Gambling and Lotteries in China

Gambling

Gambling is strictly prohibited in the People’s Republic of China (“China”, or PRC), from which ‒ solely for the purposes of the article ‒ Hong Kong, Macau and Taiwan are excluded. In China, activities related to gambling are subject to administrative penalties and even criminal liability in serious cases.

No substantial regulatory developments have occurred during the past year with regard to gambling in China. However, the competent authorities (especially the Ministry of Public Security) have tightened enforcement over new types of gambling such as online gambling and cross-border gambling. Any type of gaming that could develop into gambling is also strictly restricted.

In contrast to lawful gaming, games that involve gambling (eg, fishing games) usually have the following characteristics:

• there tends to be a two-way channel for exchanging cash for in-game “virtual currencies” or props;
• they contain a function module for drawing benefits or winnings from the game; and
• the game operator provides services such as:
1. trading or exchanging game points; or
2. exchanging cash or products in a disguised form (eg, virtual currencies).

The competent authorities may deem games to constitute gambling if they involve funds above a certain threshold (such as RMB300 in Beijing).

Lotteries

In China, lotteries are licensed by the government and operating lotteries is subject to a strict access system. The sale of lottery tickets online without permission is prohibited, according to the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2022).

The regulation of lotteries has long remained governed by administrative regulations and departmental rules. As yet, no laws have been adopted to establish a licensing system for lotteries. If a market-based mechanism is introduced for the operation and sale of lottery tickets in the future, it is clear that the relevant licences will be extremely valuable and follow-up compliance supervision will become more important.

Gaming in China

Overview

The gaming market in China has been full of surprises and challenges – as well as opportunities – in 2021 and 2022.

Chinese companies’ gaming revenues declined by 19.13% on an annual basis to RMB59.7 billion in the third quarter of 2022, according to Chinese data firm CNG. The decrease can be attributed to several factors, including:

• deteriorating economic outlook (resulting in fewer active players and tighter spending); and
• tightened regulations, such as:
1. the months-long suspension on the approval of game publication licences;
2. time constraints imposed on minors; and
3. tighter restrictions on game content.

Nonetheless, the following positive trends have emerged during the past year.

Overseas

Amid growth slowdown and regulatory uncertainties, Chinese gaming companies have been eager to expand into overseas markets, including mature markets (such as US, Japan and South Korea) and emerging markets (such as Southeast Asia, the Middle East and South America). These companies have achieved considerable success despite new modes of competition and substantial cultural challenges.

Esports

In recent years the Chinese government has supported the development of the esports industry, as evidenced by the recognition of esports as an official medal event at the 2022 Asian Games in Hangzhou. China also excels when it comes to esports revenue, esports tournament viewing figures and the number of active esports players.

Metaverse

With technological innovations such as 5G, virtual reality and AI, the concept of the metaverse is booming. Chinese tech giants have been developing the underlying technologies and metaverse applications, thereby shedding new light on the traditional gaming business.

Intellectual property operation

The Chinese gaming industry focuses more on the creation and exploitation of high-quality game-related IP. Top gaming companies in China have been developing many derivative products based on game IP, such as film and television dramas, murder mystery games (jubensha), blind box toys, and clothing.

Intellectual property rights protection

The Chinese gaming industry increasingly values IP protection. Game companies are more inclined to seek enforcement of their IP rights and to claim high monetary compensation for infringement, partly as a result of the adoption of punitive damages against malicious infringers in recent cases.

Gaming industry market access

In recent years, the gaming industry in China has seen no substantial progress with regard to supervision and market access. Since the repeal of the Interim Measures for the Administration of Online Games in 2019, China’s Ministry of Culture and Tourism has not updated rules governing the overall operation of online games.

Dynamic supervision is mainly reflected in the relevant required licences and ISBN numbers. Game operators are required to obtain different licences and certificates depending on the content of their services, which sets restrictions on the top-level ownership structure of game operators, including the permissibility of foreign investment.

