Beijing's New Superpowers Over Movie Industry Frustrate Hollywood Studios

Updated May 27, 2018 11:44 a.m. ET

The shift to party oversight has left U.S. studios with few answers about how to proceed in the world’s second-largest movie market, Hollywood executives in the U.S. and Asia say.

Until March, China’s film bureau had been part of a government agency independent of the party, the State Administration of Press, Publication, Radio, Film and Television, whose job was to regulate content, including censoring films and scheduling theatrical releases.

President Xi’s decision to place film operations under party control, coming just before the all-important summer movie season, adds a new layer of uncertainty for studios already struggling to adhere to China’s complicated, fast-changing rules.

In his rise to power, President Xi has understood the power of cinema, whether he is encouraging citizens to move to cities with shiny new theaters or blocking American films containing objectionable themes. The reorganization appears to formally acknowledge the role of film as a tool that must be managed by the party.

Now, as the two countries contend with trade disagreements, Hollywood finds itself in a frustrating holding pattern in its most important foreign market, waiting for an update to distribution terms that date back to 2012. Negotiations have dragged since February 2017.

In earlier negotiations, the U.S. delegation had proposed raising the U.S. share of theatrical grosses to at least 28%, according to one studio executive. But the executive said the U.S. side was still waiting for China to respond when the larger U.S.-China trade talks put everything on hold.

Another person familiar with the negotiations said higher figures also have been discussed. Studio executives say any substantial increase will be difficult as the country’s primary film distributor, China Film Group, requires its share to cover distribution and marketing costs.

“We’ve been waiting for more than a year,” one Hollywood executive said. “And this latest change is not helping matters.”

Last week brought some progress, when longtime Propaganda Department bureaucrat

Wang Xiaohui

was named head of the new film bureau, a post that had been vacant since China’s reorganization was announced in March. It remains unclear how much power Mr. Wang will have, or how his bureau’s policies will differ from those under the previous structure.

The Ministry of Propaganda didn’t immediately respond to a request for comment.

Hollywood once treated China as an afterthought, but now it is an indispensable source of revenue. In the first quarter of 2018, Chinese box-office grosses, fueled by the country’s Lunar New Year holiday, exceeded those in the U.S. for the first time. China’s annual grosses aren’t expected to pass those in the U.S. for at least a few more years, but recent releases such as “Ready Player One,” from

Time Warner
Inc.’s

Warner Bros., and

Walt Disney
Co.’s

“Avengers: Infinity War” each have collected more than $200 million there.

Most big Hollywood films have been released in China under a February 2012 agreement negotiated by then-Vice President

Joe Biden

and President Xi, who was then China’s vice president. It was set to be reviewed every five years.

Both U.S. and China delegations had hoped to announce a new deal in February, but there were delays on both sides. The U.S. Trade Representative’s office was slow to staff up, Hollywood executives said. People familiar with the matter said Chinese officials were wrapped up in the country’s momentous National People’s Congress, which gave President Xi a second term and abolished term limits.

Under the 2012 agreement, which remains in effect, China allows 34 foreign movies a year into its theaters on a revenue-sharing basis, and gives studios a 25% cut of theatrical grosses—far less than the 40% seen in most foreign markets.

Hollywood executives want to boost that proportion. Their movies are selling millions of tickets a year, and China can no longer consider itself a developing market. Raising the 34-title quota is a lesser concern, studio executives say, because the number covers most of the studios’ major releases.

Last month, there appeared to be some movement after Chinese negotiators offered to ease annual quotas on imported films as part of broader trade talks with U.S. officials. Those talks are expected to continue when U.S. Commerce Secretary

Wilbur Ross

leads a trade delegation to Beijing later this week, according to people familiar with the matter.

No outcome is likely to weaken Chinese control over Hollywood releases. China has say over when any Hollywood movie gets released in the country, sometimes giving studios as little as two weeks’ notice.

Studio executives say China still has many ways to protect domestic films. Chinese regulators could raise the number of foreign titles it allows in—and then approve more French or Bollywood films. Any increase to Hollywood’s revenue share could be offset by additional Chinese taxes, which studios don’t pay.

Last year, a Motion Picture Association of America-commissioned audit found Chinese cinemas underreported ticket sales by about 9% in 2016, a discrepancy that translated into at least $40 million in lost revenue for the six major studios.

After the audit, Hollywood executives wanted changes, and talks were under way late last year. Then Mr. Xi began the far-ranging consolidation of power that also included introducing “Xi Jinping thought” into the Chinese constitution, a distinction reserved for iconic leaders like Mao Zedong.

The U.S. delegation was without a negotiating partner for weeks after the film division’s shift to the propaganda ministry, though that could change with Mr. Wang’s appointment.

“At this point, no one knows what the next step is,” another Hollywood executive said.

Going forward, censors at the Ministry of Propaganda will review edits of movies, request cuts for the Chinese market and determine release dates. It is a change in protocol that comes as Hollywood submits its big-budget June and July releases.

Any Hollywood movie hoping to get into China soon must do so before mid-July, when China begins its next unofficial “blackout” period, which keeps foreign movies out of the country for about six weeks at a time.

Such blackout periods have long frustrated Hollywood executives, who believe they exist to ensure Chinese titles dominate the market. But it is difficult for the U.S. trade delegation to bring them up in negotiations: Chinese officials don’t acknowledge the blackouts exist.

—Fanfan Wang and Lingling Wei in Beijing contributed to this article.

Write to Erich Schwartzel at erich.schwartzel@wsj.com and Wayne Ma at wayne.ma@wsj.com