New dealer

After falling heavily in debt a few years ago, Hong Kong financial services company Rex Capital decided to gamble its way out of trouble – in a manner of speaking.

The company turned around its fortunes in the poorly regulated Chinese lottery market, becoming a hugely successful lottery services provider that netted more than US$40 million in 2007.

Now, with a solid network in place in almost every province, operations in Shenzhen and Beijing and a joint venture with one of the largest lottery players in the world, the company appears set to play a leading role in the development of a market poised to skyrocket.

Reluctant to talk

"There are other companies that are not as focused," said Ip Mun Lam, who handles public relations for Rex Capital.

The company itself turned down an interview request, with Ip saying executives are more interested in talking to investors and analysts than the media. This reluctance is perhaps understandable given the sensitive nature of the Chinese lottery market.

Lotteries generally operate on licenses granted by provincial governments, with central government agencies overseeing the distribution of funds. But their existence is a touchy subject and based on gray legal foundations. A new law expected this year could eliminate much of the legal uncertainty, but it could also render old networks and licenses null and void.

The move toward better regulation is seen as part of efforts to limit any potential for abuse, corruption or social unrest, while eliminating confusion.

The first foreign investor in China’s sports lottery market, UK-based Betex, invested more than US$7 million to run lotteries in Hebei and Guizhou provinces. Soon after, two of Betex’s local staff were arrested and another went on the run, accused of trying to defraud the company and selling underground tickets.

Betex shares plummeted and two company executives resigned, fearing they would be arrested on returning to China.

"If you’re too successful, it becomes an issue. If you don’t make any money, it’s a problem for the company. If you make too much money, it becomes a social issue," said Tony Tong, a director at PacificNet, which develops video lottery products in Hong Kong.

As things stand today, it is difficult to tell who regulates lotteries.

Take the China Welfare Lottery: The Ministry of Finance drafts regulations on the lottery market and how revenues are used, while the Ministry of Civil Affairs controls the China Welfare Lottery Distribution and Management Center. It, in turn, is responsible for nationwide sales and entities approved by provincial or local governments. There are lottery management centers in every province, city and county to oversee the local business. These centers can sub-contract lottery sales to firms and individuals.

Place your bets

In December, the government asked industry players for input on how to streamline rules, but little detail has emerged on its conclusions. Under the draft law, licensing power would shift from the provinces to Beijing, which may make the regulatory waters easier to negotiate.

At other levels, the government has sent out mixed signals. Chongqing upgraded its video lottery terminals (VLTs) last year and payouts were increased to 65%. But last January, the regulators suspended internet lotteries in response to widespread fraud, and set limits on bets.

Andrew Gellatly, editor of London-based Gambling Compliance, calls China the new frontier of the global lottery industry. While annual per capita spending of about US$2 is miniscule – it is more than US$200 in developed markets – state media reported that total lottery sales in 2007 topped US$14.6 billion.

For Beijing, there is a considerable upside in turning the market into a legitimate concern. Lottery revenues fund everything from sports facilities to health care. Ultimately, established companies may have a lot to gain if they can stay on the right side of the new law.

"They want to make it more difficult, but the goal is to regulate the market and not crush it," said PacificNet’s Tong.