Gradual Easing of Restrictions on Foreign Investment

China's WTO accession commitments on the mass media mainly cover the following aspects:

Distribution of books, newspapers and magazines

Wholesaling: Within three years after accession, foreign service providers will be permitted to engage in the wholesaling of books, newspapers and magazines; foreign majority ownership will be allowed; and all quantitative restrictions will be lifted.

Retailing: Mail order and offshore consumption are permitted upon accession. Retailing of books, newspapers and magazines by foreign-invested enterprises is allowed within one year after WTO entry. Foreign majority ownership will be permitted in joint-venture retailing enterprises, and all provincial capitals plus Chongqing and Ningbo will be open to joint-venture retailing enterprises within two years after accession. However, in the first five years after accession, foreign majority ownership is not allowed in chain stores with more than 30 outlets which sell products of different types and brands from multiple suppliers.

Audio-visual products

Subject to China's right to examine the content of audio and video products, foreign service providers are permitted to establish contractual joint ventures with Chinese partners (the terms of which must comply with relevant Chinese laws, regulations and other stipulations) to engage in the distribution of audio-visual products, excluding motion pictures.

Films

Upon accession, foreign service providers are allowed to construct or renovate cinemas, with foreign ownership up to 49%. Subject to compliance with China's?/span>  regulations on the administration of films, 20 foreign movies can be imported a year for theatrical release on a revenue-sharing basis.

Importation of books, newspapers and magazines and audio-visual products

Foreign trade rights will be gradually liberalised within three years after accession, but no direct commitments have been made on the importation of books, newspapers, magazines and audio-visual products. Since books, newspapers, magazines and audio-visual products have not been included in the list of exceptions, foreign-invested enterprises may be gradually permitted to import these products within three years after accession.

Although policy restrictions will be gradually eased after WTO entry, the Chinese government will still be exercising strict control over market access for the mass media and related sectors and will continue to have the final say in the scrutiny of media content and its release. In the revised Catalogue for the Guidance of Foreign Investment Industries which took effect on 1 April 2002, most of the media-related businesses remain off-limits to foreign investors. These businesses include:

• Publication, sole distribution and importation of books, newspapers and magazines;
• Publication, production, sole distribution and importation of audio-visual products and electronic publications;
• News agencies;
• Radio stations, TV stations, and radio and TV transmission networks (transmission and relay stations, TV broadcast satellites, satellite uplinks, satellite pickup stations, microwave stations, monitoring stations and cable TV transmission networks);
• Production, publication, distribution and broadcasting companies for radio and TV programmes;
• Film production and distribution companies;
• Video production and projection companies.

In fact, China has already partially opened its satellite TV market to foreign companies. At present, the number of foreign satellite TV channels permitted to broadcast in certain parts of China has increased to 22. Satellite TV is given wider geographical coverage, and cooperation in the form of equity partnership between mainland TV media and foreign companies is not uncommon. These are signs of the easing of policy restrictions on foreign financing and cooperation in the media industry.

Earlier, the Publicity Department of CPC Central Committee, State Administration of Radio, Film and Television (SARFT), and State Press and Publication Administration jointly issued a circular on the deepening of the reform of the news, publishing, radio, film and television sectors, which set out the target of actively promoting the corporate-oriented reform of the media industry and establishing multi-media news groups that transcend regional barriers. The circular also put forward positive suggestions for sensitive issues such as financing, cooperation with foreign companies, and cross-media development.

According to the document, the media are free to access safe and effective channels of financing. Upon approval, the business units of news, publishing, radio, film and television companies may absorb funds from large state-owned enterprises and organisations; distribution companies and television companies may go a step further in drawing funds from non-state sectors and abroad; and domestic news, publishing, radio, film and TV media companies may cooperate with reputable foreign media groups that are well-managed and technologically advanced. These are signs that the government is giving tacit approval to the gradual opening of the media sector.

Foreign Investors Actively Seek Market Access

Although China's media industry is basically a closed realm, an increasing number of foreign enterprises covetous of China's huge market potential have been trying to gain entry through different means in recent years. Their targets include newspapers, magazines, TV channels, music and audio-visual products production and distribution, and dotcoms.

