SHANGHAI • Four of China's leading film executives recently gathered on a Shanghai stage with a bleak message.

"There are 20,000 film and television companies" in China, said Mr Wang Changtian, president of Beijing Enlight Media. "Many aren't making money at the moment, so why are they still here?"

He predicted that thousands will go bankrupt over the next year - a full-on bubble in movie-making, ready to pop.

It is a classic Chinese tale.

Bureaucrats in Beijing decide a favoured industry must become globally competitive. Public and private support soon follows. Companies rush in. Investment surges. But customers never quite materialise. And eventually, the whole thing falls apart.

Like any good Hollywood tale, this saga has a moral - one that should echo far beyond China's all-too-numerous film studios.

On the surface, China's movie market is healthy and growing. Ticket revenue was up 14 per cent last year, aided by Wolf Warrior 2, a patriotic shoot-'em-up that grossed a record US$854 million (S$1.1 billion) domestically. It remains on track to surpass that of the United States in the next few years.

Beneath the surface, though, misguided policy and excessive capital have been setting the stage for disaster.

For years, the Chinese government, hoping to rival Hollywood's "soft power" in global theatres, has tried to prop up China's homegrown movie-makers.

Foreign competition is strictly limited by quotas, while the local industry receives generous support, including cheap real estate for studios and subsidies for theatres that show Chinese films.

As these efforts have intensified, investors have been quick to open their pocketbooks.

Between 2005 and 2015, the number of film-focused private-equity funds in China increased from five to 160.

Inevitably, all that capital led to a lot of content - too much, in fact.

In 2015, only 372 of 686 domestically produced films ever made it into theatres. Those that did get released were helped along by rich ticket subsidies that artificially boosted their box-office hauls.

Worse, far from encouraging filmmakers to produce better movies, all that investment produced a race to the bottom.

China's discerning filmgoers clearly agree.

In 2016, second-quarter boxoffice revenue dropped by 5 per cent over the previous year.

Panicked regulators, hoping to aid ailing theatres, quietly raised the quota on foreign films, allowing four additional Hollywood imports to screen.

Yet even that did not help much - total 2016 revenue grew a mere 3.7 per cent, compared with 49 per cent in 2015.

And as Mr Wang noted, the worst is yet to come. Alibaba Pictures can survive by restructuring; small studios, bereft of new investment, cannot.

A wave of production companies and studios is likely to fold and consolidate in the months ahead, while plenty of ill-timed investments will probably evaporate.

The good news is that regulators have curbed some of the most irrational film-industry practices of recent years - such as ticket subsidies.

That would allow capital to flow to the best ideas and talent, which, in turn, might produce films that people actually want to watch.

In fact, if the government can avoid further meddling in the industry - a big if - China's epic film bubble may yet have a crowdpleasing ending.

BLOOMBERG