China's fast-growing online lottery sector is likely to face a radical reshuffle after regulators tightened their grip on the yet-unregulated industry.
In a rare move, the Ministry of Finance, along with seven other ministries and government agencies, issued a joint announcement last Friday saying it planned to ban unauthorized online lottery sales.
The ministry pointed to "rampant irregularities" in online lottery sales and said that organisations have been offering services without official authorisation.
According to a statement, some Internet companies have even sold fraudulent lottery tickets. The official notice has led to a complete halt in online lottery sales in China as Internet companies suspended activities awaiting further policy clarification.
China has two State-run lotteries: the China Sports Lottery and China Welfare Lottery. The Ministry of Finance previously approved two companies, 500.com Ltd and China Sports Lottery Operation Co Ltd, to engage in online lottery sales under a pilot programme.
The government notice reiterated that any entity or institution without the approval of the Ministry of Finance should not engage in online lottery sales.
Industry sources suggest there could be as many as 400 Internet companies reportedly involved in online lottery sales, generating more than 85 billion yuan ($13.8 billion) in revenue, accounting for 22 per cent of total national lottery sales.
Su Guojing, founder of the China Lottery Industry Salon, a quasi-industry association, said the rapidly growing online lottery sector is in urgent need of official legislation and regulation.
The current regulations lack a clear and detailed mechanism, creating many loopholes for Internet companies and local lottery sales centres to manipulate, Su said.
"The latest government statement signals a major reform of the lottery administrative system may be on the way," he said.
There is speculation that the government may consider setting up a separate government agency or a regulatory body to supervise the lottery sector.
The sector is currently jointly regulated by three government departments: the Ministry of Finance, the Ministry of Civil Affairs and the General Administration of Sport.
But the wording of the statement shows the government's attitude toward the Internet lottery sector remains cautious, Su said.
"The opening up of the industry will only be very limited and there won't be a complete market relaxation," he said.
Analysts said that as Friday's statement also involved the Ministry of Public Securities, the People's Bank of China and the China Banking Regulatory Commission, it highlighted the government also intended to target the criminal activities and finanicial irregularities involved in online lottery sales.
The lottery industry is also awaiting the result of an overall audit launched by the central government into local lottery centres in 18 provinces.
The audit caught the industry by surprise and it may uncover serious problems and corruption by lottery officials involving illegal management of the lottery fund, industry experts said. While it is unclear when online lottery businesses will be allowed to resume, most Internet companies remain positive about the business prospects.
Analysts said the impact of the suspension will be limited on the e-commerce industry as a whole, as online lotteries actually contribute a very insignificant portion of the revenues of major Internet companies such as Alibaba Group Holding Ltd and Tencent Holdings Ltd.