In newspapers and magazines, notable examples of foreign participation in mainland publications include French interests in a world fashion magazine, German interests in a car magazine, Time-Warner interests in a world city magazine, Korean interests in fashion magazine, Japanese interests in the Ray-Li magazine series, assistance offered by Oxford University Press' World of Science to China's World of Science, Tom.com's acquisition of Sanlian Shenghuo Zhoukan weekly, and Hong Kong interests in two local newspapers.

In TV channels, Walt Disney and Discovery Channel programmes have already entered the China market several years ago. Encore International of the Starz Encore Group of the US has successfully obtained permission to air an hour-long programme on CCTV-8 daily in exchange for the beaming of CCTV-4 programmes in the US. Recently, STAR, News Corporation's Asia TV unit, has gained approval from the Chinese government to beam a 24-hour putonghua entertainment programme in Guangdong.

Websites also provide a venue for the entry of foreign capital in China's media sector. News Corporation began its cooperation with Renmin Ribao (People's Daily) in 1997 by acquiring a 49% interest in one of its subsidiaries, Chinabyte. In 1999, it acquired an 8.4% stake in the Chinese portal NetEase and a 26% interest in renren.com.?In the following year, it increased its participation in the Chinese media by buying into the new telecom operator China Netcom. The industry believed at the time that News Corporation was hoping to become an Internet content provider (ICP) through investment in dotcoms. Reuters also cooperated with Qingniao.net to establish Chinamediaguide.com for the magazine Chuanmei Shiye (Media Vision). Meanwhile, Tom.com has bought a number of small portals for music and audio-visual products.

Chinese Media Gear Up for WTO Entry

As the international media steadily increase their entry into the China market, mainland media enterprises are closely watching the situation and mapping out plans in a bid to enhance their international competitiveness and face the challenge. Some media are already turning to the capital market in their plans to form large corporations by means of direct or indirect listing, establishing joint-venture subsidiaries, forming cooperative ventures, acquisitions, mergers and restructuring.

Following the successful listing of the Hunan Television Broadcasting Group, Oriental Pearl also invested Rmb408 million in acquiring a controlling share in the Shanghai Oriental Television Advertising Department of Shanghai Oriental Television. CCTV, which owns the Water Margin City, Romance of the Three Kingdom and other movie and TV bases in Wuxi, as well as Gehua CATV, which owns the cable TV network in Beijing, have both gone public. Many large local media groups, such as Chengdu Shangbao, Chengcheng Culture, Saidi Media, and Shaanxi Radio and Television Information Network are all seeking listing through shell companies.

The Chinese media are also joining hands with foreign media companies to increase their international competitiveness. According to media reports, the industry began a series of cooperative ventures with foreign media last year. CCTV set up a joint venture with Rupert Murdock's Phoenix Satellite TV on 29 October, with Phoenix undertaking to put CCTV-4 programmes on mainstream US satellite television platforms. On 3 November, CCTV formed a joint venture with HKTVB for the buying, selling and distribution of global and greater China TV programmes. HKTVB has a 60% stake in this venture, while the remaining 40% is held by a wholly-owned subsidiary of CCTV in Hong Kong. On 14 November, CCTV signed a news programme exchange agreement with CNN. On 19 November, CCTV's CTV Media signed an agreement with Pearson of the UK to form Pearson CTV Media, a multimedia and production company, providing English education and entertainment programmes. Pearson holds a 50% share in this venture, CTV Media has a 40% stake, while Beijing-based Cyber Solution, a broadband and telecommunications service company, owns a 10% stake.

To improve economic benefits, expand operation scale and increase competitiveness, the best way for mainland media entities to take is to undergo cross-sector and cross-media integration. To this end, the China Radio, Film and TV Group was inaugurated in Beijing in December 2001 as China's?span lang="EN-US">largest media group. Bringing together CCTV, CNR, CRI, China Film Group Co, China Radio, Film and TV Transmission Network Co Ltd and the China Radio and TV website, the group stands as evidence of the trend of multimedia integration in China.

Foreign Participation in Publications Distribution

China has recently promulgated the revised Regulations on the Administration of Publications which took effect on 1 February 2002. The new Regulations provide for the establishment of Sino-foreign contractual and equity joint ventures and foreign-invested enterprises to engage in the distribution of books, newspapers and magazines.

The new Regulations have yet to be implemented because detailed implementation rules will not be ready until the end of 2002. However, the timetable for market opening has been worked out.

