Accused of hiding money, China agrees to new rules in secret Hollywood summit

This story first appeared in the Oct. 16 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

When Xi Jinping made his first major visit to the U.S. in February 2012, as vp of China, the trip culminated in a landmark agreement that opened the Chinese market to more Hollywood-made films (34 titles a year, up from 20) and boosted U.S. distributors' share of box-office revenue in the country. When Xi again arrived stateside Sept. 22, this time as China's president, sources tell THR the MPAA worked to seal a follow-up agreement with China Film Group, the country's powerful state-backed studio. The negotiations were shrouded in secrecy, but a Beijing-based source with knowledge of the discussions says China made two key concessions: an agreement to allow international firms to audit ticket sales at China's rapidly expanding box office, and a plan to increase significantly the number of foreign films allowed into China on what's known as a flat-fee basis.

Read MoreWhy China Is on an L.A. Spending Spree: "It's Just Monopoly Money to Them"

The MPAA declined to confirm or comment on China talks or any new agreements, but the presence of international auditors in the country would be a boon to Hollywood studios, which long have complained about irregularities and occasional fraud at the Chinese box office. In September, China Film Group was caught rigging grosses in favor of a state propaganda picture, The Hundred Regiments Offensive, released to coincide with the 70th anniversary of the end of World War II. CFG issued a set of orders and incentives to Chinese theater chains designed to boost the movie's performance, which resulted in theaters reallocating revenue from competing films -; notably Paramount's Terminator: Genisys, believed to have lost as much as $11 million due to money siphoned away from it. Sources close to Furious 7's high-profile summer release in China have told THR that China Film Distribution reported to Universal that the film grossed nearly $30 million less than outside agency estimates ($390.9 million, according to Box Office Mojo). Universal and Paramount declined comment.

The new auditing policy is expected to take effect Jan. 1. Which international parties will be allowed to carry out the oversight -; KPMG, Deloitte or PwC would make the wish list -; is not clear. What sources say is clear is that the irregularities around Terminator: Genisys gave the MPAA a strong hand at the negotiating table.

Read MoreAcademy Museum Delayed as Costs Grow

The second proposal discussed in the lead-up to the MPAA-CFG agreement -; the expansion of China's quota for films imported on a flat-fee basis -; could be a game-changer for indie and international studios. Currently, foreign films enter the China market by competing for one of the 34 revenue-sharing release slots -; all but five or six of which go to Hollywood tentpoles each year -; or they are sold for a flat fee to a Chinese distributor. Although the quota for flat-fee films has been vague, China has allowed 30 to 40 such titles into the country each of the past few years.

One THR source says CFG now has agreed to allow a potentially unlimited number of films into the market via flat fees -; possibly as early as Jan. 1 -; as long as the China Film Bureau gets final say on which companies are given permission to import.

"They may require companies to distribute a certain number of domestic films in order to get import permits," says the source, adding that CFG representatives have returned to the U.S. to continue negotiating the issue with the MPAA.

Read MoreWarner Bros., China Media Capital Unveil Joint Venture ???to Produce Chinese-Language Tentpoles