felt the open-door policy would bring long-term benefits to the national film industry (Real 1995), an idea that would be tested by later developments in the Chinese film industry.

To alleviate the massive imbalance between domestic films' market share as opposed to foreign imports' share, and to address distributors and cinemas’ overdependence on Hollywood films, MRFT ruled in March 1996 that for each exhibiting cinema, at least 2/3 of its annual screentime must be reserved for domestically produced films. This provision was officially included in the “State Regulations on Administration of the Film Industry (Order No. 200 of China’s State Council)” signed by then Chinese Premier Li Peng on June 19, 1996. Around the same time, a special project, initiated by China’s Ministry of Publicity, which supervises MRFT and the Ministry of Culture, set a goal of turning out 50 quality domestic films from 1996 to 2000, with ten appearing in each year. This Project was aimed at helping the Chinese film industry to compete better with Hollywood. Furthermore, to fund quality film production, and to offer state studios better incentives, MRFT granted three major Chinese film studios, Changchun, Beijing, and Shanghai, the rights to distribute one major foreign blockbuster by means of profit-sharing on an experimental basis in 1996. The three films that the studios distributed that year were all Hollywood imports — namely Waterworld, Jumanji (Joe Johnston, 1995), and Toy Story (John Lasseter,1995), each taking 30 to 40 million yuan RMB (US$3.62-4.83 million) in box office receipts (Fan, Mao, and Yang 1997, 5).

On the academic front, no one has been more vocal in identifying the unprecedented, severe challenges Hollywood could bring to Chinese cinema than Dai Jinhua, based at Beijing University and one of contemporary China’s most influential literary and cultural theorists and film critics. Upon hearing the government’s policy to import ten foreign films in 1994, she expressed her deep concern about the fate of the enfeebled Chinese national cinema under the aggressive entry of the “wolf," as she called Hollywood. In particular, she cited the decline of national film industries around the world as a result of Hollywood’s penetration and its essentially “unequal” and “unfair” competition, including in cinematically strong and culturally resistant France. The prospects for the all-powerful Hollywood studios, with their distribution and marketing clout, and their potential support and advising from China Film, to occupy all the mainstay cinemas in China made her believe those who were wishfully thinking of Hollywood imports as the savior of the declining Chinese film industry were overoptimistic and even naïve (“Tiaozhan”). Before long, it became clear that a large percentage of cinema operators in China violated the government mandate to restrict the screening time for foreign films, mostly Hollywood blockbusters, to 1/3 of their total time available. In view of the fact that over 70 domestic films were shelved without reaching cinemas in 1998, the very year Titanic rocked the country with an average 45-day run in cinemas of major markets, Dai lamented the regrettably shortsighted, profit-driven behavior of state-controlled distributors and exhibitors, aggressively promoting Hollywood films while neglecting domestic ones. This situation, according to her,

“further intensifies the squeezing power of transnational capital over domestic films (Dai 1999, 21)."

Apart from its strong inherent appeal, a host of external factors played in favor of Titanic and led to its smashing success and box-office magic in the Chinese film market. The endorsement that China’s President Jiang Zemin gave the film early on seemed crucial and paved the way for its timely import and opening on April 1st, shortly after it garnered 11 Academy Awards on March 23. The endorsement also helped guarantee saturated media coverage and promotion that exhausted all possible channels nationwide, and well-orchestrated, efficient distribution preparations and marketing operations that began as early as January. These factors, coupled with diligent work and much overtime commitment by cinema employees across the country, together turned the film into a major national cultural event which reached far beyond the movie screen and which had rarely been seen in Chinese social life (Weng 1998, 5-6). Titanic ended up being shown in over 1000 cinemas across China, with steep ticket prices ranging from 40 to 80 yuan RMB (US$4.83-9.66) in major cities. It set the national box office record of 360.1 million yuan RMB (US$43.5million), accounting for one-fourth of the total national ticket sales in 1998, and drove that year’s movie attendance (over 30 million) and total number of movie screenings (390,000) up to a historic high in China (Mao, Qiang 1999, 6-7; Xi 2001, 7). Even China’s most prominent film director, Zhang Yimou, in his 1999 film Wode fuqin muqin [The Road Home],included two Titanic movie posters in the home of the hero, a teacher in a remote Chinese village. It seems like a visual comment from the director on how Hollywood movies in general and Titanic in particular had penetrated the Chinese popular consciousness (Wan and Kraus 2002, 434).

Meanwhile, it was a depressingly humdrum year for Chinese cinema, an “off year," as some in the industry called it, with “nothing good to talk about, apart from Titanic” (Xing 1999, 3). Not one single Chinese film made any significant mark in the market that year, unlike the previous year when three domestic films caused a remarkable sensation across the nation amid competition from seven imported Hollywood blockbusters (Xing 1999, 3). Perhaps the shadow from Titanic was too heavy to overcome. As some in the industry noted, the appetite of the Chinese movie audiences might have been overextended for this rare, well-planned extravaganza, which cost them several times the price of a film than they had been accustomed to, preventing them from being easily contented with any lesser products for a while. This prompted Zheng Dongtian, a well-known Chinese film director and scholar, to project a fairly grim scenario with regard to the prospects for the domestic cinema. The box office receipts of Titanic in Beijing in 1998 (US$4.22 million) were about one-fourth of the local market’s total intake in 1997 (US$15.82 million), its historical high up to that time, as Zheng pointed out. Given this fact, the existing film market size of Beijing, and its population’s purchasing power, all of which would have limited space for further extension, it would take only four Titanics each year to meet the market demand, according to Zheng. This would force over one half of the imported blockbusters to struggle to find their audience each year. Should this occur, Zheng then wondered whether there would be any market space left for the Chinese domestic films to maintain their livelihood (Zheng 1998, 7). Yet all this while, the Chinese film distribution and exhibition sectors were excited about their handsome profits from Titanic as well as a strong performance from Saving Private Ryanm(Steven Spielberg, 1998), so that “they bid farewell to 1998 with smiles on their faces” (Zhang, Ying 1998/1999, 230). This self-deceptive contentment of harvest and rather ambivalent picture of the Chinese film industry in 1998 led Dai to voice even gloomier pessimism as she warned that

“like Titanic, the Chinese film industry is sinking amidst tender feelings and happiness, almost without any measures of resistance…(Dai 1999, 22).”

