China saw video game revenues grow by more than a third in 2012 to nearly $14 billion last year, but console makers are likely to face an uphill battle for market share in a country where a whole generation has grown up without a PlayStation, Xbox or Wii and where free PC and mobile games dominate.
The absence of consoles has left PC games with almost two-thirds of the market, according to data released at the annual China games industry conference in December.
The data also showed browser gaming accounted for just over 15 percent and mobile gaming was nearly 14 percent.
"If Sony and Microsoft want to expand in China they need to think of changing their business model, and study the success of Internet gaming market providers where games are free but they charge money from operating games," said Roger Sheng, research director at tech research firm Gartner.
China had banned games consoles in 2000, citing their adverse effect on the mental health of its youth.
The government's top decision-making authority, the State Council, said the suspension of the ban permits "foreign-invested enterprises" to make game consoles within Shanghai's free trade zone and sell them in China after inspection by cultural departments.
The statement, posted on the council's website on Monday, did not give more details and officials were not available to clarify the ruling, or say how long the suspension would last.
Caution on consoles
The video game sector has been battered globally by the proliferation of free games on mobile devices and PCs, as well as on social networking sites.
In China, the most popular video games are often free to play, with gamers only paying for add-ons such as weapons or extra lives.
For console makers seeking to expand in China, price may be a problem.
According to Hong Kong-based brokerage CLSA, more than 70 percent of Chinese gamers earn less than 4,000 yuan ($634) a month.
The new Xbox One sells for nearly $500 in the United States, while Sony's PlayStation 4 goes for just shy of $400.
New games for each console cost around $60.
Yang Anqi, a 23-year-old student at Beijing's Renmin University has been playing video games for more than a decade.
"To purchase a game at 200 or 300 yuan ($33 or $50) is unbearable or unthinkable for a normal player like me," said Mr Anqi.
Nintendo, which makes the Wii consoles, told Reuters the ruling changed little from when China's government said in September last year that it planned to lift the ban.
"We are still not sure exactly what we will be able to do in Shanghai, and thereafter in Greater China," said Yasuhiro Minagawa, Nintendo's Japan-based public relations manager.
"Both with hardware and software, there are many things we have to look into and so we can't say anything concrete."
Sony also sounded a note of caution.
Satoshi Najakima, spokesman for Sony Computer Entertainment, the unit of Sony responsible for the PlayStation console business, said they will continue to study the possibility.
"We do recognise that China is a promising market."
Microsoft was not immediately available to comment.
In September, the U.S. company formed a joint-venture with China's BesTV New Media Co Ltd and invested $237 million in "family games and related services".
Another possible hurdle for Microsoft, Sony and Nintendo is the availability, albeit illegally, of consoles at places like Beijing's bustling Zhongguancun tech emporium, where the customers tend to be foreigners more accustomed to the devices.
Unlike their international counterparts, the consoles available in China are modified to run pirated games, which sell for around $1 or can be downloaded onto a disc at home.
Games consoles have been made in China for export for many years, with Foxconn, the trading name of Hon Hai Precision Industry Co, making the devices for Sony, Nintendo and Microsoft.