Removing smaller online distributors of lottery products from the Chinese market could lead to a healthier industry, says a report from the Beijing office of financial services firm North Square Blue Oak Ltd, a specialist in analysis of public policy in China.
Several mainland China online platforms have – since late last month – suspended sales of lottery products. The platforms affected include those of Tencent Holdings Ltd, Baidu Inc, Alibaba.com Ltd and 500.com Ltd. It followed a notice jointly issued by the Ministry of Finance, Ministry of Civil Affairs and the General Administration of Sports of the People’s Republic of China.
“At this time, there is no further clarity on how long it will take for the lottery investigations to be complete and normal business to be restarted,” said North Square Blue Oak.
The firm, which also has an office in London, says on its website that it is an investment bank regulated by the United Kingdom’s Financial Conduct Authority and with a strong focus on China, “event-driven strategies” and exchange-traded funds, commonly known as ETFs.
Its report on mainland’s lottery market has been made available on the website of DJI Holdings Plc, a U.K.-listed distributor and promoter of sports and welfare lottery products to the Chinese market.
North Square Blue Oak said one of the reasons leading to the suspension was the “illegal online practices” by some online distributors, “which are not registering all of their sales with provincial lottery centres”.
“In cases where the odds of the bettor winning are unlikely, some agents have not registered the sale with a lottery centre in order to keep all profits from the bet,” said the report.
This practice can be rectified through the ongoing investigation into lottery sellers, said the research firm, adding that it can be resolved as some agents are removed from the market.
“Another solution would be to increase minimum capital requirements on the industry to drive out smaller players while accounting for the greater risk assumed by agents,” it added.
North Square Blue Oak also stated that local governments in China are complaining to the central government about lost revenue that they blame on the growth in online sales of lottery products. Currently, all lottery products sold online are linked to a particular province and commission is allocated to the province where the product comes from, rather than where the sale is made.
“We believe the solution to this will be to split revenues more evenly between the provinces,” said North Square Blue Oak, suggesting a greater sharing of the commission that goes to the government fund. That commission, according to the report, amounts to between 25 percent and 30 percent of the lottery ticket price.
“Currently, the government fund revenue is split 50:50 between the central government and the local government who has the authorised product. In the future, the local government in which the consumer resides may also receive some of this government fund,” said the research house.
Combined sales of sports lottery and welfare lottery tickets in mainland China reached RMB382.4 billion (US$61.5 billion) in 2014, an increase of 23.6 percent from the previous year, according to official data.
There is still no official word on when the temporary suspension of online lottery sales will be lifted, but the research firm said the move could strengthen the market.
“We continue to believe that high quality agents that have operated under [within] the law will emerge in a stronger position as smaller players are removed,” said North Square Blue Oak.
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