The short-term prosperity in the Chinese film market, built mostly on the success of Titanic, proved unsound, and hence, unsustainable. Or perhaps the “overextending appetite” theory unfortunately worked. In the following year the Chinese film market soon hit a historic low. As an industry report acknowledged, in the first half of 1999, the national film market was “facing its greatest difficulties since the founding of New China” (Gao, Du 1999, 6). It was estimated that by the end of May in 1999, the box office receipts from markets nationwide had dropped by an average of 60% over the same period in 1998. The total box office receipts of the entire year dropped to 840 million yuan RMB (U.$101.45 million) from 1.45 billion yuan RMB (US$175.12 million) in 1998. The box office gross in major markets fell by an average of 50% over 1998, with that in Shanghai having declined by around 38%, approaching the lowest possible limit that the market could sustain.

It was an indeed grim situation (Fang, yuqiang 2000b, 7; Zhang Hong 2000, 20).

There were two direct causes of the bleak scene. The year 1999 was historically unique and significant for China in that it marked the 50th anniversary of the founding of the PRC, the upcoming return of Macao as a former Portuguese colony to its motherland, and the approaching of the new millennium. Putting on government-orchestrated and -funded large film productions on Chinese revolutionary history and heroic figures for the celebration of significant occasions like these have been typical of Chinese film fare and scheduling. Yet these so-called “main melody” films over the years have formed such a pedagogical and stodgy stereotype in the mind of the Chinese public that they almost invariably turn off voluntary movie audiences. Instead these films rely heavily on non-voluntary group ticket-buying from government agencies, state enterprises, and schools, which are demanded by government-issued circulars. But group purchase was particularly undermined in 1999 due to a stringent macroeconomic policy. There were about 30 celebrative films of this nature shown in 1999 under the special mechanism of government administration rather than market rules in terms of cinema booking and scheduling. That resulted in a national box office gross for domestic films which left much to be desired (Gao, Du 1999, 6).

An even more significant cause was the aberrant exhibition of Hollywood imports that year. It was affected partially by the above-mentioned unique cinema scheduling for special celebrative films. Its direct trigger, however, was the shocking tragedy of the bombing of the Chinese embassy in Belgrade by the U.S.-led NATO forces on May 8th, 1999, leading to sad casualties of Chinese diplomats and reporters. The next day, on behalf of over 300,000 people employed in China’s film distribution and exhibition sectors, China Film Distributors and Exhibitors Association issued a public statement strongly condemning the “brutal” incident and declaring a temporary ban on the exhibition of any U.S. films nationwide effective on that day (“China Film Distributors and Exhibitors Association”).

On May 9th, a total number of over 70 cinemas across Beijing, together with cinemas across China, stopped the screening of U.S. films including Mulan (Tony Bancroft and Barry Cook, 1998). Films already being marketed and ready for exhibition shortly, like Enemy of the State (Tony Scott, 1998), were postponed from their original schedule. In their stead, movies with themes of war-time heroism from both China and abroad, such as Ying xiong er nu [Heroic Sons and Daughters] (Wu Zhaodi, 1964), and an old film import from former Yugoslavia Valter brani Sarajevo [Walter, the Defender of Sarajevo] (Hajrudin Šiba Krvavac, 1972)[19][open notes in new window], were screened to display the national sentiment. After considerable diplomatic endeavor on the U.S. side, Enemy of the State and three other U.S. films, including Star Wars: Episode IThe Phantom Menace (George Lucas, 1999), did get shown later that year. Nevertheless, there was a gap of over five months during which no U.S. films were exhibited in Chinese cinemas. The total box office receipts for the Hollywood imports that year were less than 150 million RMB (US$18.12 million), considerably lower than those in the previous years and what were originally expected. In particular, Mulan and Tarzan (Chris Buck and Kevin Lima, 1999) only grossed 11.17 million yuan RMB (US$1.35 million) and 13.38 million yuan RMB (US$1.78 million) respectively, to Disney’s great disappointment (Zhang, Ying 2000).

That dismal year for the Chinese film market also exposed a distinct, serious dilemma for Chinese cinema. The ten imported foreign films, essentially Hollywood blockbusters, which the government decided to bring in ultimately to boost the Chinese national cinema, had taken well over one half of the market share, squeezing out the domestic films, when they ran normally. Yet, without the Hollywood films, the Chinese film market could barely have sustained itself. Differently put, they had become a seemingly indispensable pillar to buttress the very survival of the Chinese film industry. It was a reality that was not expected nor accepted with ease by policymakers or those who truly cared about the well-being of the Chinese national cinema. It was against this backdrop and on the heels of the signing of the Sino-U.S. agreement on China’s accession to the WTO in November, 1999, that Zheng Dongtian used that famous line from Shakespeare’s Hamlet — “To be, or not to be?” — to illustrate what the Chinese film industry was confronted with on the eve of the new millennium (Zheng 1998, 4). It was a time when the balance of power between Chinese cinema and Hollywood tilted towards the latter, and when the post-WTO world, with much graver challenges for the former, loomed large just over the horizon.

