The holiday season in the west may be over but for the Chinese film industry party time has begun.

Blockbusters in the final weeks of 2010, led by the gangster comedy Let The Bullets Fly, helped China’s annual box-office receipts rise 40 per cent to Rmb10bn ($1.5bn).

The film, starring Chow Yun Fat, earned Rmb453m in its first two weeks when it came out at the end of December, and it continues to sell well.

Film companies expect the hunger for entertainment of China’s growing middle class as well as heavy investment in new cinemas to continue to fuel expansion for years.

China has 5,000 screens, about one-eighth of the US. But the country adds new cinemas at the pace of three screens a day, faster than any other market.

“It will be the world’s largest cinema industry in 10 years or less,” says Tony Adamson, marketing head for DLP, the digital cinema technology arm of Texas Instruments.

“China could have as many as 100,000 screens and it would not be over-screened.”

International companies are piling in.

Imax has raised the number of cinemas planned in China by 15 to 96, and Lotte Cinemas of South Korea is planning to build 30 theatres in the country this year.

The lion’s share of the growth is in smaller cities, some of which do not have any cinemas.

Zhang Baoquan, president of Antaeus Group, a real estate conglomerate which is expanding into film, says he expects cinema construction to spread like wildfire in areas outside the main cities, driven by urbanisation and the increasing availability of digital projection.

“In the US only one-third of all screens are digital so far, but I expect China to be 100 per cent digital by the end of 2011,” Mr Zhang says.

While converting existing cinemas requires sizeable investment, there is no additional cost to equip a new cinema for digital projection.

“The increase in screens raises the average revenues per movie, so you can spend more per film – hire better directors, get better scripts, have better special effects,” says Jiang Yanming, one of China’s leading visual effects producers.

“We will be making better movies.”

Recent releases would suggest that this is happening, at least as far as ticket receipts are concerned.

In 2009, China saw its first locally produced horror film, Painted Skin.

Last year, the country’s audiences were treated to a Chinese “chick flick”, Go Lala Go, a Hollywoodesque romance about a Beijing office girl. It made Rmb124.5m.

Fox released its first Chinese-language movie, Hot Summer Days, which it co-produced with Huayi Brothers, China’s largest studio. The romantic comedy made Rmb125.8m.

“These firsts are indicative of the opportunity,” says Sanford Panitch, president of Fox International Productions.

“For a long time, most Chinese films tended to be period, and now you’re seeing more commercially minded films, clearly in response to a growing middle class audience.”

But there remains a barrier to foreign filmmakers.

The Chinese government, which keeps the industry under strict control in the name of protecting public morals and Chinese culture, has an annual quota of 20 foreign films for distribution by two state-owned companies.

The World Trade Organisation ruled last year that China was breaking its 2001 WTO entry terms and that this restriction must be changed.

However, few in the industry expect the government to take meaningful action to open up the market further, so the only way in for foreign film companies is through co-production with Chinese partners.

The films will continue to be censored for sex and violence because China does not have a film ratings system. They may also be banned for political reasons.

Zhang Xun, president of China Film Cooperation Corporation, the state outlet which supervises co-productions, says CFCC rejected a script from Taiwan about a policeman with mafia ties.

She says: “We absolutely do not encourage such films. The institutions of the state are a force for good in any country. We do not hope to describe China’s police as that ugly. We hope that justice can defeat evil.”

CFCC interfered in Yip Man, a kung fu drama set under Japanese occupation in the 1940s.

“The unity and power of the Chinese when the Japanese invaded – none of that appeared in the original script,” Ms Zhang says.

Some foreign studios find such interference too much to swallow. Joint productions are growing more slowly than the market. According to CFCC, it received 75 applications in 2009 and 90 last year.