Special report: The Chinese puzzle (Part 3)

Catch up on part one and part two of our special report.

SLOW BOAT

Predicting these longer-term prospects for online gambling in China remains a tricky proposition. While financial pressures – particularly the slowdown in the country’s manufacturing sector – have the government searching for alternate revenue streams, how far it is willing to go when it comes to gaming is hard to gauge. While the government made much of the need to diversify its economy in its last five-year plan, a segment of the ruling Communist Party still shares the view of gambling, propagated under Mao, as a “capitalist vice”. And as well as going after illegal operators and criminal gambling rings, in 2012 around 350,000 Chinese citizens were prosecuted for minor gambling offences.

But it is likely that moral concerns will eventually give way to economic imperatives. The government is well aware that the illegal gambling market is worth upwards of 20 times its regulated lottery offer. So the temptation to regulate and tax should ultimately prove too big to turn down. In the meantime, the focus will remain on lottery products. “The government is in the process of re-regulating online gaming and is expected to provide the marketplace with significantly greater clarity on the terms, conditions and permissions required for the sale of lottery products online,” Conforti says, adding that it is unclear exactly when a verdict will be delivered.

This could be a particularly slow process. Jay says the authorities are in no rush and will take a “slowly but surely” approach to any reform, cautious that while the economic case is compelling, there are legal and social welfare issues to consider as well. “What China needs is a nicely run, well-regulated and well-taxed market, which is run by people of good faith and good intentions, not by people in the shadows. These people do a lot of harm, especially when the gaming and betting gets out of hand,” Jay says.

If there were to be an opening up of the gambling market, it is unlikely the government would allow foreign operators to enter uncontested. China has a history of protectionism in the online sector – it moved quickly to block Facebook, Twitter and YouTube to allow domestic alternatives the chance to grow. Even in a best case, full legalisation scenario, major operators would likely need to partner up with local firms to secure a slice of the pie, giving those that already have such agreements, including Ladbrokes and Betsson, an important head start.

Jay says there is a precedent in China’s equity and bond markets to suggest the government would not necessarily commit to the monopoly approach it currently takes to lottery products. He stresses that foreign firms attempting an entry would need to surround themselves with people who understand the market. “Don’t expect to be a millionaire this time next year. Expect that things will go wrong. Forget your Western business practices and act intelligently and maturely,” he says.

Foreign operators should simply be aware of the potential opportunity. China has something of a track record when it comes major policy U-turns, and also knows a thing or two about growing a sector. If or when it moves to regulate its gambling market, it will likely change the face of egaming the world over and no firm will want to miss out.