Meanwhile, following the bombing of the Chinese embassy in Belgrade in May 1999, heated discussions in the industry about the cultural and ideological implications of imported Hollywood films and their market dominance in China came to the fore, unlike the previous ones which had dwelled mostly on their economic impact on the national film industry.

An article was featured in the July 1999 issue of the Chinese Film Market, China’s primary film trade journal, with a telling title, “Pulling the Veil off Hollywood." It argued that what Hollywood set to achieve was not merely to take over film markets worldwide, but more significantly, to export U.S. values and its national image. Despite all the social ills of the United States, the author noted, the country’s values and image had forever been presented as “perfect, eternal, and international," and therefore as a superior standard for the rest of the world to worship and emulate, just like those classic, lovable, and sleek images in each exported movie from the U.S.. Those films, the author maintained, while garnering massive popularity for and obsession with Hollywood style blockbusters, fostered a subliminal belief from the audiences that the U.S. was the center of the world and the messiah of humanity. Finally the author warned against overemphasizing the commercial and entertaining values of Hollywood blockbusters while dulling and even ignoring the need for ideological alertness and criticism in importing them (Zeng 1999, 10).

Another article from the same journal called attention to Hollywood’s ultimate ambition of completely dominating the Chinese film market with an unlimited flow of films preaching the American way of life in China. The article also warned about the strong impact, particularly in ideological terms, of an all-around penetration by Hollywood into every aspect of the Chinese social and cultural life. It pointed out that the impact cannot be over-estimated in the present era when film and television increasingly converge. Alluding to the ongoing bilateral trade negotiations on China’s membership in the WTO, the author held that U.S. cultural expansion and invasion in the form of “bullying” free trade should by no means be allowed. This was because, the author went on to argue, cultural trade, like any other type of trade, should be conducted in line with the international practice of equal-footing negotiations and mutual benefits, with due respect for the rules and regulations of the countries concerned. The article called for as serious reflection on and alertness to U.S. cultural expansion through Hollywood as on the U.S. military attack of China’s embassy. The latter, according to the author, had awakened the entire nation to the reality of power politics. It also necessitated somber considerations over the profound sentiments from European countries, South Korea and the like to protect their national film industries and cultural identities from Hollywood’s global expansion (Yu, Xin 1999, 8).

Hollywood majors’ ambitions, frustrations, and strategies to forge ahead

"…You need to find crevices where you can squeeze in….I think there is a lot of room to grow. But it's like growing flowers in a rock garden."
— One executive at a U.S.-based entertainment company (Dolven and Granitsas 2002, 88)

"Ultimately, there will be a market in China; it’s a matter of timing."
— Jim Burk, Executive Vice President of United Cinema International (Groves 2000, 7)

While the formidable market presence of Hollywood blockbusters in China cast a shadow of uncertainty and apprehension in the Chinese film community, nevertheless, the all-ambitious Hollywood majors were discouraged by the gap between what they had expected and what was. They had long set their eyes on this most populous nation on earth, even during their absence over the past five decades. With a population of 1.3 billion, and a fast-rising middle class with steadily growing purchasing power, the massive market of the PRC in the 1990s and beyond, U.S. studios believed, was perhaps the last major untapped, most promising, and potentially lucrative “goldmine." In their widespread global crusades to gain markets, China appeared a second Europe to them, at the very least. A senior official at the MPAA projected with much optimism,

“In the first year after China joins the WTO, the total number of U.S. films allowed to be imported to China would increase from 10 to 20. The Chinese are known to be a movie-loving people. If each one pays ten yuan RMB (US$1.2) to see a movie, the ticket sales would be over US$2 billion (Quoted in Meng 2001, 24).”

Yet, when the door to this exciting new frontier finally opened, and the Hollywood majors rushed in, they found many more roadblocks to achieving their goal than they ever expected. In addition to the informal annual quotas of ten revenue-sharing films that the Chinese government placed on the imports, the denial of Hollywood major’s rights to distribute their films in China put marketing, cinema booking and scheduling firmly in the hands of China Film. The latter enjoyed a centralized monopoly over the importation and distribution of foreign films in China. Moreover, under the revenue-sharing terms agreed upon by the two sides, Hollywood distributors and China Film were to split each film’s box office revenues 50-50. Nevertheless, after exhibitors’ cut, government tax, import tariff, and other fees, the final return for the Hollywood majors was only around 13%; whereas Hollywood’s take on box office gross in other territories typically amounted to 40 to 50% (Groves 2000, 7). Even for a substantial hit like The Lion King, which met its prior projection of total box office receipts of 20 million RMB ($2.4 million) in the first ten days, the ultimate return from China was so insignificant that it could only be comparable to that of a small Central European country (“Disney’s Lion King”). In 1998, the year the film Titanic rocked the Chinese nation and took in US$43.5 million at the box office, Hollywood studios’ revenues from China were a mere US$18 million, the equivalent of what they earned in Peru (Bates and Farley 1999, A1). Twenty Century Fox, distributor of Titanic outside of the U.S., got only about US$5 million from the Chinese market (Bates and Farley 1999, A30). Furthermore, as U.S. government statistics from 1999 suggested, film revenues from China were among the smallest in Asia, less than those in Singapore, Malaysia, Thailand, and the Philippines.[20] This was definitely a far cry from what the Hollywood majors had initially hoped for. (The Hollywood majors have tried hard to push for a boost in their share of the box office receipts from the Chinese market — for example, in late 2003, they pressed China Film to raise their share to at least 18% — but they have not succeeded so far.[21])

There were other obstacles too, such as the red tape, infrastructural deficiencies, and cultural barriers. Referring to the arduous 16-month negotiation for the film The Lion King, the short notice given to prepare the marketing kit, and poor theater infrastructure in China that generally denies a good scale of exhibition,[22] Senior Vice President of Buena Vista International (BVI), Larry Kaplan, commented on their Chinese business,

“there’s a future, but there’s not much of a present” (Stanley 1996, 37).

