I've heard this but can't really search for verification. Supposedly this law forces all Chinese videogames to be set in fantasy settings. Nothing in the real world.
If this law exists I argue it should be removed. It's holding their industry back from making any culturally relevant content because nothing can be set in our world, about real lives, people or places. You'll never get a Death Stranding or Metal Gear out of China while it exists. They should untether their industry so it can produce more of cultural relevance.
Can anyone verify?
I sincerely doubt it given that romance of the three kingdoms and journey to the west are both in the real world and involve real people and like twenty of those get made every year.
Wuxia exception as fantasy?