Special report: The Chinese puzzle (Part 1)

The lines between legality and reality are often blurred in China, but perhaps no more so than when it comes to the country’s complicated relationship with gambling.

All forms of gambling are expressly prohibited by the ruling Communist Party (the government doesn’t include the lotteries it operates within this definition) but the activity is undoubtedly deeply embedded within Chinese culture, with around 200 million people taking part in some form of gambling each year.

These contradictions are even more pronounced online, where large-scale illegal operations and an extended digital lottery offer has given the country a substantial online market despite the government’s unwillingness to shift the legal status.

“Any bet placed via the internet in the country is illegal,” Harmen Brenninkmeijer, SVP Asia and strategic markets at Inspired Gaming, says, but even by conservative estimates Chinese citizens are nonetheless gambling in excess of Â¥1trn (£102bn) each year, with an increasing percentage of that figure shifting online.

With the government hinting at further regulation and the country’s two gambling enclaves – Hong Kong and Macau – returning billions of pounds a year in revenues, a number of foreign operators and suppliers are beginning to sense opportunities, even if approaches to the market so far have been markedly different.

Playing the lottery

Lotteries remain the only legalised form of gambling in mainland China, with the government operating two primary lottery offerings, the China Welfare Lottery and the China Sports Lottery.

While it doesn’t consider these lotteries to be a form of gambling, the definition of what a lottery actually constitutes has been stretched in recent years by a number of firms which began to offer both online gaming and limited sports betting opportunities through the vertical.

One such firm – Nasdaq-listed sports lottery operator 500.com – enjoyed several years of success before the government curtailed its offer in March. 500.com and other similar operators cut deals with provincial, land-based lottery operators to essentially act as online proxies.

The deals allowed the operators to accept online bets which automatically triggered the provincial operator to print a ticket for the player, the details of which would then be transmitted back to the player. “It wasn’t really illegal but it wasn’t exactly what the government had in mind,” Brenninkmeijer says.

The set-up allowed these online proxies to also introduce some limited sports wagering through the medium, with the China Sports Lottery licensed to offer some betting opportunities on football and basketball.

“Some of these organisations saw a loophole whereby they could sell tickets to customers in the same way Amazon will sell you a saucepan. The ticket might be for Chelsea or Arsenal to win a match at odds of 4/1,” Patrick Jay, a partner at Regulus Partners and former head of trading at the Hong Kong Jockey Club, says.

“This went on for a year or two but the government decided this might not be legal and has currently stopped all such operations.”

Repackaging sports

The change of heart will concern those operators and suppliers that have focused on lottery as a point of entry into the Chinese market. One such firm is Ladbrokes, which entered a joint-venture with Hong Kong-based AGTech in 2007 and launched its first product in China in 2011.

Inspired Gaming supplies Ladbrokes with virtual content in the country, and says that in the face of strict limitations on product offers, finding creative ways to dress up lottery-type products becomes increasingly important.

“We are not looking at virtuals as a sports betting game,” Brenninkmeijer says. “We are looking at it as an interactive lottery game. We are offering games that give people an interactive experience. It is a much nicer experience than just picking numbers.”

Inspired tailors its games to the Chinese market, in part to appeal to users but also because of the rules that relate to pay-out. “The games we offer in China are quite different to the ones we offer elsewhere because the pay-out structure is different,” Brenninkmeijer says.

“If we talk about sports betting games, the average pay-out to the players is 85% to 92%. In China it’s much lower. We operate a game called Lucky Racing in Hunan province with a pay-out of just 59%. It’s a lottery game so it is taxed on turnover. We also have a game derived from football, where players can bet on a combination of six games, and that has a pay-out of 69%.”

Brenninkmeijer says that despite the government crackdown, the country’s online lottery offer should again be extended once authorities are happy it is properly regulated.

Before this year’s crackdown, around 20% of all lottery sales were through online channels. “I would say two or three years down the line mobile lottery will be totally legalised and more games will be available,” Brenninkmeijer says.

“At the moment we are happy with the process in China. Right now it is a small piece of the total but it will increase and be more lucrative going forward. I expect the government will be open to what lotteries can bring. It might not be happening very quickly but it will speed up.”

Part two will be published tomorrow.