The documentary The Sinking of the Lisbon Maru tells the story of an incident in the East China Sea that left more than 800 British and Canadian prisoners of war dead.
It had been selected by China as its entry for the best international feature prize at the Oscars, but on Monday it was deemed ineligible.
The competition's rules state that a film in that category must have "a predominantly (more than 50%) non-English dialogue track".
Fang Li, the director, said the film was selected by China's official committee without his knowledge. "I didn't know the rules at all," he added.
The documentary, which is a surprise hit in China, tells the story of a Japanese ship that was used to transport 1,816 British and Canadian prisoners from Hong Kong to Japan during the second world war. In October 1942, as the unmarked vessel was sailing through the East China Sea, it was torpedoed by the US navy.
Hundreds of prisoners drowned or were shot by Japanese troops as they tried to escape. But more than 300 were rescued by Chinese fishing boats who spotted the smoke and debris from an archipelago on China's east coast. Sadly, most of the 300 were later recaptured by the Japanese.
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