Market Opening Schedule for Publications Distribution

The director of the State Press and Publication Administration, Shi Zongyuan, recently disclosed the timetable for opening up the publications distribution sector.

Within one year after China's?/span>  WTO accession, foreign service providers may engage in the distribution of books, newspapers and magazines through the establishment of Sino-foreign joint-venture retail enterprises at designated locations. These include the fShanghai and no more than two are allowed in other localities. In the case of Beijing, two of these retail enterprises may set up branches within the city.

Within two years after accession, all provincial capitals plus Chongqing and Ningbo will be open to joint-venture retail enterprises. Besides, foreign investors will be allowed to hold controlling stakes in these retail enterprises.

Within three years after WTO entry, all geographic, quantitative, equity ratio and form of establishment restrictions on the distribution of books, newspapers and magazines by foreign investors will be lifted.

However, in the first five years after accession, foreign majority ownership is not allowed in publication chain stores with more than 30 outlets.

Where audio-visual products and entertainment software are concerned, subject to China's right to examine the content of such products, foreign service providers are permitted to establish contractual joint ventures with Chinese partners to engage in the distribution of audio-visual products and entertainment software upon accession.

Market-Oriented Reform of Mainland Media

The Chinese media have witnessed rapid development in recent years. They have gradually changed from tools of the government into a market-oriented industry, with annual turnover growing at a rate of 25% since 1998. Today, the media sector is China's?/span>  fourth largest industry, with total profits tax exceeding those of the tobacco industry.

The industry embraces nearly 2,000 public-circulated newspapers, 4,000 radio and television stations, 8,000 magazines, and two news agencies (Xinhua News Agency and China News Service). Most of the media enterprises are small operations lacking in competitive strength. Departmental and regional barriers also result in duplication in structure and waste of resources.

In the face of market changes and competition, including competition from multinational media giants, the Publicity Department of CPC Central Committee, State Administration of Radio, Film and Television (SARFT), and State Press and Publication Administration jointly issued a circular on the deepening of the reform of the news, publishing, radio, film and television sectors, which set out the target of actively promoting the corporate-oriented reform of the media and establishing multi-media news groups that transcend regional barriers.

Actually, China's?/span>  media sector has been undergoing comprehensive reform since the beginning of 2001 whereby the political and commercial functions of the media are separated and resources are re-allocated. Under the leadership of the local radio and television authorities, radio, film and television companies incorporating major provincial-level TV stations, radio stations and cable networks are formed. These companies are phasing in a series of reform measures, such as the separation of station and network management, specialisation of broadcast channels, and separation of production and broadcasting etc. Shanghai, Beijing, Hunan, Guangdong, Jiangsu and Shaanxi have all set up their radio and television corporations and are reorganising their broadcasting media (radio and television) and cable networks.

Since trans-regional acquisition of local TV stations is still subject to local protectionism and policy restrictions, cooperation remains the order of the day. This includes the contracting of time slots, co-production of programmes and sharing of resources. With the acceleration of the marketisation process, obstacles to the acquisition of TV stations may be gradually eliminated.

With the further development and popularisation of network communications technology and the change in the government's telecommunications policy (breakdown of monopoly), the media and telecommunications industries will move closer together. Their integration will result in the formation of mixed media corporations. This development reflects the growing commercialisation of the radio, film and television sectors and the emergence of cross-media groups.

As for print media, the government is giving strong support to the development of local party papers and encouraging local newspapers to pool their resources and form news groups. On the basis of the establishment of 16 news groups including Nanfang Ribao, Yangcheng Wanbao, Jingji Ribao and Guangming Ribao, China's media industry is seeking greater capital support and developing in the direction of conglomerisation and economy of scale through reorganisation, expansion and other means. People in the trade believe that the emergence of newspaper groups will increase competition and lead to a new order of oligopolistic rivalry.

The trend of commercialisation of the Chinese media will continue. The integration of the media is expected to pick up speed and the market will be restructured following China's entry into the WTO. Cross-media groups with radio and television media, newspaper media or network media forming their core business are bound to emerge. WTO accession and commercialisation of the sector will pave the way for the entry of foreign media groups into the China market. Foreign investors should be able to find many business and investment opportunities from the restructuring, international expansion, public listing and other economic activities of mainland media enterprises.

