Regulus Partners examines the Chinese government’s crackdown on offshore gambling and real-money games, fulfilling its wider determination to control consumer behaviour and how CCP actions will impact the sector’s regulatory outcomes across Asia.
China’s nineteenth-century battles with opium are one of the generally lesser-known but more profound undercurrents of modern history. Two wars with Britain were fought and lost, most major ports were ceded to Western powers and a nation became hooked – especially the ‘middle classes’ that had been the engines of impressive Chinese administrative, technological and cultural progress previously (before opium, China wanted only silver in return for its tea, silk and finished goods – the West had little of value to trade).
The vast majority of this opium was provided by British India and was a key component of British imperial economics, which was only ended during the First World War. By that time Imperial China had crumbled, but its nationalist successor state and competing warlords continued to cultivate opium as a source of funds (hence the Golden Triangle) – it took the Communist government to finally grip the situation and largely stamp out the catastrophic addiction that over a century of trade had caused. So when the Chinese government talks about ‘opium for the mind’ it is referring to a backstory of Communist success over Western and capitalist exploitation – not just the dangers to the individual or organised crime that modern trade in opiates causes. This is a backstory much more familiar to Chinese decision-makers and audiences than Western observers – in China this period is known as the ‘Century of Humiliation’. This context matters as a signal to how the Chinese government sees a problem and what policy solutions might be reached for when an explicit public link to opium is made.
We have been following the ramping up of Chinese crackdowns on gambling for some time, especially its recent shift to extra-territorial pressure (especially Cambodia and Philippines) and digital interdiction (advertising, payments, affiliates and junkets, ‘the Great Firewall of China’, state monitoring and a ‘report your neighbour’ system). This has caused significant disruption for affected operators and has led some to reduce their exposure to the country. However, this is a classic whack-a-mole strategy that can severely impact individual operators and the overall growth curve but does little to cut out underlying supply and demand.
China’s latest proposed crackdown expands the squeeze on gambling to domestically available gaming products which have some similar characteristics to gambling – hence fears that Tencent and other online gaming peers may be impacted. Much like the USA and Australia, China is a very large market for social gaming in part due to the lack of domestically regulated digital real money alternatives (especially in terms of upper-cohort revenue generation vs. overall customer footprint). Because some of the consumer and product dynamics of social gaming are clearly dissimilar to real money gambling (lacking either a direct financial consideration or the direct chance of a financial prize), they are often legally available to be played by children, which is the key area of Chinese concern.
This is further evidenced by prosecutors in Beijing initiating a civil lawsuit against a subsidiary of Tencent, saying the ‘youth mode’ on the company’s social messaging app (WeChat) does not comply with laws protecting minors. Referring to gaming products as ‘opium for the mind’ is about as damning and loaded an epithet as Chinese state media can give. While the state news agency was subsequently keen to alleviate potential panic impacting large listed Chinese companies, it is clear that stricter controls are coming.
A tightening of the Chinese social and mobile gaming sector may have only peripheral relevance to the offshore real money sector at first glance, but we see the two as inextricably intertwined. China has seen a surge in digital commerce adoption over the last five years before Covid-19, with 30%+ CAGR leading to a digital retail mix of over 25% in value terms in 2019; Covid-19 disruption has driven this to c. 30% (ie, 25% YoY growth from a relatively high base), with over 40% of consumers now engaging in digital commerce.
China’s online gaming market has largely tracked this. For example, in 2020 Tencent’s online games business grew net revenue by 36% to RMB156bn (US$23bn), including ex-Chinese revenue, with a 71% mobile mix; in 2015 Tencent’s online games revenue was ‘just’ RMB57bn (US$8bn; 30% CAGR). Digital transactions of all types are therefore now uppermost in the minds of the Chinese government – gaming and gambling are a subset of this. As the Chinese gaming and gambling markets move from a domestic niche which looks large because China is big to potentially mainstream products, the Chinese government will do everything possible to control this evolution: online gaming and gambling is no longer under the radar.
Chinese policy seems to be evolving into a three-layer structure:
- Make domestically available products as safe as possible through the lens of government views on harm
- Interdict offshore products by all available means
- Use Chinese regional and potentially global power to squeeze or shut down offshore supply
We would expect each of these layers to be increasingly supported by laws, technical capabilities and enforcement powers. Perhaps more importantly, China’s diplomatic muscle might increasingly be used further afield than its immediate region – to English football, for example, or in Malta (where Chinese investment is growing in scale and leverage, corruption scandals notwithstanding). An important element of Chinese thinking which could have global repercussions is the extent to which offshore businesses are seen as ‘enemies’ rather than just nuisances as the pressure ramps up – this might even put the governments and regulators of larger jurisdictions in the firing line.
In a fight for influence between China and gambling it is hard not to pick an obvious winner in that narrow context whatever broader qualms governments might have (NB, we still see Duterte playing a clever game of poker rather than defending the Philippines’ gambling sector against Chinese pressure on its merits – the more gambling is worth in the Philippines, the more Duterte will need from China to be able to constrain it). Given this context, we would also see the likelihood of China licensing real money gambling in a way that non-domestic commercial operators can easily participate any time soon as slim to nil; even allowing gaming companies to sail closer to gambling products as a half-way-house seems now to be firmly off the agenda. Therefore, while underlying secular growth may remain robust for both digital gaming and offshore digital gambling, the severity of regulation and interdiction is likely to get much worse, in our view.
A final issue which may become important beyond China is the extent to which non-real money gaming is seen as a potentially dangerous and addictive product that requires specific regulation. It was only recently in the UK that labelling high-street roulette in betting shops as the ‘crack cocaine of gambling’ was the beginning of the end of the product (FOBTs / B2) – linking gambling to opiates is simple if also dangerously simplistic policy signal (whatever the historical context). The rise and rise of ‘not gambling’ in jurisdictions that have limited or no domestically available digital real money gambling (eg, Robin Hood in the US) demonstrate the holes that exist in current digital thinking.
There is a tendency in the gambling sector to think that if gamblers cannot access domestically regulated supply then they will turn to the same products in the black market. Increasingly, this too may be dangerously simplistic – social gaming, esports/lootboxes and options trading (spread betting by its global name) are all potentially much more fungible products than the regulated sector often appreciates; even at the entertainment rather than addiction level, Candy Crush has probably had a material if largely unnoticed impact on bingo engagement. Some regulators have taken some steps on some of these dynamics, but progress is patchy and the links are poorly understood.
However, the corollary is that heavy restrictions on real money gambling which push consumers to legal but completely unregulated products that have similar risk characteristics would be as bad an outcome as driving customers to the black market – and it too could be hidden in plain sight. Indeed, ‘not gambling’ products can have the added danger of being less clear about the risks to consumers, regulators and policymakers – ‘gaming’ or ‘investing’ sound a lot softer and/or more sensible than ‘gambling’ – but appearances can be highly deceptive. Again, it is worth reflecting with the relative explosive growth of Robin Hood that participation in ‘spread betting’ has often been associated with elevated levels of problem gambling.
China’s determination to control consumer behaviour and the internet might be specific to its own cultural and constitutional position, but its understanding that whacking the same molehill over and over again is a complete waste of time is worthy of broader consideration, in our view. Retail comes in boxes, and boxes are satisfyingly easy to regulate – digital has already made these boxes almost completely irrelevant to consumer behaviour and where potential harm may be found – including old definitions of what is gambling. Perhaps the biggest thing to be said for domestically regulated online real money gambling is that it does exactly what it says on its digital tin.
Featured article edited by SBC from ‘Winning Post’ Sunday 08 August 2021 (click on the below logo to access a full unedited version)