Relevant policy adjustments will affect the barriers faced by game operators trying to enter the gaming market in China. In order to offer online games in China, for example, most operators must first obtain a “value-added telecommunications business licence” and have a registered business scope that includes the operation of online games. Up until now, these licences have not been granted to applicants who have more than 50% foreign ownership.

Since 2021, Chinese law has imposed more obligations on game operators, such as real-name authentication and restrictions on minors’ game time. This sets a higher standard and has made it more difficult for game operators to enter the market. Game operators have also encountered great difficulties in China’s capital markets. According to public market information, there are few gaming operators who have successfully completed IPOs in the A-share market, which reflects the increased tightening of supervision in the gaming industry.

Video game publication licence (banhao)

In China, game operators must obtain a publication licence (banhao) for each game from the National Press and Publication Administration (NPPA) before such game may be launched and operated. Game operators must first submit an application for a publication licence to the provincial publication administration, which – upon the examination and verification at the provincial level – will be submitted to the NPPA for final approval.

According to the Provisions on the Administration of Online Publishing Services, a game operator that fails to obtain a publication licence for its online game before operation will face the closure of gaming websites, confiscation of devices, and/or payment of an administrative penalty equal to no more than five times the illegal income. The game operator may also bear civil or criminal liability if such operation constitutes infringement or criminal offence.

In April 2022, the NPPA resumed granting new publication licences following a lengthy suspension that began in July 2021. The current publication licence approval process has demonstrated the following trends.

• The NPPA granted publication licences to 314 new titles between April and October 2022. This is significantly fewer than the number granted before the suspension, which suggests stricter approval standards.
• The NPPA has nonetheless published five lists of approved new titles in six months, thereby indicating the normalisation of licence granting.
• Most new titles are mobile games, whereas very few are computer games, browser games and games designed for game consoles.

Recently, the NPPA has piloted the devolution of licence-granting powers to certain provincial administrations in Beijing, Shanghai, Guangdong Province and Jiangsu Province. This move suggests that the approval process may be accelerated and simplified.

In the Opinions on Promoting High-Quality Development of Outbound Cultural Trade (“Opinions on Outbound Cultural Trade”), which was published by the Ministry of Commerce and 26 other Chinese authorities in July 2022, the government outlined plans to optimise the approval process for online games by expanding the adoption of pilot approval procedures at the provincial level and experimenting with supervision during and after the operation of games. In June 2022, 16 new games approved by NPPA were marked as “pilot” for the first time, showing that the pilot approval process has been implemented in practice. Reportedly, the pilot approval procedure mainly applies to those large-scale online games operated and published by entities within the pilot provinces.

Game content limitations

It is noted that the following types of games meet the publication licence approval standards and are therefore more likely to be approved:

• games that publicise traditional Chinese culture or are in traditional Chinese style;
• games that promote Chinese revolutionary themes, in line with the political and cultural policies of the Chinese government; and
• games with educational features.

By contrast, games containing the following content are unlikely to be approved by the publication administration:

• gambling – if a game contains a lucky draw of treasure chests, weapons, characters or skins, the publication administration will scrutinise the play mode, the number of draws per player, disclosure of the chance of winning, etc;
• drugs, prostitution, erotica, violence, blood, etc;
• themes inconsistent with the law and social values (eg, massacres, Doomsday and superstition);
• themes inconsistent with traditional moral values (eg, homosexuality and underage marriage); and
• distorted interpretations of history, historical characters or traditional literature.

Protection of minors in online gaming

China has always treated the protection of minors as a top priority when regulating online games. With the promulgation of several important legislative and administrative documents, the past year has witnessed another round of policy tightening that further strengthens online gaming providers’ obligations to protect minors.

