Lights, Camera...China?

Some of the most popular movies coming out of Hollywood in recent years have been altered by censors' demands -- officials of the Peoples' Republic of China, who demanded changes in return for access to that country's huge and increasingly lucrative market.

The name of the main villain in 2013's Iron Man 3 was changed from The Mandarin to avoiding offending Chinese sensibilities. That same year when World War Z was adapted for film from the novel of the same name, the origin of the zombie virus was changed from China.

These types of demands were nothing new. The previous year Men In Black 3 removed Asian-American characters because they were revealed to be aliens in disguise. The remake of the 1980s cult-favorite Red Dawn had to undergo digital alternations to switch the identity of the foreign invaders from Chinese to North Korean. In 2007 Pirates of the Carribean: At World's End, the actor Chun Yow Fat was edited out, because displaying a Chinese pirate wasn't considered acceptable to the film industry's government overseers. In Mission Impossible: 3 from 2006, the producers had to remove a brief scene where laundry could be seen drying outside -- an image objectionable to the Chinese government because it highlighted that most Chinese citizens could not afford washers and dryers.

These examples illustrate the extent to which Chinese censors go to make sure Hollywood casts their country in the best light possible. 

But new worries about Chinese attempts to censor Hollywood are being raised by a wave of investment from that country into the U.S., including the movie industry and other media.

That includes Dalian Wanda Group's purchase of the Legendary Entertainment movie studio, its 49% stake in Paramount Pictures and its purchases of the two largest U.S. movie chains AMC Entertainment Holdings  (AMC) and Carmike Cinemas (CKEC) . Hunan TV's stake in Lions Gate (LGF) raised those concerns as well. Adding TV production to U.S. media interests, Dalian Wanda on Friday sealed a deal to buy So You Think You Can Dance maker Dick Clark Productions for $1 billion.

The prospect of Chinese officials holding sway over what American audiences see has set off alarms in Washington. Lawmakers and some lobbyists have called on their colleagues and for government watchdogs to examine whether Chinese investment in U.S. media companies poses a threat to free speech here.

Citing the investments of Dalian Wanda and others, Rep. John Culberson, R-Texas, last month warned there is "a growing number of troubling examples of how agents of the Chinese Communist Party are exerting control of American movie content, both through direct ownership of studios and distribution as well as through coerced cooperation with the Chinese censorship agency." Culberson, chairman of the House Commerce, Justice, Science and NASA Appropriations Subcommittee, called on the Department of Justice to examine whether foreign buyers of U.S. media companies should be required to register as foreign agents.

The Foreign Agents Registration Act was enacted in 1938 to address concerns about Soviet and Nazi propaganda in the U.S. Culberson argues that the law has been weakened with "carve-outs and exemptions" for a number of activities by foreign governments. Culberson last month asked the Department of Justice to implement 14 recommendations issued by the DOJ's Inspector General in September to improve compliance with registration requirements and track the activities of registrants.

In that vein, the Government Accountability Office, the watchdog unit of Congress, said it will examine whether the Committee on Foreign Investment in the U.S. has the necessary authority to keep up with efforts by state-owned firms in China and other countries to buy a broad range of assets in this country.

Cfius is the Treasury Department-led panel charged with reviewing acquisition of U.S. assets by foreign buyers. The GAO disclosed its plans in a Sept. 30 letter to lawmakers. The request for the GAO study was made by a group of lawmakers led by Rep. Robert Pittenger, R-N.C., chairman of the Congressional Task Force on Terrorism and Unconventional Warfare and vice chairman of the Bipartisan Task Force to Investigate Terrorism Financing, who outlined his concerns in an interview with The Deal.

Pittenger has been part of vocal minority in Congress that has called on Cfius to expand beyond its traditional boundaries, which have been limited to blocking only those deals that would give potential adversaries access to military technology or facilities or to critical infrastructure such as the electric and telecommunications grids. They also want Cfius to consider whether allowing foreign owners, particularly potential rivals such as China, to gain control of companies in sectors that are economic drivers such as semiconductors, financial exchanges and transportation also raises national security concerns worthy of blocking some of them.

"We need to be looking at investments other than critical infrastructure—China has made investments ranging from the Chicago Stock Exchange to semiconductor technology," Pittenger said. "There is a real danger. On Sept. 28 the Pentagon warned against using Lenovo laptops on the Defense Department network."

Pittenger noted that is isn't just a group of conservative Republicans raising questions about China's broad holdings in the U.S. His request for the GAO study drew Democratic supporters, and the U.S. Economic Review Commission, a congressionally chartered panel, has issued its own report raising doubts about the wisdom of allowing unbridled investment by economic, and possibly military, rivals.

Although the Cfius review process was formalized following a political uproar over Dubai Port's attempt to acquire to buy a major U.S. port operator in 2006, Pittenger said there's been no comprehensive look at what investments should be scrutinized since Cfius was created in the 1975.

"Since 2010 Chinese investment here has gone from $2 billion to $20 billion a year," he said. "The issues today are much broader than they were when President Ford formed it."

Instrumental in keeping the issue before lawmakers and the press has been the the Center for American Security, an advocacy group by conservative lobbyist Richard Berman. He is also president of Berman and Co., his Washington public affairs firm.

Berman said he isn't pushing to ban Chinese investment, only to make it more transparent and to make sure media and other important investments are scrutinized. Berman said he is less concerned about the kinds of alterations that make a film more appealing to the lucrative Chinese audience, which now accounts for 20% of Hollywood's box office take. (In 2014 American movies grossed nearly $2 billion in China out of their total $10.5 billion global revenue.) His real concern is preventing the Chinese government from having a say in what Americans see.

"I understand the business rationale of appealing to Chinese audiences, I'm more concerned about potential for exposure to a foreign government's propaganda."

Even those who have represented Chinese investors here acknowledge that it's reasonable for the U.S. government to apply more scrutiny to inbound investment.

If one looks at the military doctrine of the Russian Federation, [which derives from that of the former Soviet Union,] information warfare is central to their statecraft," said Mario Mancuso, a Kirkland & Ellis LLP partner who represents clients before Cfius. "Information is also explicitly central to China's concept of 'Comprehensive National Power.' I'm not suggesting that buying a movie studio is a precursor for a disinformation campaign, but it's not prima facie unreasonable for a national security regulator like Cfius to ask these questions."

He predicted that the eventual GAO report on Cfius's authority will be closely watched. "Typically, no one outside of Congress pays much attention to GAO reports. But this may be one of the few that leads to something."

The appeal of both Donald Trump and Bernie Sanders in this year's election highlights the deep anxiety many have about the impact of free trade and open investment. "Even after the Dubai Ports debate there was a consensus on the importance of the United States' integration into the global economy," Mancuso said. "That has been declared U.S. policy for decades across presidential administrations. Now that consensus is being called into serious question by large parts of the electorate. Today, around 40% of population thinks it has no 'equity' in the current system."

Notes Mancuso: "Whoever is the next President, one thing will remain true: Donald Trump and Bernie Sanders supporters aren't going away.  People are anxious about their futures and a global landscape in flux. China seems ascendant, and Russia acts with only a modicum of restraint."

EDITOR'S NOTE: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.

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