In a smoky, strobe-lit nightclub in south Shanghai, Meng Fanyu strides out on stage wearing a theatrical get-up of top hat, bow tie and black eyeliner. To the delight of a roaring crowd and their waiting smartphones, he strips down to just black underwear and suspenders to the rousing soundtrack of Nina Simone’s Feeling Good.

But this is no underground club. This is the final in the Mr Gay China competition, a franchise from the international pageant Mr Gay World, and Meng has just been voted as China’s first ever Mr Gay.

Crowd displays LGBT flag at Mr Gay China final. Photograph: Helen Roxburgh/The Guardian

Tall, tattooed and striking, the 27-year-old won by a landslide. The four-week competition has been a rather raunchy beauty pageant; a continual catwalk of muscly, well-groomed men in tiny underwear concealing “props” such as bananas, condoms and even cartons of milk. As a dance teacher Meng says he isn’t afraid to peel his clothes off on-stage in the name of the gay community.

“Something like this event is a great platform to raise awareness of the LGBT community,” he says, still looking slightly stunned at having won. “Many people don’t really know what LGBT is, and coming out can still be difficult, so you really have to prove yourself to be an upstanding person.”

A previous attempt to hold the competition in 2010 was shut down by the authorities, but in 2016 the event met with zero resistance. Kate Sun, from organisers Tontou, says they have avoided censure by focusing on core values of “being healthy, positive and energetic”, even offering free HIV tests at the club. “This competition has no links to politics; we just focus on creating fun events,” she adds.

The LGBT community is slowly gaining acceptance in China, especially in cosmopolitan Shanghai, which hosted its eighth Pride festival last month. But the situation is complex – for many a gay club is still the only place they can express their sexuality. Even among the Mr Gay China candidates, surprisingly few are out.

“It’s very hard to do this in China,” says one candidate. Another adds: “I will never tell my parents that I’m gay. I’m their whole life – I don’t want to let them down.”

A survey of those registered with the country’s largest gay dating app, Blued – which has 27 million users – suggested less than 5% were visibly out.

Meng Fanyu (centre), winner of the first ever Mr Gay China, surrounded by his co-finalists. Photograph: Helen Roxburgh/The Guardian

“Here in China many companies are starting to see LGBT people as a new market opportunity, without feeling obliged to invest in their welfare,” says Steven Paul Bielinski, founder of China based non-profit platform WorkForLGBT. “Whereas just a few years ago anything related to LGBT was viewed as potentially destabilising, the growing number of firms targeting the Pink Market today is something much more understandable to officialdom. Now it’s become a business issue – and business is something the government understands.”

When it transgresses from a business issue, activists face tightening restrictions. Filmmaker Fan Popo sued the government in 2015 after his film Mama Rainbow was removed from online sites. “In recent years the gay community has developed a lot on an economic level, but on a human rights level there has not been much improvement,” he says. Campaigners also face restriction under new NGO laws.

New state guidelines list homosexuality as an example of “immoral” content, alongside extramarital affairs and incest. Programmes to fall foul of the rules include the hugely popular internet TV show Addicted, which revolved around a gay relationship between two teenage boys.

Regardless of official sanctions, support for LGBT people among China’s younger generations is growing.

There were huge outpourings of sympathy from netizens for victims of the Orlando shootings in a gay nightclub, and very vocal online support for the US gay marriage bill. And now the LGBT community in China has started to be visible, says Fan Popo, they can hardly be hidden away again.

For Meng, his new Mr Gay China colours will be worn with pride. “Next I want to go to Mr Gay World,” he says. “ I want to stand on the world stage and say to people, ‘I’m gay, and I’m from China,’ and show them that the LGBT movement in China is vibrant and active.”