When the Chinese Bubble Burst

As the summer begins to play like an impending sequel to 2008, the Chinese stock market has taken a bearish turn. Last Spring, the CNN Money report was so bullish, all eyes were focused on the Beijing miracle. Now, the Asian and Chinese markets have taken a fast fall and the ripple effects are billowing.

This is especially true in the Chinese media market. As noted last week in Variety, companies like China Film Group are being hit. China Film Group had been moving towards an IPO after a long period of restructuring in this pursuit; and for the second time in several years, these plans have been put on hold because of market volatility. Since China Film Group has been one of the biggest Chinese companies engaged with Hollywood, its problems will have a direct impact on other American media companies. Ironically, its involvement with the movie Furious 7 had given them greater clout within Hollywood. Possible financial retrenchment could not come at a more awkward time.

Another potential issue will be the development of large screen theaters in China, and who will control them. IMAX has been busy moving into China by way of its Hong Kong based China IMAX company. However, IMAX has been facing strong competition from the Chinese rival called DMAX. China IMAX is on the Hong Kong market exchange, which is currently faring better than mainland Chinese exchanges, on which DMAX is listed. At the moment, the advantage is tilting toward China IMAX.

However, the real impact of the Chinese market crisis could go far deeper. China has been looking to expand into the American and European media market through cooperative financial ventures with a strategic balance of direct- and co-ownership. Hollywood is primarily focused on expanding into the Chinese box office as well as acquiring Chinese production money for American-controlled productions. As mentioned in some previous blog pieces, these objectives are conflicting.

Now there is the possibility of more direct conflict. Hollywood has persuaded Chinese parties to begin opening more of their market to American movies. Currently 34 American films are allowed to be released in the mainland market. Likewise, China has various elaborate reasons for not allowing movies into the country. (See the recent banning of Despicable Me 2). Add in the low rate of return Hollywood actually get from the Chinese box office-currently about 25% of the gross-and you have two parties talking past each other.

If their stock market bubble continues to deflate, the Chinese will become more restrictive in dealings with American companies. Hollywood will likely become pushier about gaining entry into the Chinese market under the pretense of “helping” with the crisis. Of course, cash flow in Hollywood is often tricky. Mostly, the media industry likes having money coming to them, not the other way around.

So the immediate future promises to be a stark tribute to the old saying about living in interesting times. It is also a good moment for American companies to seek out consultants who might actually know something about the Chinese financial and business scene.

Either way, a major reassessment is about to take place. China’s interest in the Hollywood media market will undoubtedly stay strong, but with more caution and a greater focus on return. Hollywood will continue to run hot for the Chinese market. They will also, most likely, continue to insist that they need a free hand to control production and try to crave out a larger share of distribution profits. A head on collision is seemingly inevitable.

-Dennis Toth Copyright (c) 2015, All Rights Reserved