Although large State-owned film corporations and successful private companies like Huayi Brothers and New Pictures are active players in the mainland film market, most of China's film enterprises are still in the early stages of development and are in urgent need of funds, as they lack the necessary capital to fund their operations.

This capital shortage coexists alongside capital that lies idle. On the one hand, China's film industry lacks funds. On the other hand, a great many social funds are not being put to use. In addition, overseas capital is eager to enter movie production in the mainland, but it is still prudently observing the market, as there is as yet no ownership system.

The establishment of an ownership system is crucial for the commercial success of China's film industry. The lack of an ownership system is the main bottleneck for film enterprises, especially for large State-owned film enterprises, and this directly influences the financing of the industry.

It is also necessary to facilitate the orderly entry and functioning of capital from other industries or overseas into China's film industry. The effectiveness of such a system would greatly depend on the efforts of professional consulting and assessing institutions, which are still absent from the mainland. Due to the absence of film fund management institutions, many funds that would be willing to invest in the film industry have no channels to enter the market and those investments that do enter the industry are often risky and aimless.

Capital always flows to lucrative industries and instinctively tries to avoid risks. Risk assessment is the main issue investigated by investors prior to any capital input. Currently, the profitability of China's film industry is not that high. Due to the lack of licensed products spun off from movies, the profit of most movies relies on box-office returns and the sale of DVDs, but the returns from these are significantly reduced by the theater chains and the pirating of DVDs.

In recent years, some attempts have been made to diversify the revenue streams. For example, the producer of the film Hero met all the costs before its theatrical distribution by utilizing different revenue channels, such as the sale of the VCD and DVD copyright for the Chinese mainland, pre-movie advertisements by China Mobile and others; and licensed products such as a computer game, book, comic, stamps and figurines.

Currently China's film derivative development is aimed solely at recouping the investment instead of maximizing profits. Hollywood, on the other hand, makes derivatives an important link in the profit chain of the industry, in fact derivatives produce larger revenues than the box office.

Meanwhile, the different genres of the films presented in the mainland market in 2010 and their proportion of the total was almost the same as it was in 2009. In 2010, three genres accounted for 80 percent of the 17 films with box-office returns above 100 million yuan ($15.9 million): six action films, four comedy films and three romances.

The lack of other genres, such as science fiction and horror, is partly because the blockbuster action movie is a mature genre in the mainland market and offers a successful model for investors, reducing the uncertainty and risk associated with their investment. This then becomes a self-fulfilling circle, the success of blockbusters attracts investment to blockbusters, causing blockbusters to dominate the market, thereby making the most returns, which then attracts investors. While boosting the market, blockbusters also hinder diversification.

The author is with a Beijing-based investment fund company.

(China Daily 03/06/2012 page9)