Yet, the unprecedented sale of the film’s soundtrack (over 700,000 copies sold, “the most successful Western soundtrack album in history”) in China and promising room for market growth made BVI “see huge opportunity for Disney” in China while trying to “seed the garden and harvest returns later” with great patience (“Disney’s ‘Lion King’”).

Moreover, China’s strict censorship, necessitated by the absence of a ratings system and rooted in a strong Confucian tradition of modesty and decorum, has kept Hollywood studios from introducing overly violent and sexually explicit films. This has considerably limited the kind of films that can be brought into the market. From time to time, studio executives were also puzzled by the fact that smash hits in the U.S. and other territories were not necessarily welcomed in China (e.g. The Mummy [Stephen Sommers, 1999] failed to get an import permit), while obscure, far less commercially successful films in the U.S. could be favored (e.g. Proof of Life [Taylor Hackford, 2000], Meet the Parents [Jay Roach, 2000]). Another intriguing twist to the puzzle was that while the first mummy film was rejected, its sequel The Mummy Returns [Stephen Sommers, 2001]was accepted later. This fact speaks to the fairly arbitrary standards and decision-making procedure in China’s film censorship process, which is an issue that has also frustrated Chinese filmmakers. While quintessential Hollywood blockbuster productions, marked by special effects, massive scale, and gigantic investment, were usually the most popular with the Chinese audiences, especially early on, other genres and styles could also be surprise hits. A case in point was The Bridges of Madison County (Clint Eastwood, 1995). In 1996, the film set the Beijing box office record of 1.9 million yuan RMB (US$228,900) during its first three days of screening, and grossed 39.5 million yuan RMB (US$4.77 million) nationwide (Major 1997). To put this success in perspective, Star Wars: Episode IThe Phantom Menace grossed only 33.94 million yuan RMB [US$4.1 million], and Matrix [Andy Wachowski and Larry Wachowski, 1999] only 17.94 million yuan RMB [US$2.2 million].

If the taste of an audience that is so different from that in the West is not easy to predict, then films based on Chinese stories, such as Mulan, are less likely to resonate culturally with the local audience as they can be easily be Americanized or Disneyized.  (This difficulty largely explained why Mulan was a relative flop in China, though Disney and those business-minded Chinese distributors would like to believe that it was missing the ideal summer season that led to the film’s misfortune). This soft, “cultural discount” barrier will remain a long-term, tougher challenge to Hollywood than a hard quota will. (New developments in the post-WTO period demonstrate this problem as well.)

Interestingly enough, China became one of the major bones of contention in the legal settlement between former Disney studio chief Jeffery Katzenberg and the Eisner-headed Walt Disney company. China’s ambivalence in the eyes of Hollywood, which it saw at once as a promising market full of destiny and hope, and also as a difficult new frontier to chart and conquer, was brought home through the episode. On the one hand, Katzenberg’s final contract settlement involving a staggering amount of money was believed to have been heavily influenced by one judge’s estimate of the potential long-term profits that movies and TV shows Katzenberg launched would engender from the Chinese market. These included The Lion King, Aladdin (Ron Clements and John Musker, 1992) and Beauty and the Beast (Gary Trousdale and Kirk Wise, 1991). On the other hand, the Walt Disney company cited “legal, ideological, cultural and economic constraints," as well as “rampant piracy” to demonstrate its skepticism towards the promises China would hold for the company (Bates and Farley 1999, A30), though the company's actual strategies suggested otherwise.

Yet within their more immediate sphere of influence, the Hollywood majors spared no efforts to push, among other things, for an increase in import quotas and a breakdown of China Film’s distribution monopoly to enhance their market access. For example, the two issues were clearly presented by Disney in early 1999 in one of their negotiations with SARFT, as the top two priorities on the agenda of their “plan of cooperation” with China for the next two years. With respect to the import quotas, they tried to talk the Chinese government into allowing a total of 17 films from the Hollywood majors to be imported to China from June 1999 to June 2000, and a total of 25 films from June 2000 to June 2001. They suggested that the two sides convene again in June 2001 to analyze the market, and devise further new plans for the following two years. Regarding their second request, they argued that increasing the number of Chinese distributors of U.S. films to at least two, and more if possible, would benefit the Chinese film industry by expanding local knowledge and skills concerning film exhibition and marketing.

In fact, Disney, together with other Hollywood studios, was convinced that China Film could be pushed to do a much better job distributing Hollywood films in China if the company had competitors in the market. Essentially they tried to dump China Film as the middleman by dismantling its monopoly over the import and distribution of foreign films. That dismantling, according to Barbara Robinson, would significantly increase the studios’ profits from importing and releasing their films in China, by enabling local exhibitors to work more directly with them.[23] Robinson made the remark while working at ERA Films, a Hong Kong-based film distribution company with exclusive licenses from major Hollywood studios, before heading Columbia Pictures Film Production Asia later in producing and distributing Chinese-language films (Kuhn 1995, D7).

