Developers lured by the huge potential rewards of the world's largest online games market of China will face increasing challenges as the market value approaches $1bn, analysts have warned in a recent report.

China's games market is predicted to become the world's largest, as the number of online players increases from 30 million now to between 60 and 80 million by 2010.

Broadband connections in the country of 1.2 billion people are increasing at a rate of almost 30 per cent per year.

Smaller games firms are particularly at risk as the competition intensifies. "The non-public players with a single hit in the market face a number of challenges in terms of business model and scale," said Deutsche Bank analyst William Bao Bean. 

"It is likely that a couple more gaming companies can enter the survivors' circle for a while, but smaller players face the same challenges as those that have raised money in the public markets without the benefit of the cash balance. "

Recent market data shows how smaller firms are being squeezed, even as the market expands.

The combined share of China's top three online games operators reached 64 per cent in the first half of 2006, up from 51 per cent in the first half of 2005, according to data from Beijing-based research consultancy Analysys International.