Director Lou Ye has been banned from making films in China for five years for submitting an entry for the Cannes festival without government approval.
Lou Ye won the main prize at the Rotterdam Film Festival in 2000
Lou entered romance Summer Palace for competition without clearing it with China's censors, state media reported.
The film, which features explicit sex scenes, takes place around the Tiananmen Square protests in 1989.
Lou said at Cannes in June that he would consider changing the film's content so it could be seen in China.
An official at China's State Administration of Radio, Film and Television confirmed news of the ban to the country's official Xinhua News Agency, but declined to give any further comment.
The news agency reported that the film would be confiscated along with any income made from it.
The producer of Summer Palace, Nai An, has also been banned from film-making for five years.
Summer Palace was the only Asian film which competed for the prestigious Palme D'Or at the film festival in France earlier this year.
Hong Kong media reported at the time that Chinese outlets were banned from reporting Lou Ye's appearance at Cannes.
The 1989 protests in Beijing remain a sensitive issue with the Chinese authorities, who still condemn them as "counter-revolutionary".