While the inaugural Entertainment Expo looks set toreinforce the local film industry's international status, it takes placeduring a difficult chapter in the evolution of Hong Kong cinema.

Production levels haverecently shrunk to record lows as producers opt for fewer but bigger-budgetproductions and the industry faces a fresh onslaught from new forms of piracy.

Alarming statistics suggestthat illegal downloading is already rampant in Hong Kong and its major exportmarket, mainland China.

Hong Kong producers also appear to be torn in two directionsas they attempt to win back international territories and establish their placein the wider pan-Asian film market.

Over the past five years, Hong Kong filmmakers have played acrucial role in shaping the pan-Asian industry with films such as The Eye and Threeseries and Hong Kong-Korean co-production Windstruck playing strongly across the region.

Indeed, the pan-Asian market currently seems to be thrivingwith stars from Hong Kong, Korea and Japan proving time and again that they candraw audiences in each other's territories.

But Hong Kong has found the temptation to also look inwardto the vast China hinterland is just too strong. Some producers believe that itis impossible to serve both the Chinese and pan-Asian markets because of hugedifferences in censorship regimes and audience expectations. So far, onlymartial arts-based period films, such as House Of Flying Daggers and Kung-fu Hustle, have hit the mark both in China and the rest ofAsia.

Despite its limitations, Hong Kong producers bet heavily onChina last year but found the market is still too immature to support anythingapart from large-scale "event" films.

As a result, most companies have scaled back small tomid-sized production and are focusing on bigger-budget films that have thepotential to play both in China and international markets.

Upcoming films in this bracket include Stanley Tong'sUS$20m action adventure The Myth,starring Jackie Chan; Tsui Hark's US$18m wuxia epic Seven Swords; Peter Chan's US$10m musical PerhapsLove, starring China's Zhou Xun andTakeshi Kaneshiro, and on a slightly smaller scale, Stanley Kwan's US$5mhistorical epic Everlasting Regret.

In addition, Hero andFlying Daggers producer Bill Kongis currently putting together a big-budget biopic of martial arts legend FokYuanjia, to be directed by Ronny Yu and star Jet Li.

But this doesn't mean that quirky or potentiallycontroversial films - the sort that are unlikely to pass muster with mainlandcensors - have disappeared altogether. Johnnie To isn't counting on theChina market for his uncompromising triad drama Election. And Asia's arthouse directors can still tappan-Asian and Western sources of finance without giving a second thought toChina.

Case in point is Pen-ek Ratanaruang's InvisibleWaves which was filming last week in HongKong and Macau. The US$2m film noir demonstrates the level of collaborationthat the Asian film industry can achieve, even if China isn't included inthe mix. Combining cast and crew from Thailand, Hong Kong, Japan and Korea, thefilm is co-financed by Fortissimo Films, Hong Kong star Andy Lau's FocusFilms, Korea's CJ Entertainment, Thailand's Dedicate andItaly's Faruk Alatan.

However directors such asJohnnie To and Ratanaruang are always likely to find an audience among die-hardfans, particularly if they stay within a certain budget limit. The big test forthe Hong Kong film industry is how the crop of big-budget films currently inproduction will perform over the summer.

Easter releases such as the latest film in The Eye series, The Eye Infinity, and Stephen Fung's HouseOf Fury are expected to set the pace.

Over the summer, the industry's hopes are pinned onMedia Asia's US$12m car racing drama Initial D, which receives a wide pan-Asian release at the endof June, Seven Swords, whichopens across the region at the end of July, and Perhaps Love, which is scheduled for August.