• In June 2021, the newly amended Law of the PRC on the Protection of Minors came into effect, which ‒ for the first time – stipulates in law the compulsory implementation of real-name authentication and time restrictions for minors in online games.
• In September 2021, the Notice by the National Press and Publication Administration of Further Imposing Strict Administrative Measures to Prevent Minors from Becoming Addicted to Online Games imposed the “strictest-ever” anti-addiction regulations, which include:
1. restricting minor players’ game time to only three hours each week; and
2. expressly prohibiting the anonymous “visitor experience mode” without going through real-name authentication.
• In October 2021, the Ministry of Education, together with several other authorities, published the Notice on Further Strengthening the Management of Preventing Primary and Secondary School Students from Being Addicted to Online Games, which urges online gaming companies to strengthen content review and eliminate harmful content that may:
1. cause unsafe, unethical, illegal or even criminal behaviour; or
2. contain terror, violence, pornography, vulgarity or superstition.
• In March 2022, the Cyberspace Administration of China released the Regulations on the Online Protection of Minors (Draft for Comment), which propose more “prevention and intervention” obligations on game operators, such as:
1. installing “youth mode” and parental supervision mechanisms;
2. limiting minor players’ in-game spending;
3. adopting necessary measures to authenticate the true identity of players; and
4. displaying age-appropriateness rating labels.

Although these draft regulations have not come into effect, they exemplify the increasingly heavy regulations for minor protection.

Policy support for Chinese gaming companies to “go abroad”

While regulatory uncertainties may make for a grim home market, top-level and local policy support for gaming companies to “go abroad” continues in 2022.

As part of the broader national “cultural export” strategy, games are regarded as the most suitable medium to promote Chinese culture and values worldwide. The Opinions on Outbound Cultural Trade emphasises the cultivation of competitive advantage through exporting online games, as well as the development of processing trade within comprehensive free trade zones ‒ for example, the printing, translation, dubbing, editing and post-production for games produced outside China.

Some Chinese cities also support the development of the gaming industry at a local level. Shenzhen, for instance, launched the Action Plan for Fostering Digital Creative Industrial Clusters (2022‒25) (“Action Plan”), which proposes to:

• strengthen business co-operation and the exchange of talents with Hong Kong and Macao in the field of gaming; and
• export Shenzhen’s creative digital products and services to the international market through Hong Kong and Macao trade channels.

The Action Plan highlights the importance of the gaming industry and encourages gaming companies to both create and produce original game products and IP, as well as tap into overseas markets.

Intellectual property operation and gaming industry derivatives

As the impact of the COVID-19 pandemic made itself felt, many game operators began to expand their businesses into related industries, such as game livestreaming, esports, murder mystery games, and blind box toys. While such industries have become increasingly popular and lucrative, they have also attracted attention from regulators in recent years.

Game livestreaming

Since 2022, the game livestreaming industry has undergone increasing regulation. On 12 April 2022, the National Radio and Television Administration and the Publicity Department of the Communist Party of China’s Central Committee issued the Notice on Strengthening the Management of Game Livestreaming on Online Audiovisual Platforms. This ordered the administrations in Beijing, Shanghai, Guangdong Province and Hubei Province to increase the supervision of game livestreaming carried out by platforms, game operators and game influencers.

The issuance of this notice indicates that stricter control and law enforcement are being imposed on game livestreaming. The notice prohibits the livestreaming of any games that have not been approved by the Chinese authorities ‒ ie, any games for which a publication licence has not been obtained. This has heavily impacted the livestreaming of unlicensed overseas games on many platforms.

Esports

Different levels of Chinese government have seen the great economic potential in esports and are competing to establish a local esports hub by introducing encouraging policies in 2022. Several Measures on the Construction of International Esports City in Shenzhen (Draft for Comment), published in September 2022, stipulates financing policies for qualified esports enterprises, competitors, clubs and competition, and encourages the establishment of industry alliances and standards.

Meanwhile, the regional administrations find it challenging to promote esports under the generally stricter supervision of video games, especially when it comes to limitations on the playing hours of minors (who have been essential for professional competitions). Since the beginning of 2022, numerous official Chinese government media have been criticising the chaotic state of the esports industry and voicing concerns about false competition, mudslinging between fans of competitors, gambling activities, security concerns at esports hotels, etc. The specific regulation of esports is therefore foreseeable and worth observing further.

Murder mystery games

Murder mystery games are a popular role-playing activity, operated offline in stores or through web pages and mobile applications. Murder mystery games are usually considered a derivative of the gaming industry.

