In spite of the substantial liberalization of China’s film industry, it is still highly regulated and protected from foreign competition through a series of policy measures. In the midst of pushing both liberalization and protectionism, Chinese firms tend to exploit favorable government policies and avoid restrictive regulations through alternative options to maximize profits. Most preceding studies emphasized the liberalization efforts by the Chinese government as a significant contribution to the film industry, while neglecting the response and strategies of Chinese filmmakers that have upgraded their overall competitiveness. Therefore, this paper aims to examine the government-firm interplay and their influences on the enhanced competitive advantages of Chinese filmmakers and the film industry, by utilizing the theoretical framework of the ABCD model to demonstrate this interaction. Based on the comprehensive analysis of both Chinese achievements and remaining challenges, this study further provides useful policy implications for improving China’s film industry.