Disney also tried to push the Chinese government to reduce its high taxation on U.S. films in China, but did not achieve these objectives.[24] The U.S. team's signature, arrogant style in dictating its will often led to unpleasant tensions rather than a collaborative atmosphere at the negotiation table.

Of course, the major Hollywood studios had even more ambitious long-term plans for the Chinese market. A good example was detailed in a letter of March 1999 from Gerald M. Levin, Chairman and CEO of Time Warner, the parent company of Warner Bros. studio. It was addressed directly to China’s Premier Zhu Rongji, prior to his state visit to the U.S. the following month. In the letter, Mr. Levin presented the framework of Warner Bros.’s plan of “comprehensive cooperation” with China. The plan spelled out the studio’s objectives in the Chinese market. These included:

The studio made a special commitment to re-investing its profits in China at the initial stage of importing and distributing Warner Bros. films, in order to guarantee the longterm success of the joint venture. In the letter, Mr. Levin also acknowledged that he was encouraged by the Chinese government’s ground-breaking decision to open China’s banking and insurance sectors to foreign businesses, and that he had on many occasions expressed to the U.S. government his strong wish to achieve similar breakthroughs in the media and entertainment field. Time Warner’s longterm aspirations for the Chinese market across different media platforms and business lines have been, for the most part, shared by other major Hollywood studios. Theatrical release of their film productions is but one small, albeit important, part of their overall grand China scheme.

China’s movie exhibition infrastructure has been largely underdeveloped. Most cinemas in China are inadequately equipped and thus unwelcoming to potential moviegoers. Therefore, Hollywood has long had an eye on the Chinese exhibition market. At the annual CineAsia Film Exhibitors Convention in 1997, Valenti explicitly publicized Hollywood’s wish to join with partners “throughout Asia, especially in China” to invest in the building of “modern cinema auditoriums” to accommodate the growing number of Asian moviegoers with an “epic viewing” experience unavailable at home (Valenti 1997). Yet the Chinese government did not show any sign of lifting the ban on foreign investment in Chinese cinemas until it reached the agreement in late 1999 with the U.S. on China’s accession to the WTO. Before that, major cinema operators in the U.S., such as Warner Bros. International Theaters (WBIT) and United Cinema International (UCI),[25] had held many talks with both the Chinese government and potential Chinese business partners in an attempt to break through obstacles in the policy, but to no avail. To Hollywood studios, the goal is not only to expand their cinema business in the emerging Chinese market. More significantly, they believe that constructing multiplexes would push China to import more Hollywood blockbusters to fill the cinema seats.

Compared with a traditional one-screen cinema, a multiplex is more attractive to audiences, due to choice, flexibility and modern facilities. The state-of-the-art sound system in a multiplex gives full play to the typically special-effects-laden audio track of spectacular Hollywood blockbusters, while it does not favor small films to the same extent. Moreover, the multiplex provides a more efficient operation in terms of capacity utilization for distributors and exhibitors alike. It enables different screening halls to show different films simultaneously, or to exhibit the same popular movie with staggered starting times. The long-term strategy of Hollywood’s multiplexing in China is not only to prompt the importation of more films, but also to obtain the best space for their films once they take over the cinemas’ ownership. Hence, we can easily understand why Hollywood's exhibition sector had been pointing their global strategic focus increasingly on China. During the annual ShoWest trade fair, for example, convened by the National Association of Theater Owners (NATO) in March 2000, executives from WBIT and UCI expressed their major concern over cinema-overbuilding in mature markets such as the U.S. and West Europe. They also publicized their plan to shift their investment to unsaturated markets such as Latin America, East Europe, and especially Asia, where there was significant room for growth in the exhibition infrastructure, a deep love of films, and a newly accomplished economic turnaround. In particular, Peter Dobson from WBIT remarked that China was

“just sitting there waiting for the taking (Ellingson 2000)."

“The taking” could take place in different ways, at different speeds, with some changes happening in a fairly proactive and aggressive manner while others would be accomplished in rather low-profile and round-about ways. Companies like UCI were mostly holding back in a “wait-and-see” mode. They knew the obstacles, including the lack of a steady supply of commercially viable films due to de facto quotas on foreign films imported per year, lackluster box office performance of the majority Chinese films, and government ruling set in 1996 that mandates two-thirds of screen time for domestic films.[26] UCI and companies with similar calculations were cautiously waiting for the right time before making a big investment in the market, a time when more of their films will be allowed into China, and cinema investments, especially in new multiplexes, would be safe and profitable. As Executive Vice President of UCI Jim Burk clearly remarked, availability of U.S. films there would be a major incentive for his company to explore business opportunities in China (Groves 2000, 7).

However, United Artists Theatres, another major cinema circuit from the U.S. now under the umbrella of Regal Entertainment Group, quietly and successfully extended its brand in China as early as 1997 when its subsidiary based in Hong Kong, United Artists Cinema Circuit (UACC), in which UA had 5% of equity investment, built China’s first multiplex of six screens in Wuhan, a major city in central China.[27] By the year 1999, when UA opened its six-screen multiplex in China’s largest film market, Shanghai, it already had four multiplexes in mainland China, and a total of over 100 in Singapore and the Greater China region, including Hong Kong and Taiwan (“Zhongguo”). This was one of the examples of Hollywood squeezing into the must-get Chinese market with creative tactics in the face of stringent policy restraints.

Yet all in all, in movie business in the pre-WTO period, the major studios could not really directly tear down the protection wall initially erected by the Chinese government. Therefore, it was only when the MPAA, in particular, Jack Valenti, and the U.S. government on their behalf successfully pushed for greater film market access in China in the Sino-U.S. bilateral WTO agreement that eventually China increasingly opened this market. As a matter of fact, had it not been for the support of the MPAA and the U.S. government from the very beginning, Hollywood would not have been able to re-enter China smoothly in the first place.