Liberalisation of Film Sector:

Distribution and Cinema Operation

China has made two promises regarding its film market during its WTO membership bid. First, upon WTO accession, subject to compliance with China's regulations on the administration of films, 20 foreign movies can be imported a year for theatrical release on a revenue-sharing basis. Within three years after accession, the number of foreign movies will be increased to 50 a year. Second, foreign investors are allowed to participate in the renovation and redevelopment of cinemas in China, with foreign ownership up to 49%.

In keeping with China's commitment to allow foreign participation in renovating and redeveloping cinemas, the State Council promulgated the revised Regulations on the Administration of Films on 1 February 2002 which took effect and replaced the old version on the same day.

Under the new Regulations, foreign investors may form Sino-foreign equity or contractual joint ventures to construct or renovate cinemas. Upon approval by the relevant administrative department responsible for radio, film and television under the State Council, domestic film production companies may co-produce movies with foreign film-makers. However, other companies or individuals are still prohibited from doing so. Likewise, foreign organisations or individuals are not allowed to undertake any independent film production in China.

Furthermore, in order to regulate the activities of foreign artists participating in Chinese film making, improve the recruitment system, strengthen the management of film-making, and assure the quality of movies, the State Administration of Radio, Film and Television (SARFT) has formulated a set of provisions on the administration of recruiting foreign artists and production personnel to participate in the production of domestic films. According to the provisions, for the production of domestic feature films, foreign directors may not be hired while the leading artists and production crew members should also be Chinese citizens residing in the mainland as a general principle. If foreign leading artists and production personnel are considered necessary due to thematic or technical reasons, the production unit concerned should file a request to SARFT for approval before going ahead with appointment. In any event, the number of foreign artists hired to play leading or supporting roles in the Chinese film may not exceed one-third of the total number of the leading artists. As for Sino-foreign co-productions, the majority of the leading artists and production crew members should be Chinese citizens residing in the mainland. Again, if foreign leading artists and production personnel are considered necessary due to thematic or technical reasons, the mainland production unit concerned should file a request to SARFT for approval before going ahead with appointment. In any event, the number of foreign artists hired to play leading or supporting roles in the co-produced film may not exceed half of the total number of the leading artists.?The provisions came into effect on 1 January 2002.

Foreign investors now have three options in entering China's film market: 1) the screening of foreign movies at cinemas, in the form of audio-video products, via video-on-demand (VOD) channels, and through leading broadcast networks; 2) investing in the renovation or construction of new upmarket cinemas, introducing foreign business models of cinema circuits and management expertise, as well as investing in the cinema screening business; 3) foreign film producers may invest in Chinese films or co-produce films with their mainland counterparts.

In fact, foreign players have already made inroads into the China market through the above three ways. At the end of 1994, the China Film Group Corporation started to introduce foreign blockbusters to the mainland on a revenue-sharing basis. At present, more than 10 imported blockbuster films are screened in China on a revenue-sharing basis every year, while the number of foreign movies distributed not on revenue-sharing basis is even greater.

Foreign investors have also participated actively in cinema construction in China, which has been the development trend of cinemas in mainland cities in recent years. For instance, the four most upmarket multiplex cinemas in Wuhan are the investments of Studio City, Xinle and Golden Harvest, which have brought with them the operation and management models of foreign cinema circuits.

Today, most of the leading studios from Hollywood have established their footholds in China. For instance, Disney, Columbia and Warner Brothers have their offices in Beijing, while Paramount, MGM and Universal Studios have a presence in Shanghai. The parent company of 20th Century Fox, the Fox News Group, also has its head office in Beijing.

Rapid Expansion of JV Cinemas

Foreign investors are allowed to invest in renovating cinemas following China's entry into the WTO. In fact, joint-venture cinemas already appeared in China prior to WTO accession. In 1997, Beijing, Shanghai and Guangzhou were first designated as pilot cities for joint-venture cinemas. Since then, joint-venture cinemas have grown rapidly. As of the end of 2000, more than 20 joint-venture cinemas had been approved in China, of which 15 were opened in large cities such as Beijing, Shanghai, Chongqing, Guangzhou and Wuhan.

In January 2001, Kodak and the Shanghai Film and Television Group jointly invested US$4 million in setting up a multiplex in Shanghai's Xujiahui district. According to David Sanderson, general manager of Kodak Entertainment Imaging, Greater China Cluster, Kodak plans to establish six to eight world-class cinemas in large cities such as Beijing and Guangzhou over the next few years.