Murder mystery game applications have undergone systematic regulation in 2022. The Administration of Press and Publication of Fujian Province issued a guiding document in January 2022, pursuant to which online murder mystery games applications are classified and regulated as online games, indicating that most murder mystery game apps may face the compliance risk of operating without a publication licence.

Similarly, many Android app stores have taken down a series of murder mystery game apps since the beginning of 2022. The OPPO app store released its Updated Rules on Approval of Murder Mystery Game Apps in February 2020, which explicitly classifies murder mystery game apps as online games that must have a publication licence and functions such as real-name authentication, anti-addiction messages, age-appropriateness reminders, etc.

Blind box toys

In China, it is common for blind box toys to be used to exploit game IP. In 2022, the Chinese administrative authorities established systematic regulation over the blind box toy industry in response to current issues such as excessive marketing, false advertising, counterfeit and shoddy products, and difficulties in after-sale protection.

• In January 2022, the Shanghai Municipal Administration for Market Regulation issued the Guidelines for Shanghai Blind Box Operation Compliance. These are the first domestic guidelines for blind box toy operations compliance and put forward a series of compliance standards for sale prices, extraction rules and guarantee mechanisms, etc.
• In August 2022, the National Administration of Market Regulation released the Guidelines for the Regulation of Blind Box Business Activities (for Trial Implementation) (Draft for Comment), which lists numerous compliance standards such as:
1. no gambling activities disguised as blind box toys;
2. reasonable and transparent pricing;
3. disclosure of key information; and
4. no backstage manipulation that changes the extraction results.

These moves have set forth the basic regulatory direction for the blind box toy industry nationwide.

Judicial developments

In recent years, with the official implementation of the Civil Code of the PRC and the newly amended Copyright Law of the PRC, the protection of IP rights in game-related cases has been further enhanced. High compensation awards and the application of punitive damages have become more common in IP rights infringement cases. In addition, the Chinese courts have shown an inclination towards protecting right owners’ interests against unconventional acts of infringement via the unfair competition law system and other paths.

Gradual application of punitive damages

The Civil Code of the PRC stipulates the general rules for punitive damages for IP rights. However, the Trademark Law of the PRC and the Copyright Law of the PRC further specify that punitive damages may apply to serious and malicious infringement, and the total compensation may amount to between one and five times’ the right holder’s losses, the infringer’s illegal profits, or the royalties obtained from the licensing right. An increasing number of cases have resulted in punitive damages recently – for example, the Guangzhou Internet Court imposed punitive damages of four times' the baseline figure in a copyright infringement case earlier this year (2022).

Increasingly high compensation awarded in infringement cases

Compensation awards have been increasing for game-related infringement cases, especially those involving overall or game content infringement. When it comes to determining compensation, courts will generally consider:

• the overall profits of the defendant;
• the contribution rate of the infringing materials to the game as a whole; and
• the malice of the defendant.

The courts then try to determine damages that are proportional to the profits of the infringement in order to deter the infringement. In 2021, for example,  the Higher Court of Guangdong ordered compensation of more than RMB25 million in China's first case of First Person Shooter map “skin-changing” infringement ((2020) Yue Min Zhong No 763).

New types of infringement cases in the gaming industry

In recent years, apart from the traditional game content infringement, many new types of game-related infringements have emerged, including:

• infringement caused by cloud platforms and game simulators;
• fraudulent use of other games’ ISBN numbers;
• game-boosting services;
• use of plug-in programs; and
• other “grey and black market” activities.

Chinese courts have been more flexible when it comes to accepting cases and taking action against such unconventional acts of infringement. At the end of 2021, Shanghai Pudong People’s Court issued a “pre-litigation injunction” against the operators of an application engaged in providing game-boosting services to minors ((2021) Hu 0115 Xingbao No 1).

In past few years, the gaming industry in China has faced ups and downs. The gaming industry is recognised as an essential part of China’s culture-building and export strategy that is supported by the Chinese government. The heavy regulation and legislative changes may present some challenges; however, the pilot approval procedure for publication licences, the maturing of the judicial system, and an increasing awareness of IP operation and protection all offer the promise of some great opportunities for well-prepared players in the gaming industry.