China?s film industry earned $1.6 billion in 2010 to become one of the largest movie industries in the world. At its current size and pace of growth, the movie industry is the third largest in the world after Hollywood and Japan. Going by the projections of Warner Bros, the Chinese film market is expected to overtake the US market in a decade and become the world?s largest movie market.

One would have expected the fantastic growth in the size of the Chinese film market to have been accompanied by an equally rapid increase in the market share of films ?made in China?. But that is not the case. The biggest successes in China are Hollywood blockbusters. Transformers 3 and Kung Fu Panda 2 earned the most in 2011. Latest offerings from the Pirates of the Caribbean and Harry Potter families were other top successes. The only Chinese movie to feature in the top ten was The Flowers of War, starring noted Hollywood actor Christian Bale, the first mainland movie to cast a leading Hollywood star.

While Hollywood films dominate China?s theatrical market, Indian movies, despite their limited access, are also successful in wooing Chinese audiences. In contrast to the big-bang mega visual effect-based blockbusters from Hollywood, a far more sedate offering like 3 Idiots has been remarkably successful in China. Youku?the Chinese edition of the YouTube?has the Aamir Khan starrer as one of the most popular downloads of the last year.

The success of foreign movies in China underlines the hunger of domestic audiences for globally popular entertainment products. It also reflects the changing tastes and preferences of the domestic audience, particularly the younger generations.

But does the success of foreign movies make a strong case for deregulation of China?s film industry?

China?s film market is tightly regulated with foreign producers and distributors having very limited access to the market. Foreign producers keen on making movies in China require government licences, which are difficult to obtain unless movies are jointly produced with Chinese firms. A cap of 20 foreign films per year makes flow of imported films heavily restricted. The ones finding their way into the market have to go through an elaborate and rigorous censorship. The state-owned China Film Group has a monopoly over film imports. Local distribution of movies is controlled by the China Film Group and the Huaxia Distribution Company. There are also caps on screening time for foreign films in domestic theatres.

Given the entry barriers, only a handful of foreign films reach domestic audiences in local theatres. Off-theatre viewings through DVDs are very common. So are internet video consumptions, particularly through Youku. Broadcast of foreign films and soaps on television is also difficult, given the strict regulation of foreign content aired on domestic television channels. For audiences accustomed to watching movies online, the experience of viewing special effects on big screens is a big temptation. That explains why high ticket prices of Hollywood blockbusters in Beijing and Shanghai (ticket prices can be as much as 50RMB) have not dampened the enthusiasm of movie goers.

Like several other service industries in China, the entertainment industry is a market where foreign producers visualise considerable prospects. Much of the bullishness of Hollywood and European entertainment industries about China is based on the assumption that China will deregulate several of its existing limitations. But will it do so?

Rulings at the WTO have urged China to end its state agency monopoly over import and distribution of films. China, however, is not expected to be affected too much by the WTO?s missives and would, in all likelihood, follow its own calibrated approach in deregulating the industry. Two factors are critical in this respect.

The first is China?s posture towards western culture and its influence on Chinese society. Regulations on foreign content entertainment in China have been influenced by the objective of keeping mainstream western culture at a distance. Though that has not stopped western cultural exports from penetrating China, the perspective regarding a more easy access of western movies and entertainment products into the domestic market probably remains unchanged. This is clear from Chinese President Hu Jintao?s recent concerns on greater westernisation of Chinese culture.

While the above could constrain deregulation, an opposite, but almost equally influential factor could be facilitating it. China is keen on expanding its own cultural influence worldwide. A part of this strategy focuses on obtaining greater access for its own products in world markets, particularly western markets. Chinese domestic film makers are keen on making greater inroads into world markets, particularly now that they have begun a conscious process of brand-building by roping in Hollywood?s acting resources. However, securing market access in world trade is a quid pro quo. Gaining access is usually conditional on granting it. China would need to liberate markets, at least partially at its end, for gaining footholds elsewhere.

Does this mean ?Chammak challo? for Bollywood in China in the not-too-distant future? Could well be.

The author is head (development & programmes) and visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views