Hollywood’s blessings: MPAA, the U.S. government, and the trade and PR game

"That every major metropolitan area on the planet is playing mostly American movies is a monument to Jack Valenti."
— Douglas Gomery, film historian (Bromley 2000, 41)

"China's WTO accession, together with PNTR, constituted up perhaps the most important American trade and foreign policy debate of the past decade." — Charlene Barshefsky, U.S. Trade Representative (Barshefsky 2000)

If eroding movie attendance within a troubled domestic film industry was China’s trigger from within for its 1994 policy shift to import ten revenue-sharing foreign films, then the unremitting efforts of the MPAA, especially its Chairman and CEO, Jack Valenti, in assisting the U.S. government to press China’s Intellectual Property Rights (IPR) enforcement, laid the desirable ground for the transition from without. As a veteran lobbyist for the Hollywood majors on Capitol Hill, and having served as a special assistant to U.S. President Lyndon Johnson, Valenti had uniquely calculating tactics to push the U.S. government hard to coerce China to comply with its requests on IPR protection and market access through threats of trade sanctions. Yet he knew that the U.S. side could not go too far lest the pressure drive China completely out of dialogue and potential business co-operation. He knew when to push and when to hold back, yet he always tried to play the “good cop” role in front of the Chinese government, while letting the U.S. government do the hard work. By this means, he tried to maintain a clever balance between carrot and stick with the tacit collaboration of the U.S. government. He knew that collaboration has always been ensured, given the predominant position that U.S. entertainment industry has held in the overall U.S. export sector.[28][open notes in new window] For the most part, his tactics seemed effectively to have worked effectively.

In the immediate aftermath of Deng’s open-door policy in the late 1970s, the U.S., together with other Western countries, began to pressure China to adopt more stringent intellectual property laws to protect foreign rights. The pressure escalated in the early 1990s when China had become a lucrative destination for foreign investments. In 1989 and 1990, the U.S. trade representative (USTR) applied the newly acquired instrument of Special 301[29] by placing China on the Priority Watch List to push for the process of legal reform in the country. China promulgated the Copyright Law of the People’s Republic of China in 1990 to be in line with international practice. In 1991, USTR named China a Priority Foreign Country on the ground that the new law was not compatible with the Berne Convention[30] (Wang, Shujen 2003, 77 & 79). Backed by Valenti’s personal engagement in the matter, China and the U.S. entered into a Memorandum of Understanding in January 1991, under which China soon complied with its commitment to adopt Berne-compatible copyright regulations, join the Berne Convention, and adhere to the Geneva Phonograms Convention within the next two years. Most importantly, China agreed to make U.S. works “fully eligible for protection (“Excerpt from”)." After the legal framework went into place in China, the MPAA began to ascribe the high level of piracy there to the lack of enforcement (Wang, Shujen 2003, 79). In 1994, the MPAA was granted permission to open an office in Beijing. That, even more significantly than China's importing The Fugitive, marked the real beginning of Hollywood's business in China. To ensure China’s effective enforcement of IPR and to advance Hollywood’s market access in China have been the two top priorities on the agenda of the MPAA ever since.

Together with the International Intellectual Property Association (IIPA)[31], the MPAA lobbied intensely for sanctions against China in Washington on the ground of IPR violations with regard to the Sino-U.S. bilateral IPR negotiations in 1994-95. That effort successfully pushed the Clinton Administration to take a tough stance and use the Special 301 designation, which was hailed by Valenti as “an essential weapon in the war against worldwide piracy and market access barriers” (“Motion Picture Association”), with the threat of potential, imminent trade sanction to press for China’s enforcement of copyrights. In June 1994, acting USTR Mickey Kantor put China on the Special 301 Watch List by giving an ultimatum of six months for copyright enforcement (Rosen 2002, 53). By the end of the six months, on the last day of 1994, the Clinton administration warned the Chinese leaders that beginning from February 1995, it would impose trade sanctions on over US$1 billion worth of Chinese imports, unless they took strong measures to severely penalize piracy of U.S. movies[32], music recordings, and computer software, and to allow greater market access in China for U.S. entertainment, publishing and technology products (Behr 1995, A27).

The claim by IIPA head, Eric H. Smith, that piracy-based, total commercial losses for U.S. firms (including all copyrights products such as movies, music recordings, and computer software) in China exceeded US$1 billion each year (Behr 1995, A27), might be an exaggeration. Yet the considerable loss was understandably a major source of frustration for the United States. It was clear that the annual film import quota of ten definitely fell far short of Hollywood’s appetite. And Mickey Kantor was obviously dissatisfied with the 260 anti-piracy enforcement raids launched by Chinese authorities in the first ten months of 1994 as reported by China Daily, China’s official English-language newspaper (Behr 1995, A27). China’s Ministry of Foreign Trade and Economic Cooperation (MFTEC) promptly responded to the threat of trade sanctions from the U.S. government with a counter-threat to block imports of U.S. films and television programs, music records, among other things (ironically, including those very products that Washington accused China of pirating). It also threatened to suspend requests of U.S. companies to establish subsidiaries in China as well as talks with major U.S. automakers regarding potential joint ventures (Bilski and Nankivell 1995, 18). A trade war that could mark the most serious economic confrontation between the two countries seemed imminent. The stakes were high for both sides, as an average of 40% of China’s exports went to the U.S., mostly to leading U.S. retailers. Meanwhile, most major U.S. corporations were rushing to invest in China, one of the world’s fastest-growing markets. The stakes might have been even higher for China, given that China’s trade surplus with the United States was US$24.6 billion in the first ten months of 1994, second only to Japan’s (Behr 1995, A27). Besides, China was eager to obtain membership in, and hence become a founding member of the WTO, which was to be established per the Final Act of the Uruguay Round of negotiations on January 1, 1995 to replace GATT (General Agreement on Tariffs and Trade) and oversee global trade rules. The Clinton administration led the opposition to China’s WTO membership, and used that as forceful leverage to push China for compliance in anti-piracy enforcement and for market access expansion for U.S. companies, particularly the Hollywood majors.

