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China lifts ban on foreign consoles

China has temporarily lifted its 14-year-old ban on foreign-made game consoles, opening up a hugely lucrative market to gaming giants such as Sony, Microsoft and Nintendo.

The relaxation Tuesday by China's State Council, which originally flagged the idea last year, permits "foreign invested enterprises" to manufacture games consoles within Shanghai's free trade zone and sell them in the world's second-largest economy.

But the products would still be subject to inspection, the Chinese government said, and the games are likely to remain under strict censorship.

China originally banned foreign consoles in 2000 citing concerns that violent games could have a detrimental effect on the mental health of young people. Instead, gamers have been brought up on a diet of PC games which makes up two thirds of the revenues generated in the country's gaming market. Nonetheless, despite the prohibition, games consoles have been on the illegal "grey market" for years – often at a deep discount.

(Read more: Is the video game industry finally rebounding?)

Big opportunity for console makers?

The liberalisation of the laws could pave the way for major players to gain a foothold in the Chinese gaming markets, which raked in revenues of around $14 billion in 2013, up 38 percent from the previous year, according to China's game industry body. The U.S. gaming industry brings in double this at $38 billion.

Chris Morris | CNBC

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"We recognise that China is a promising market and we are studying the possibilities in it, but at the moment there are no concrete plans," a spokesperson for Sony Computer Entertainment told CNBC on the phone.

Microsoft and Nintendo were not immediately available for comment.

Uphill battle ahead

But these companies are likely to face an uphill battle to establish dominance in China.

The video game sector has taken a hit globally in recent years as mobile gaming, which offers free games, has eaten in to the market share of big consoles.

China's internet café culture, where gamers can play PC and web-based games for cheap, has been dominant in a country where more than 70 percent of Chinese gamers earn less than 4,000 yuan ($634) a month, according to Hong Kong-based brokerage CLSA.

The proliferation of the grey market and PC-based gaming culture, as well as the high prices that are likely to be charged for consoles, will prove a tough headwind for companies to adapt to, according to analysts.

"In a games market so focused on free-to-play and online, and where pirated console games are sold for pennies, the returns in this market may be far smaller than hoped," Heloise Thomson, gaming analyst at Enders Analysis, told CNBC in a phone interview.

(Read more: Grand Theft Auto V shoots video game sales to recovery)

"Trying to sell expensive hardware and software to consumers where the free-to-play model is the traditional norm will not be an easy sell; it's hard enough to sell this model in the European and North American markets."

Game producers will also have to adapt to the tastes of the Chinese market, and adhere to government guidelines. Hollywood blockbusters have been modified in the past and plot lines enhanced for a Chinese audience and this is something that could be seen with games, Thomson said.

—By CNBC's Arjun Kharpal: Follow him on Twitter @ArjunKharpal

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