In January Beijing launched a new crackdown on gambling, with a spate of high profile arrests and sieges of underground casinos. However, the government now seems interested in taming and channelling the betting instinct, rather than eradicating it. Moves towards legalisation of gambling may also bring more transparency to the distribution of funds from the multi-billion dollar state lotteries. Matt Perrement investigates the current state of play.

"I go every week," says my taxi driver as we set off for the racetrack at Hong Kong's Happy Valley. The radio is blaring news from the track and the evening paper on the dashboard is open at the racing section. This is a common passion among cabbies in Hong Kong, where there are three race meets a week. Today's midweek card is affected by rain and the normally large crowds will be low, my driver says. He is right, but several thousand devotees still turn out.

Back on the mainland, my cab driver has to ask directions nine times before we reach the Beijing Jockey Club in Shunyi, where the flat season recently resumed with fortnightly cards of 8-10 races. There are less than 200 spectators, but regulars say crowds used to be much bigger before a 2004 tightening of the ban on gambling dampened the sport's appeal. Twenty closed betting terminals, with notices stating that identity cards must be produced for wins over CNY 5,000, are evidence that business was once brisker.

Most gambling in the capital is informal, family entertainment, with stakes of one yuan for a game of mahjong, according to my cabbie, who also spends ten yuan each week on lottery tickets.

However, national press reports complain of the damages inflicted on China's economy by misappropriation of public funds for illegal betting rings. Estimates put annual losses to the public purse at CNY 600 million (USD 72 million).

Gambling revenues also tell a story. Turnover at Hong Kong's two race courses totaled USD 8.9 billion in 2002/03. The Hong Kong Tourism Board website, recommending a trip to the races, proudly announces that the territory has the world's highest betting turnover per race.

UN sources place Hong Kong as number eight in a 2002 global league table of per capita expenditure on gambling: USD 1,650 per person per year. This is double the UK spend, 60% higher than the US, but 30% lower than Japan where gambling is acknowledged as a significant social problem. Macao, where the gambling industry provides 90% of government revenues, has the second highest per capita spend in the world: an astronomical USD 22,600 - much of it doubtless actually spent by Hong Kong and mainland China visitors.

Recorded per capita betting on the mainland is among the lowest in the world - a mere CNY 6 (US 70 cents), although averages in rich cities such as Beijing and Shanghai are 4-10 times higher. The state lottery takes the lion's share of recorded spending (although lottery tickets are not officially counted as 'gambling'), and by 2001 lottery tickets had come to account for 0.4% of total, national consumer expenditure. What is not known is how much money changes hands on the black gaming market, in backstreet mahjong parlours and underground casinos.

The national Welfare Lottery was launched in 1987, and a Sports Lottery was added in 1994. By 2003, their cumulative gross sales had reached CNY 175.8 billion (USD 21.3 billion.) Growth has been particularly striking since the mid-1990s rising from CNY 8 billion in 1998 to CNY 40 billion in 2003. The following year saw a dip in sales, following a series of scandals over fake tickets and allegedly fixed draws; but public confidence now appears to be restored, with sales totaling CNY 18 billion during the first quarter alone.

Dr. (Ms.) Wang Xuehong, Executive Director of the China Centre for Lottery Studies at Beijing University, puts the current recovery down to the withdrawal of lottery instants (scratch-cards) and the low ebb of the stock market, which hit a six-year low shortly after the May Day holiday. Many very small Chinese investors 'play' the Chinese stock market, in some cases trading handfuls of shares several times a day in the hope of a few yuan profit; so badly performing stocks are likely to send those in search of a winning streak back to the lottery. Dr. Wang forecasts lottery sales well in excess of CNY 50 billion by the end of the year.

But the gaming industry, overseen by the Ministry of Finance, remains very narrow. The Shunyi race-track is one of the biggest international standard clubs in Asia, and it has government permission to develop racing as a major business. At present, horse breeding is the focus of that business because the lotteries remain the only legal form of gambling. But legalisation of pari-mutuel gambling would surely see crowds return to Shunyi where, before the crackdown last year, betting went on as a quasi-legal 'prediction skill test.'

Asked if legalisation is a possibility, Dr. Wang, whose Centre feeds directly into policy debate, was brief, but emphatic: "Definitely."

She goes on to explain that the gaming industry has in fact been legal since 1987 when the Welfare Lottery was first introduced, but stresses the virtues of incremental reform. "The industry needs to grow soundly and healthily," she says, adding that "legalization of different games will happen one by one" and will include pari-mutuel and casino gambling.