After further “torturously complex” negotiations before the ultimatum, as acknowledged by one insider to the talks, with the final days spent on the issue of market access for U.S. film and music companies, on February 27, 1995, the two sides signed the Agreement on Enforcement of Intellectual Property Rights and Market Access. The 22-page pact was described by U.S. officials as “the most comprehensive and detailed copyright enforcement agreement” they had ever negotiated with any country (Faison 1995, A1). The agreement entailed strong IPR enforcement measures such as an intensified six-month crackdown on copyright violations, including:

That pact clearly displayed Hollywood’s intention to eliminate all regulatory barriers on their way to invade the Chinese market freely. Chinese officials, however, voiced their complaints during the negotiations that some U.S. demands would violate China’s sovereignty (Faison 1995, A1). As Valenti made very clear later, based on the success in China’s experiment of importing ten foreign films on a revenue sharing basis, “all limits on that process should be removed." He hailed the agreement as “a thorough blueprint for action," and a major step towards “a positive and constructive partnership” between the two sides (“Statement of Jack Valenti” 1999).

The shadow of trade war did not fade away. Another scenario followed only about one year later. This time the trigger came again from the Valenti-led MPAA as well as IIPA. In February 1996, in their annual report to USTR Kantor, the two organizations called for the U.S. government’s help in wiping out piracy in the Chinese market by retaliating against China for not living up to the Enforcement Agreements signed the previous year, unless immediate steps were taken to enforce copyright protection (Wharton 1996, 8). In May 1996, based on a charge of China’s unsatisfactory implementation of the 1995 Enforcement Agreement, acting USTR Charlene Barshefsky threatened to impose US$2 billion in tariffs on certain goods imported from China, unless China took unambiguous actions to fulfill its commitments in the agreement by June 17. Again, China’s MOFTEC responded quickly with a list of U.S. automobiles and other products targeted for retaliatory trade barriers. The two sides once again were on a brink of a trade war. Valenti expressed his concurrence with Barshefsky’s decision before the Special 301 Committee on June 6, 1996. Nevertheless, he acknowledged the important progress the Chinese government had made in improving anti-piracy enforcement, especially on the retail and wholesale levels, and expressed his optimism that “critical work” could be done to achieve the objective in the next ten days to reverse the decision (“Statement of Jack Valenti” 1996). Finally that potentially disastrous scenario was averted by a last-minute accord signed between the two sides on June 17.

In addition to installing more explicit and heavy-handed copyright enforcement measures, and expanded market access for the recording industry, the trade agreement officially eliminated the film import quotas imposed by the Chinese government. Nevertheless, it kept intact China’s ability to block film imports that would violate standards set by China’s film censorship board. In fact, this provision left much open to interpretation and turned out to be an effective means of protection for the Chinese film industry (hence the de-facto “unofficial quotas” thereafter). Hollywood majors were still upset by the fact that no advance in market access encouraged joint ventures for cinema construction between the U.S. and China companies, despite Valenti’s warm celebration of the new accord (“Breakthrough," 1). Following the new agreement, Barshefsky called off the threat of trade sanctions against China that she made earlier, citing a sufficient demonstration of China’s commitment to IPR protection. China also called off its counter-retaliations against the United States.

To Valenti, one major roadblock that still remained in the Chinese market was China's arduous resistance to pushing through increasing market access for Hollywood. His plan, representing major Hollywood studios' ultimate objectives, was clearly laid out in June 1996 when he called for further support from the U.S. government to that end, in particular, for eliminating all quotas on film, video and TV, and revising duties and taxes imposed by the Chinese government on Hollywood imports. As he stated, these were the “last obstacles on the threshold of one of the biggest and most exciting markets in the world," i.e. obstacles to Hollywood studios’ readiness to make major investments in China, which included, to construct or renovate cinemas, to do film and TV co-productions, to join in cable TV projects and build theme parks, etc., as he went on to specify (“Statement of Jack Valenti” 1996). These terms later would become the major components on the agenda that USTR strived to push through during the Sino-U.S. bilateral negotiations towards China’s accession to the WTO.

One thing that deserves special note here is the linkage Valenti has tried to build, from the very beginning, between pressuring the Chinese government for ever more forceful anti-piracy enforcement on the one hand and for increasingly expanded Hollywood’s market access in China on the other. He has argued repeatedly that the market access barriers exerted by the Chinese government have thwarted Hollywood’s efforts to deliver legitimate film and home entertainment products to Chinese audiences. “How can we expect to beat piracy,” he asserted, “if there is not an assured supply of legal, good quality videos?” He went on to say,

"If Chinese audiences do not have the option of seeing a legitimate film in the cinemas, pirated home video products will fill in the demand….Only the criminal elements behind piracy will benefit from this decision while legitimate businesses are deprived of success" (“Valenti Testifies”).

