China Hopes to Quell Fears of Another Video Game Crackdown

Late December, particularly the week before Christmas, is usually a quiet time for the stock exchanges. However, just three days before the festive holiday, on the final day of trading before the weekend, the exchanges exploded into life following strong words from the National Press and Publication Administration, China’s gaming regulator.

The gaming regulator put the proverbial cat among the pigeons by saying it will implement new measures to curb excessive consumption of video games. That consumption refers to the time and money spent on games. They sparked panic among investors, resulting in a massive sell-off that wiped off almost $80 billion in market value from China’s two biggest gaming companies, Tencent and NetEase.

China has some of the strictest rules for leisure activities globally. There is a blanket ban on real money basketball betting apps, Hollywood movies and television shows produced in the Western world are heavily censored, and many popular video games are refused classification and are banned from mainland China, for all intents and purposes, Despite the draconian laws and regulations, China’s online gaming industry is the biggest in the world, with annual revenues of $45 billion from 650 million active users.

Shares in Tencent experienced their sharpest drop in 15 years, falling by 12.4%. Matters were worse for Tencent’s rival, NetEase, which wiped off over 24% of its market capitalization. Spooked investors selling shares in those and other gaming-centric and tech companies resulted in Hong Kong’s Hang Seng Tech index, made up of China’s largest tech firms, dropping 4.4% on the day.

Tencent and NetEase shares have since shown signs of recovery but still trade lower than on December 22 before The National Press and Publication Administration’s latest attack on China’s gaming industry.

The Latest in a Long Line of Gaming Regulations

The National Press and Publication Administration has a long history of imposing hard-hitting rules for online gamers. In August 2021, the Chinese gaming regulator hit the headlines after ruling that online gamers under 18 would only be allowed to play for an hour on Fridays, weekends, and holidays. Young gamers were permitted to play games between 8:00 p.m. and 9:00 p.m.. Previous rules allowed them to play up to 90 minutes daily, rising to three hours on holidays.

The regulator used scaremongering language in its recent planned curbs, stating there will be a ban on “forbidden online game content that endangers national unity” and “endangers national security or harms national reputation and interests.”

Online games will be banned from giving players rewards if they log in daily; incentivizing players to log into their accounts is commonplace among the most popular games and acts. Also forbidden is giving rewards to players who make a purchase for the first time or if they make several purchases in close succession. In addition, pop-ups warning players of irrational playing behavior are set to come into force.

A former unnamed Tencent employee spoke to the Financial Times, stating that imposing limits on how much gamers could spend would have severe consequences for publishers.

“Many games rely on a small number of wealthy players for revenue through in-game purchases. If there are restrictions on top-ups, it will significantly impact the game’s income.”

Gaming consultant Daniel Camilo told the BBC that the proposals could see smaller publishers going out of business.

“If a small company is affected in a few millions, then it might mean that they have to close their doors. 2023 has been a year full of layoffs and a lot of struggle in particular for the gaming industry in China. So this is kind of a severe blow, I would say, especially for the medium and smaller publishers.”

China’s Gaming Regulator Approves Record Number of Games; Fires Senior Official

Although the Chinese government has a penchant for keeping its citizens in check, it is also aware of the wider-reaching implications for its economy when investors react negatively to new rules and regulations.

Following the financial bloodbath on December 22, the gaming regulator acted on December 27 to instill some confidence in the industry. First, it approved the release of 105 new games, the highest number for 17 months. Second, it went on record saying it supports the healthy development of the gaming industry and would study responses to its plans.

The sacking of Feng Shixin was, perhaps, the most telling action that Chinese officials had got things wrong. Shixin acted as the head of the publication bureau of the Communist Party’s propaganda department. Shixin had been seen at numerous events discussing real-name verification requirements for gamers and the approval of games.

Media reports suggest Shixin was relieved of his duties for not consulting with key economic supervisors or gathering the opinions of major gaming companies before releasing the draft into the public domain.

Game publishers were initially led to believe that most of the regulation would focus on minors, but many strict measures in the final draft apply to all users. This prompted worry and nervousness within the industry, which ultimately spilled out and caused a mass sell-off by investors.

Game Developers Summoned By Regulators For Fast-Tracked Discussions

Beijing and provincial regulators have summoned leading and prominent game developers for behind-closed-door seminars where they will discuss the feasibility and potential impact of the draft regulations. Such processes usually take three to six months, but industry talk suggests talks could be completed as early as the end of January.

Shares in Tencent are trading 6.1% lower than last month, although they have increased by 2.74% over the past five days. It is a similar story regarding NetEase. Shares are down 11.5% compared to a month ago but have risen 1.68% during the last five days of trading.