The state-of-the-art facilities and comfortable environment of joint-venture cinemas have created tremendous competitive pressure on their state-owned counterparts. For instance, Studio City in Shanghai, with six screens and a seating capacity of 1,300, grossed box office receipts amounting to Rmb15.8 million in 2000, ranking second among all movie theatres on the mainland. Meanwhile, the box office revenues of three joint-venture cinemas in Wuhan account for 80% of the total in the city, which in turn makes up 70% of the total box office revenues of Hubei province. The situation in Chongqing is similar.

The advent of joint-venture cinemas marks the departure from the traditional set-up and operation mode of cinemas in China. With state-of-the-art facilities and equipment, excellent location, advanced marketing techniques and good service, joint-venture cinemas have achieved sharp increases in box office revenues. As a result, the rankings of different cinemas in terms of market share have undergone major reshuffling.

At present, government-funded cinemas are still the leading players in the movie screening business in China. However, the rapid expansion of joint-venture cinemas has breathed new life into China's stagnant film market, forcing government-funded cinemas to improve their services and compete pro-actively in the market.

Foreign Companies May Distribute Films

China will completely overhaul its film distribution system by ending the long-standing monopoly of the China Film Group Corporation (CFGC) and allowing more foreign companies to distribute imported movies. Shanghai Golden Harvest Media Management Co, which is majority-owned by Hong Kong's Golden Harvest Studio, has become the first foreign-invested company in 50 years to be granted approval to distribute foreign films in China.

At the national working meeting on films held in early 2002, government authorities revealed for the first time that they would end CFGC's monopoly in film distribution. While maintaining the unified importation of foreign movies by the state, one joint-venture company of multiple ownership structure will be set up to compete with CFGC in distributing foreign movies.

Shanghai Golden Harvest's nationwide distribution of American film, Epicenter, represents the first move to break CFGC's monopoly, although in this cooperative venture between Golden Harvest and CFGC the distribution rights still lie with CFGC. According to industry sources, CFGC has kept its cards close to its chest in its unprecedented decision to allow a foreign company to distribute movies. The move marks CFGC's determination to overhaul the film distribution system in China by experimenting with a new model that leverages on the strengths of foreign companies. Against this backdrop, foreign companies are now set to gain access to the film distribution business in China.

It is understood that in addition to foreign companies, CFGC will also allow some domestic players, including Beijing Forbidden City & Trinity Pictures Co and Beijing Xinyinglian Film Co Ltd, to distribute foreign movies as well.

Industry sources also pointed out that by delegating distribution rights to other operators, CFGC could get a guaranteed sum of revenue. This, to some extent, will relieve CFGC from its financial burden and alleviate the huge costs and risks incurred in the old system. However, the change is also bound to trigger intense competition in foreign movie distribution among industry players nationwide.

Foreign Cable TV Landing Rights Set to Expand

To date, more than 20 foreign cable TV networks have been granted landing rights by SARFT. These include CNN, HBO, NBC, Phoenix Chinese Channel, and China Entertainment Television Broadcast, a subsidiary of AOL Time Warner. However, their landing rights are mostly restricted to high-end hotels in large- and medium-sized cities and, as such, the audience is limited.

In recent years, the landing rights for cable TV have been gradually liberalised. In February 2002, China Entertainment Television Broadcast became the second offshore satellite TV station after Phoenix to have successfully secured landing rights in parts of the Pearl River Delta region in Guangdong province (including Guangzhou and Shenzhen) via cable networks. It marks the first of its kind to gain access to landing rights in China following WTO accession. Meanwhile, News Corporation was granted approval on 28 March 2002 to broadcast its new Chinese general entertainment channel, Xing Kong Wei Shi, via Guangdong Cable TV Network.

In mid December 2001, STAR (a wholly-owned subsidiary of News Corporation), China Central Television (CCTV), China International Television Corporation and Guangdong Cable TV Network entered into an agreement under which STAR was to broadcast a 24-hour general entertainment channel in putonghua via cable system in Guangdong in the first half of 2002. In return, Fox Cable Networks, run by News Corporation in the US, was to arrange for CCTV's English channel to be aired in the US.