The Hong Kong film industry is looking forward to a surge in production activity following the signing of a trade agreement that exempts Hong Kong movies from the mainland's import quota of 20 foreign films a year (Screen Daily, June 26).

The Closer Economic Partnership Arrangement (CEPA), signed by the Hong Kong and Chinese governments on June 29, also lifts some of the restrictions on co-productions between China and Hong Kong.

The proportion of Hong Kong cast and crew members allowed to work on co-production movies has been increased. The requirement that co-productions have to be set on the mainland has also been removed.

The announcement is encouraging many Hong Kong studios to ramp up production.

At present there are only three methods by which Hong Kong-produced movies can be distributed on the mainland. They can be selected as one of the 20 revenue-sharing films that China imports each year, most of which are Hollywood blockbusters; they can be sold for a comparatively low flat fee or they can be set up as a co-production with a mainland film studio. Films produced under the latter scenario are treated as domestic films.

However, the CEPA agreement should result in a wider range of Hong Kong movies gaining access to the mainland market.

"This is a wonderful opportunity for the Hong Kong film industry which in turn will drive development in China," says Film Workshop co-founder Nansun Shi. "There have been many Hong Kong films - including social dramas and our 'cops-and-robbers' films - that have great production values but are too small to qualify as revenue-sharing imports and can't be made as co-productions because they're set in Hong Kong. These can all be imported into China now."

Although Hong Kong film executives are welcoming the agreement as a step in the right direction, they also hope to see other changes in China.

"Censorship is an important issue because there's only two options on the mainland - you're either accepted or rejected," says Tony Shu, executive secretary of the Movie Producers and Distributors Association. "However, we've heard that China may introduce a ratings system with three categories, which is similar to the system used in Hong Kong."

Observers also point out that, while the overall number of Hong Kong imports is set to increase, there are still only two companies authorised to distribute foreign films - China Film Group and its upstart rival Huaxia Film Distribution. As both companies have a busy slate of Hollywood blockbusters, along with commitments to distribute domestic films, the resources left over for Hong Kong movies may be slim.

In addition, the terms on which Hong Kong movies will be distributed remains unclear.

According to Tiedong Zhou, vice president of acquisitions at China Film Import and Export Corporation, China Film will not be obliged to distribute all of the growing numbers of Hong Kong imports on a revenue-sharing basis. "We can either do revenue-sharing or flat sale, according to the quality of specific movies and with due negotiations between China Film and the rights holders," says Zhou.

However, the industry - which has been battling declining box office, particularly during the SARS crisis - is generally optimistic about CEPA.

"Now for the first time we have the opportunity to create a healthy domestic market," says Shi. Apart from the concessions in the area of imports and co-productions, the agreement also permits Hong Kong companies to take a majority stake in joint venture cinemas and audiovisual distributors on the mainland.

Alvin Lam, COO of Universe International Holdings, points out that the quota exemption will encourage Hong Kong, and perhaps even other foreign companies, to invest in mainland cinemas: "In turn, this will increase the demand for good, quality films. And due to the size of the mainland market, the return on production will improve substantially. We believe the future of the Hong Kong film industry is very bright."

Observers also say there's a chance that CEPA could benefit foreign investors looking to access the mainland market as the definition of a "Hong Kong company" has yet to be announced.