Is Film Finance in China About to Change?

In the Hutong
Break time
1120 hrs.

Since China began the reforming and opening process in the late 1970s, a small number of industries have been held outside the reforms that most other sectors have enjoyed. One of those industries has been the national defense complex, and the other has been media.

The media and entertainment sector in the world’s largest and most entertainment-hungry market has been kept in the hands of government at the insistence of the Party. This has meant that the government has rebuffed not only attempts by foreign investors to buy into domestic traditional media properties, but similar attempts by powerful local companies as well.

The result has been the anemic development of the domestic media industry, forced as it is to rely on its revenues, the government, and ingenuity to support its efforts. This has been particularly challenging for the film and music businesses in China, making it difficult for those businesses not only to finance new projects, but to make long-term capital investments and to attract and retain talent.

Not so constrained have been new media companies, in particular the online video websites, the largest of which are taking foreign venture capital investments, conducting offshore IPOs, and starting to produce their own television/video programming. This contradiction is a latent problem in Chinese policy, one that is frustrating to the leaders of China’s state-owned traditional media, and it becomes more severe as the online video sites grow in revenue and production capacity.

The government will have to level he playing field at some point. They can do so either by forcing the online video sites to buy out their foreign investors (not so easy after an IPO,) or by allowing traditional media companies to seek outside investment. The latter would mark a radical shift for Chinese policy makers, and one fraught with risk. The implicit belief in Beijing is that once private interests control media, the Party loses control. In China’s system, this risk is nigh unacceptable.

But there are some signs that the party is willing to experiment with a degree of private ownership in traditional media. South Africa’s NASPERS has long held an interest in Beijing Media Corporation, a marketing and advertising vehicle for print media in Beijing, and a joint venture with Anhui Daily Newspaper Group. These deals took place with the implicit approval of the Party, and it appears they are being watched with great care.

That degree of experimentation appears to have now extended to film. Last week, Beijing Xiangqiao International Media, a film and animation production company and subsidiary of state-owned Hunan Broadcasting, went private in a management buy-out, and there are apparent plans for a domestic IPO at some point in the future.

This will be an important development to watch. If this is allowed to go forward, this marks a limited but key precedent for wider privatization – and private finance – in China’s growing film industry.

This could also be a watershed moment for online video providers like Youku (YOKU) and Ku6 (KUTV). If regulators are prepared to allow domestic production houses outside investment, it could mean that they are also prepared to allow Youku, Tudou, Ku6 and others to continue their evolution toward becoming integrated media companies.

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