The Chinese Gambling Market Vs. US Gambling Market: What Investors Need To Know

Online and sports gambling has been a booming industry in the U.S. in 2020, generating some big returns for investors of DraftKings Inc. (NASDAQ: DKNG) and Penn National Gaming Inc.(NASDAQ: PENN).

In China, regulations on gambling are much tighter than in the U.S., and China has recently begun cracking down on a massive illegal online gambling business.

Gambling In China: In the U.S., gambling is legal nationwide as long as no bets are placed across state lines and there are no state laws prohibiting it.

Related Link: Analyst Says DraftKings Trades At 'Big Premium' To Other Growth Stocks

In China, all forms of gambling are illegal and have been since 1949. Yet there are certain specific exceptions to those laws.

First, casino gambling is legal in Macau, a Special Administrative Region of China that was under the  control of Portugal until 1999. There are only six companies with permits to operate casinos in Macau, including Wynn Resorts, Ltd. (NASDAQ: WYNN), Las Vegas Sands Corp. (NYSE: LVS) and MGM Resorts International (NYSE: MGM).

The other exception is the Chinese lottery. The Chinese government-approved Welfare Lottery allows Chinese gamblers to buy tickets at local shops and potentially hit large jackpots, similar to state lotteries in the U.S.

The China Sports Lottery allows Chinese gamblers to bet on international soccer, basketball and baseball games. Together these two lotteries generated $60.1 billion in revenue in 2019.

The illegality of online gambling in China was clarified in a 2005 ruling by China’s Supreme Court and the People’s Procuratorate.

In addition to both casino and online gambling being illegal in mainland China, the ruling also emphasized that it is illegal to collect fees to recruit Chinese citizens to gamble overseas.

This ruling essentially barred junkets that recruit VIP gamblers to take them to foreign casinos. The recruitment laws are at the center of a recent crackdown on Australian casino operator Crown Resorts.

Black Market Gambling: The coronavirus pandemic has led to explosive growth in U.S. online gambling, and China has reportedly seen a similar surge in illegal online gambling.

China recently launched investigations into more than 8,800 illegal cross-border gambling cases and arrested more than 60,000 people allegedly tied to these operations. The crackdown also included 1,700 online gambling platforms and 1,400 banks that were allegedly involved with $151 billion in illegal gambling transactions, according to the Chinese Ministry of Public Security. The total dollar amount of these illegal transactions is reportedly up from just $2.7 billion in 2019.

The illegal gambling boom reportedly implicated large Chinese tech companies as well, according to a report from the news outlet Caixin. Illegal gambling sites reportedly marketed their businesses on platforms owned by Tencent Holdings ADR (Pink: TCEHY) and Baidu Inc (NASDAQ: BIDU). Payments were processed via Tencent’s WeChat Pay and Alibaba Group Holding Ltd - ADR (NYSE: BABA) affiliate AliPay. Money was reportedly laundered via fake merchants operating on Pinduoduo Inc - ADR (NASDAQ: PDD).

Benzinga’s Take: Given the market’s massive size and growth prospects, it’s understandable why so many U.S. companies are making China part of their long-term financial plan. However, China has recently made it crystal clear to its citizens that it doesn’t plan on easing tight restrictions on gambling anytime soon, and it is no longer willing to look the other way on hundreds of billions of dollars in illegal online gambling.

Both online gambling and recruitment of gamblers to overseas casinos are banned in mainland China, essentially walling off the nation to any American gaming company that isn’t one of the six Macau casino license holders, and taking China out of the equation for U.S. online gambling leaders.