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The proposed total advertising ban pitted anti-smoking advocates and the health ministry, which blames cigarettes for causing one million deaths in China a year, against the State Tobacco Monopoly Administration.
So far the tobacco monopoly has won, with China's largely rubberstamp parliament, the National People's Congress, retaining a partial ban after discussions last week.
The administration controls 98 percent of China's vast cigarette market. It wields extraordinary power because it provides an estimated 7-10 percent of government revenues in China - as much as 816 billion yuan ($132.87 billion) in 2013.
State news agency Xinhua reported on Saturday that Chinese lawmakers had called for a complete ban on tobacco advertisements during discussions on amendments to the 20-year-old Advertisement Law, including all media and public venues.
However, five sources have told Reuters that, before the bill was submitted to the parliament, the state tobacco monopoly managed to remove a complete ban and block efforts to reintroduce it despite the health ministry's backing, demonstrating the power that it wields in Beijing.
With more than 300 million smokers, that is not surprising. China faces a smoking-related health crisis but cigarettes are part of the social fabric, and more than half of Chinese smokers buy them at less than 5 yuan, or about 80 U.S. cents, a pack.
One said the tobacco monopoly, through its parent the Ministry of Industry and Information Technology, blocked efforts to reintroduce a full advertising ban in the draft bill passed at a cabinet meeting in June.
Another source confirmed there was disagreement among the ministries over the advertising ban during the closed-door session.
The June meeting was chaired by Premier Li Keqiang, whose younger brother, Li Keming, has served as a deputy head of the tobacco monopoly since 2003.
The watered-down rules will likely take effect by the end of this year after they are passed by the parliament, sources said.
The state tobacco monopoly and the health ministry did not respond to requests for comment. China's tobacco monopoly has previously blocked other measures such as the introduction of graphic warnings on cigarette packages.
Studies show that partial advertising bans have little effect on reducing smoking rates.
While agreeing to prohibit more forms of tobacco advertising, the bill stops well short of the full ban advocated by the health ministry. The draft includes a limited list of restrictions such as in public transport venues, electronic publications, libraries and parks, according to Xinhua.
Excluded from the ban, however, will be promotional activities such as cigarette product launches, and tobacco sponsorship for sporting events and schools - despite the World Health Organization urging China to implement a comprehensive ban on tobacco advertising, promotion and sponsorship, according to the five sources involved in the lawmaking process.
"Resistance to the advertising law amendment mainly came from tobacco stakeholders, especially the tobacco industry," said Jiang Yuan, deputy director of Tobacco Control Office of the state-run Chinese Centre for Disease Control and Prevention, who advises lawmakers.
Since 2008, the tobacco monopoly has argued against amendments suggested by lawmakers by saying that rules should "suit China's national conditions", one of the sources said.
It has also argued that cigarettes should be given "reasonable space for promotion" because they are legal products and that tobacco advertising should be "restricted, not banned".
In 2007, a deputy director at the monopoly said demand for tobacco was very large, and that a crackdown on tobacco use would affect China's social stability.
Under the current law, tobacco advertising is prohibited on radio, film, television, newspapers and magazines, and in public areas such as theatres and sports arenas. Billboards promoting cigarettes can still be seen along Chinese roads and, despite restrictions, tobacco ads are on websites, television, newspapers, and on the side of football fields.
Tobacco marketing even targets schools. Some primary schools are named after tobacco industry donors, mostly local branches of the tobacco monopoly, with slogans on campus walls such as "tobacco helps you become a useful person".