Qui Chengwei stabbed Zhu Caoyuan in the chest when he found out he had sold his virtual sword for 7,200 Yuan (£473).
The sword, which Mr Qui had lent to Mr Zhu, was won in the popular online game Legend of Mir 3.
Attempts to take the dispute to the police failed because there is currently no law in China to protect virtual property.
Buying and selling gaming artefacts such as imaginary weapons is a booming business on the web.
The internet games section of Ebay saw more than $9m (£5m) in trades in 2003.
While China has no laws to deal with the theft of virtual property, South Korea has a section of its police force that investigates in-game crime.
A lawyer for one Shanghai-based internet game company told a Chinese newspaper that the weapons were in fact just data created by games providers and therefore not the property of gamers.
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