Bright Prospects for Chinese Culture Industry Investment

10 September 2012

The Cultural Industry Promotion Plan (Promotion Plan) issued by China’s State Council on July 2009 focuses on promoting the culture industry, such as cultural creation, film production, publication, printing, advertisement, entertainment and performing arts, cultural exhibitions, digital content and animation. This is the first culture industry plan to be released on the national level and has been in effect for two years since publication. However, although the culture market has experienced continued growth under the stimulus of the Promotion Plan and other related polices, many wellfinanced investors still remain cautious.

Finding projects for investment within the Chinese culture market is no easy task in the eyes of venture capitalists. Many cultural market projects lack uniqueness and creativity, limiting forecasts for profit and competitive edge. Certain entrepreneurs with strong creativity are able to produce business models that meet market demand, but as related Chinese laws and regulations often lag behind market changes, regulatory authorities generally tend to lean towards conservatism. Creative business models thus often fall within the grey space of Chinese laws and regulations, making it difficult for venture capitalists to assess the risk involved in such projects. This issue is even more apparent when dealing with digital content projects.

Foreign investment in the Chinese culture market is also limited by foreign access rules. Publishing, film production, internet value-added services and other industries are closed off to foreign direct investment. However, the Chinese government actively encourages state-owned and private capital investment into the Chinese culture market, providing various discount policies and establishing special industry funds to offer support. Foreign investors cannot take advantage of these discount policies for Chinese stateowned and private capital, and can only invest in peripheral industries (such as technology research and development or service enterprises). Foreign investors have the option of going through complicated transaction structures (such as variable interest equity (VIE) structures used by overseas listing companies) to take advantage of rapidly growing opportunities for profit.

However, such complicated investment procedures that deliberately evince Chinese foreign access rules not only create higher expenses and tax burden, but also run the risk of provoking the Chinese government. In the past, Chinese internet enterprises have also used VIE structures to seek financing and be listed on foreign stock markets. However, as a safety precaution these companies have invested large amounts of time and capital to restructure in order to eliminate the potential negative impact of VIE structures under the current Chinese legal and regulatory environment.

It is difficult for investors to assess whether investment in the Chinese culture market can yield a reasonable profit or offer safe exit plans. The market bubble has increased investors’ investment costs, and with listing as an exit mechanism, the current global economic slump has made listing increasingly difficult both abroad and in China. With statistics released by the China Securities Regulatory Commission (CSRC) in June 2012 as an example, 112 companies had been approved by the CSRC but not yet listed on the market, including companies that were approved as early as 2008 and have still not been able to go public.

Although the present development of the Chinese culture industry is admittedly determined by “government direction,” “local image projects” and other special circumstances, this also proves that investment projects in the culture industry are particularly valued by local governments, evidenced by the promotion of various discount policies across the nation. Compared to traditional industries, the still nascent Chinese culture industry has great potential and room for dynamic development. Investors may only need to sit back for some time to see how the market further matures.

Run Ming Law Office

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