Ironically, the Hollywood majors have been known to recruit former pirates as their well-connected licensees for local distribution in China. One prominent case is that of the first of Warner Bros. studio's three homevideo licensees in China, Xianke. The company happened to be the first of the two “test cases” for home video piracy that the MPAA brought to the Chinese court in 1994. In 1996 it was ordered to compensate the MPAA for damages, lawyers’ fees, as well as court expenses. (By summer 2000, two major Hollywood studios were also designating a pirate network to be their licensee.) By adopting strategies to convert pirates into legitimate partners, Hollywood majors intended to minimize their financial losses and competition, while trying to take advantage of the sophistication and efficiency of the existing piracy networks (Wang, Shujen 2003, 87).[33]

The above best demonstrates Valenti’s masterful lobbying of and tacit collaboration with the U.S. government in using the sticks of trade sanctions to press for China’s compliance in enforcing IPR protection[34] and its relaxing market access for Hollywood. On the other hand, the MPAA he led and its member companies have been equally good, if not better, at resorting to carrots to appease and curry favor with the Chinese government through a series of diplomatic and public relations initiatives when necessary.

A salient example was their handling of totally unfamiliar types of political and cultural sensitivities, one of the major challenges they were confronted with in the late 1990s. In October 1997, the Chinese government issued a temporary ban on business co-operation with three Hollywood studios — Sony Pictures, Disney, and MGM — due to their respective films — Seven Years in Tibet (Jean-Jacques Annaud, 1997; starring Brad Pitt; Sony Pictures Entertainment), Kundun (Martin Scorsese, 1997; Disney), and Red Corner (Jon Avnet, 1997; starring Richard Gere; MGM).With the former two criticizing China’s Tibet policies and the latter critiquing China’s judicial system, they were all regarded by the Chinese government as politically offensive and culturally insulting to China. Particularly, in the case of Disney’s Kundun, Martin Scorsese’s presentation of the life of the Dalai Lama, including a portrayal of brutal repression by the PRC in Tibet, the Disney studio did not back off from a Chinese government warning in late 1996 prior to the film’s release and still proceeded with its China distribution. That led the studio to face an unanticipated official threat that could end to its business with China.[35] The episode was also a factor in the firing of Disney President, Michael Ovitz. Disney made some initial PR efforts to mend ties with the Chinese government, in which the importance of filmmakers’ rights to free speech in the U.S. and the company’s contract-bound obligation to distribute the film were stressed. This action was not enough.

For fear of jeopardizing its access to the alluring Chinese market, including a promising outlook for building a theme park in the country, the all-powerful Disney corporation hired one of the most prestigious U.S. statesmen, Henry Kissinger, who in the early 1970s had helped President Richard Nixon take the historical step towards establishing state-to-state relations with China. Kissinger joined Disney in seeking to assuage China’s outrage over the movie Kundun, and to reach rapprochement with the Chinese government through his good offices (Weinraub 1997, E7). Disney also bought two Chinese films and offered to sponsor an acrobatic troupe from Shandong province in a performance tour of Europe (Bates and Farley 1999, A30). Furthermore, Disney tried to draw the Chinese authority’s attention to its upcoming Chinese legend-based animation film Mulan, which had been under development since 1994, and sold it as a major move of good-will to help promote Chinese culture and tradition throughout the world. The film turned out not to be authentically Chinese, hence resulting in box office receipts well below expectations in China. Yet, besides garnering considerable box office revenues in the overseas market, including the U.S., it also played its due part in mending fences. In the fall of 1998, Disney CEO Michael Eisner made a special trip to China and paid visits to top Chinese leaders in the hope of putting the unpleasant episode behind them for good. After that, the release of Mulan in China in February 1999 with the permission of the Chinese government signaled the beginning of the end of the freeze in relations.

In the two years that followed China’s temporary ban on business relations with the three studios, senior executives of Sony Pictures Entertainment. After relations resumed, that company’s senior executives frequented China and established a business plan to co-produce and distribute Chinese-language films as both a good-will gesture and a feasible long-term strategy of localization[36] to overcome linguistic, cultural, and other access barriers in the Chinese market. Other Hollywood heavyweights not involved in the three films with offensive “anti-China” themes also stepped up their PR efforts to build up an image of good corporate citizen in China. For instance, Time Warner Inc. started a short-term training program in 1998, accepting interns from Fudan, a top university in Shanghai. It also sponsored FORTUNE Global Forum with the theme “China: The Next 50 Years” in Shanghai in September 1999 to highlight China’s increasing global significance at the dawn of the new millennium.

In the meantime, News Corp continued to consolidate its ties with China. Rupert Murdoch had delivered a famous London speech in 1993, shortly after the media giant acquired Star TV, a Hong Kong-based pan-Asia satellite TV service with a “footprint” in the mainland. His suggestion in his speech, that his satellites would soon eliminate totalitarian politics throughout the world, considerably angered the Chinese government. China responded by blocking News Corp’s planned venture with a Shanghai magazine, as well as by prohibiting individuals from owning satellite dishes to receive Star TV programs. Since then, Murdoch has taken some noticeable steps to remedy the situation. On March 21, 1994, to appease the PRC government, Rupert Murdoch dropped the BBC World Service from Star TV, which sometimes ran stories critical of the Chinese authority. In 1998, Murdoch’s HarperCollins publishing house refused to publish East and West, a book by Chris Patten, who had infuriated the PRC government by introducing more democracy while serving as the last Hong Kong governor (Gittings and Borger 2001). In January 1997, News Corp. invested US$5.4 million to establish a joint venture with China’s major official newspaper, People’s Daily — an Internet Portal for IT information and consultation service known as ChinaByte Technology Co. (“Murdoch and China”). News Corp.’s strenuous government PR efforts have taken the company quite far in China, as proved by later developments.[37]

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