The film sector is one of few boom industries in China, with an annual growth rate of more than 30%. As a result, movies have become a top draw for high-risk financial instruments.
The flood of cash has been a boon for actors, directors and others tied to the industry; salaries of movie stars just below the top tier doubled in the past few years to more than 10 million yuan ($1.5 million) per film, according to talent agencies and producers.
Much of the money has been attracted by the success of movies such as “The Mermaid,” a comedy about a romance between a business tycoon and a mermaid, directed by Hong Kong hit maker Stephen Chow. Before it opened in February, Hehe Pictures, a film company affiliated with state-run China Minmetals Group, set up a private-equity fund to secure the distribution rights. Together with two studios, they bet the movie would gross at least 1.5 billion yuan, say executives among the sponsors.
It was a daring bet. At the time, only two films in China had grossed more than 2 billion yuan. But it paid off: The film broke all Chinese box-office records and still is in theaters after regulators granted it an extended screening period. It has grossed nearly 3.4 billion yuan so far.
On the one hand, more money enables Chinese filmmakers to make further gains on Hollywood. China is the world’s fastest-growing and second-largest movie market, with a 49% increase in box-office takes last year to $6.8 billion, according to the Motion Picture Association of America, or MPAA. That compares with $11.1 billion in the U.S., a rise of 8%.
On the other hand, ample funding means more movies get made than there is a market for. According to Beijing-based film-research company EntGroup, only 372 of 686 domestic films made last year were able to get theatrical releases, in a market where the profit on a movie comes almost entirely from box-office receipts.
Last year, 166 film-focused private-equity funds were set up; 10 years earlier, there were only five such funds, according to Beijing-based Zero2IPO Research, which researches financial institutions.
Cash for movies also is flowing in from other industries, like real estate and energy firms, which had long invested in them to get access to perks such as dinners with movie stars. Now as their main businesses feel the effects of China’s slowdown, they are looking more seriously at film projects.
The investment bonanza is having significant ripple effects in an industry whose revenue didn’t reach 10 billion yuan until 2010.
“For someone who has been in the industry for over two decades, it is rare to see so much new money and so many people who are eager to get into this industry,” said Ben Ji, managing director of Beijing marketing firm Reach Glory. He sees an upside: “All the attention could help the industry become more resilient.”
However, much of the fundraising is from online-lending platforms subject to little transparency and with practices that are strictly banned in other sectors, such as using the same collateral for more than one loan.
Zhao ChunXia, founder of online-lending platform itouzi.com, said it isn’t unusual for a movie-focused wealth-management project aiming to raise more than 10 million yuan and offering an 8% to 12% annual yield to be closed in just a few minutes after being released.
A scandal in March involving “Ip Man 3,” a Chinese-made martial-arts movie featuring Mike Tyson, shows how such financing has exacerbated murky practices in the industry. The movie’s main distributor, Dayinmu Film Distribution, was part of a network of companies affiliated with “shadow bank” lender Shanghai Kuailu Group that financed “Ip Man 3” largely with money raised on online platforms. Some of that was used to buy tickets in bulk to raise box-office numbers, which drove up stock prices of the listed Kuailu affiliates with stakes in the movie.
After Dayinmu admitted to spending nearly $9 million on tickets and “ghost screenings,” regulators suspended its operations for a month and the shares slid. Shanghai Kuailu has since halted redemptions on wealth-management products for a quarter-million clients.
By contrast, Hollywood has resisted nontraditional fundraisingfor movies. In 2010, the MPAA objected to plans by two Wall Street firms to launch an exchange based on film futures, saying it could open the door to financial irresponsibility. There is no comparable trade group in China to shield the industry from disruption.
“The current Chinese film-industry organizations were founded by the government, and they don’t really represent stakeholders, unlike MPAA,” said Liu Haodong, former director of industry research center of the state-backed China Film Association. “It’s everyone for themselves.”
Regulators say they have had trouble keeping up with developments in the sector. “When we spot problems, we are not able to apply regulations one by one to punish [perpetrators] accordingly,” said Li Dong, deputy director of a department under China’s top media regulator—the State Administration of Press, Publication, Radio, Film and Television—at a recent industry seminar.
Some in the industry also worry the ramped-up financial resources are creating bubbles.
“Right now I see more harm than good from these so-called financial innovations, because they are not what the movie industry really needs,” said Ann An, president of Desen International Media, a major Chinese film studio. “They just use films for a quick profit.”
Bill Borden, co-executive producer of “The Mermaid” and a veteran Hollywood producer, said the new money is driving up the prices in a way that hurts Chinese filmmakers.
“In Hollywood, you’re worth this money because that is how much we think we can sell you for,” he said. “China is wide open,” with money that used to “build bridges and dams for billions.”