China's booming film industry could provide huge returns to venture capitalists, funds and other investors, but the market is still in its infancy and it'sstill not clearin which areas to invest.

These were some ofthe messages to emerge at a seminar at the Shanghai International Film Festival (SIFF) on Monday about the influx of capital into the Chinese movie business.

Panelists including filmmakers Bill Kong and Peter Ho-sun Chan - along with representatives from venture capital firms and prominent investment bankers such as CICC president Levin Zhu - discussed changes in China's film market that are making it more attractive to the financial sector.

Sequoia Capital China became one of the first venture capital firms to back a Chinese film studio, when it invested in Beijing-based Polybona last year. ButSequoia China'sfounder and co-president Neil Shen warned that the risks in China's movie market are still huge.

'A film studio should not be different to a dotcom - you examine the team, the business model and the market size - but in China the film market is still small,' said Shen. 'Also the value chain is not clear - cinemas in second and third tier cities are being transformed into internet bars.'

His comments highlighted one of the major problems for investors when assessing the film industry in mainland China. Box office is booming - revenues grew by 45% to more than $245m (RMB1bn) in the first quarter of this year - but it's not clear that theatrical will remain the dominant distribution channel.

As China is still under-screened, many local film companies have switched their focus, or increased their investment, in cinema builds. Ren Zhonglun, president of Shanghai Film Group which operates one of China's biggest circuits, observed that cinemas are a good investment as they're not as expensive as blockbuster moviesand quickly generate cash.

But panelists also observed that while China now has 3,500 cinema screens, most of the country's youth are packed into its 130,000 licensed internet cafes, where they spend hours playing online games.

Indeed, while firms such as Sequoia have taken the plunge into the movie business, China's internet businesses still absorb most of its venture capital. Video-sharing web-site Tudou.com recently raised $57m from investors including IDG, Granite Global Ventures and General Catalyst.

However, IDG executive vice president Hugo Shong argued that internet cafes should be viewed as an opportunityfor the film industry. 'Content owners should be working towards revenue-sharing contracts with the online platforms - they can help the business rather than pose a threat.'

China Film Group's outspoken chairman Han Sanping said he believed that online platforms will replace the DVD market in China, with films moving directly from cinemas to the 'net. 'The current revenue of the internet market is not big but the growth rate is 300%,' said Han (in comparison, box office growth is around 20-30%). 'But we need to make 'net players abide by the rules.'

Earlier in the discussion, Han said that the Chinese government is considering support for the cultural industries - including tax incentives and fund matching - although 'now that market forces have been introduced, the capital markets need to play a greater role'. He also spoke of the need to develop China's post-production expertise and develop ancillary markets.

Peter Chan said the film market needs to move away from its reliance on big-budget films as they can't recoup at the domestic box office. 'In order to achieve box office of RMB100m we need investment muchgreater than that,' said Chan. 'The future of the China market depends on lowering the costs of production.'

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