Times Staff Writer

A foreign buyer, one of more than 1,000 at this year's American Film Market, was discussing how tastes in his country have grown more adventurous despite a state policy of "No sex, no violence." In fact, he said, the most recent import is the Sylvester Stallone revenge thriller "First Blood."

"We can do some cutting," explained Lu Youngming in stilted English.

Lu represents China, which is attending the market for the first time this year. Its presence also accounted for the market's first diplomatic faux pas. As the Chinese delegation arrived at the Hyatt on Sunset, site of the market, an employee accidentally raised the Taiwanese flag. It was quickly removed when the Chinese balked.

Lu purchased rights to three films during the first few days of the market: "Breakin"' and "Body and Soul" from Cannon Films and Crown International's "Police Women," That put the Chinese representative well ahead of many other buyers.

After five years of booming growth as the world's largest marketplace for English-speaking, independently produced films, the American Film Market has hit hard times.

The numbers are still impressive, however. More than 500 foreign film distributors are being offered theatrical and video rights to 289 films, ranging from the likes of "Cavegirl" and "Zombie Island Massacre"--with Rita Jenrette (ex-wife of ex-Rep. John W. Jenrette Jr. of South Carolina) "as you've never seen her before"--to rarities such as "All of Me" and "Passage to India."

But crowds and deal-making activity at the Hyatt were down dramatically during the first few days of the market, which ends Friday. "It's very quiet," said Keith Walley of Empire International, which constructed a garish display for its upcoming production "Troll" to help lure buyers into the firm's suite. "Companies that aren't willing to compromise (on prices) just aren't selling."

The main culprit is the American dollar, whose strength has decimated the purchasing power of foreign currencies. Buyers who would have bought half a dozen films at the market are picking up two or three, and they're delaying their purchases to obtain the best possible bargain.

The dollar isn't the only problem, however. The appetite for American films overseas has been shrinking steadily since 1980 and only Hollywood-scale hits still succeed, according to market officials. The world videocassette market, which picked up much of the slack for independent films in recent years, finally crested in 1984.

The financial crunch is forcing foreign sales companies into financing, packaging or producing films to generate more revenue. "In order to acquire produce, we're having to make the product," said Michael Goldman, owner of Manson International and president of the American Film Marketing Assn.

One hot spot at the marketplace has been the suites of the largest American seller, Producers Sales Organization. PSO recently merged with the Delphi limited partnership companies and launched a five-year, $350-million slate of films with major stars and directors. Rights to PSO's films-- "9 1/2 Weeks," "Clan of the Cave Bear," the forthcoming "Navigator" and "8 Million Ways to Die"--are selling briskly, according to PSO/Delphi Chairman Mark Damon.

The push toward production inspired one state film bureau to rent a suite at the market for the first time this year.

"We've uncovered several projects that could work in Wyoming," said Bill Lindstrom of the Wyoming Film Office. Wyoming scored its first coup in January: The "Rocky IV" scenes showing Sylvester Stallone training in the Russian wilderness for a battle with the top Soviet boxer will be filmed in Jackson Hole, Lindstrom said.

TOPSY TURVY: Based on its first 48 hours, the current week isn't shaping up as a good one for writers, producers or agents in Hollywood. Or studio executives--especially if you're Frank Yablans.

Executives and producers had laid plans to return to work with writers on film projects this week. But the writers, who were expected to approve a new contract Monday night, instead balked at the latest offer and reawakened the possibility of a damaging strike. For their employers, it's back on hold.

Meanwhile, over at MGM/UA, the long-rumored departure of MGM chief Frank Yablans was suddenly becoming fact. The usual realignments in Hollywood geography will commence as producers, directors, writers and agents who were in business with Yablans scamper for cover elsewhere.

This round of scampering should be less frantic than others, however. Yablans' blunt style had aliented many key players in the film industry. And the ascension in January of Alan Ladd Jr. at reformed United Artists dramatically undercut Yablans' perceived power.

At least one movie in pre-production under Yablans has been left hanging in the wind. "Whereabouts," directed by peter Bogdanovich, was scheduled to start shooting in New York next month.

BOX OFFICE: "Witness" sold $4.5 million worth of tickets last weekend to end "Beverly Hills Cop's" three-month ride as the nation's top-grossing film. "Cop" grossed $4.4 million followed by "The Breakfast Club" with $3.3 million and "the Sure Thing" with $2.9 million.

"Into the Night" moved into wide release with a lukewarm $2.6 million.

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