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'm guessing you could make such a MG type game but it would have to almost completely ignore China and East Asian politics.
Maybe a East vs West(PDX abandoned Cold War game) could be allowed if it was stritctly from USSR/China perspective with western enemies but then again the risk you mentioned, why work on a game where you're not even allowed to make somewhat equal or a challenging opponenent.
If you want a USSR sim city i.e a cakewalk "strategy" game, you wouldn't make a grand strategy/political game?