But careful terminology will be a key to acceptance of any new legislation, with 'lottery' being the term of choice for most forms of gaming.

Dr. Wang shows me two slot-machines manufactured by Spielo. Having seen Chinese press photos of similar machines being smashed up in Haidian District, I am surprised to learn that one of the machines carrying the name 'Video Lottery' is considered legal. The same machine, with all the same functions but omitting the word 'lottery' from the title, would end up in pieces or in a police compound.

Timescales for reform are, however, not clear. Dr. Wang estimates around five to ten years but the process is being slowed by the weight of conservative opinion. Some legislators such as National People's Congress Deupty, Luo Yifeng, are calling for the criminal law to be expanded to include gambling on the Internet and gambling outside the Chinese mainland, and for the introduction of heavier penalties. The current criminal law, which dates back to 1979, sets a maximum punishment of a three-year jail sentence.

Better Operation, Fairer Distribution

Alongside the move to legalisation, structural reform of the lotteries is also expected. Government currently acts both as regulator and operator, but Dr. Wang considers that has led to a lack of professionalism. She is hoping to see foreign companies enter the market to strengthen and has already been approached by American, Australian and French operators.

"Government will continue to monopolise the market through licensing or other means, but will not be the operator" according to Dr Wang, who expects a tender process to open up opportunities to private and foreign operators. This aspect of reform seems well advanced, with Premier Wen Jiabao giving notice shortly before May Day that changes to the licensing system should be expected.

The separation of roles should solve other problems. Dr. Wang complains that the dual regulator-operator role has made profit, rather than social welfare causes, the main goal of government agencies.

Currently, social causes are supposed to receive 35% from the sale of each two yuan lottery ticket, but the distribution has proved contentious. Operators decide where and how lottery monies will be spent, guided by broad overall principles of 'helping the vulnerable,' including the elderly, poor and disabled. But Dr. Wang notes that "Money has been misused hugely," drawing attention to the large cars and plush buildings, especially at provincial level, sported by the Civil Affairs and Sports Departments who run the lotteries.

Spokespeople at the Ministry of Civil Affairs could only offer a very general picture of how resources are distributed: half of what Civil Affairs receive, they say, is channelled directly into central budgets, and the rest retained for specific projects. But from a 2003 budget of CNY 12 billion (USD 1.46 billion), officials could give details of just two grant awards: CNY 30,000 to a blind persons massage centre and an education scholarship for one individual.

Dr. Wang hopes that an independent distributor will eventually be set up, leading to a fairer and more transparent system for distributing funds.

Meanwhile…keep on cracking down

Meanwhile, pending reforms to legalise and regulate gambling, traditional crackdowns continue on its illegal forms. Efforts in the latest campaign have focused on border regions, a magnet for corrupt government officials, with the campaign claiming success. Reports are that 82 casinos in North Korea, Vietnam, Burma and Russia have been forced to shut down because of a lack of Chinese customers. Recent campaigns have even involved mobilisation of the Peoples Liberation Army to seal off a Burmese 'casino-city' on the Xischuangbanna border.

Li Shubiao, a Hunanese official, faces trial for embezzling CHY 120 million (USD 14.5 million) to play in Macao's casinos, whilst Cai Haowen, a Jilin official was recently handed a 17-year jail sentence for embezzling CHY 3.18 million (USD 385,000) to fund gambling trips abroad.

In Hong Kong pathological gambling is dealt with more sensitively. The Hong Kong Jockey Club itself takes a leading role in raising awareness. Brochures carrying the slogan 'Don't gamble your life away' are readily available from its high-street HQ. These offer basic guidance and signpost gamblers towards counseling services provided through hotlines and drop-in centres.

Dr. Wang is critical of punitive approaches that can force casinos deeper underground, and deeper into criminal violence. Gang-leaders in Hainan are reported to been involved in small arms dealing, and linked to murders. An Access Asia report claims that 50 illegal casinos operate in China with police protection.

Other, less visible social costs associated with gambling include divorce, debt, theft, homelessness and even suicide. To generate a stronger evidence-base, Dr. Wang's Centre is hoping to investigate the social impacts of gambling through a national-level research project. It also plans to open a 'treatment centre' and hotline for gambling addicts.

The Centre was established in 2002, and now offers a Masters of Public Administration course with a specific focus on the gaming industry.

The establishment of the Centre itself suggests a change in government priorities and legalisation certainly seems to be in the pipeline. While the Ministry of Finance concerns itself with the business mechanics, less thought appears yet to have been given to governance structures for fair and useful revenue distribution, and to social support for problem gamblers. But, come what may, China seems to be gearing up for a new gambling era.