egaming: Will China ease its new video game controls? Investors think so

Since the weekend, regulators have attempted to calm the market after shares of the two largest video game companies, Tencent and NetEase, plunged Friday.

When trading resumed after the four-day holiday weekend in Hong Kong, Tencent rose about 4%, and NetEase jumped 12%, recovering some of their losses. The companies’ shares rose again on Thursday, although more modestly.

The events of the past several days underline the push-and-pull forces in Chinese policymaking. The country’s top leaders have acknowledged they need to stabilize the economy, which has been slow to recover from being virtually locked down during the COVID pandemic. But the government’s tight control of how companies do business continues to inject uncertainty into the markets.

China’s National Press and Publication Administration, which issues licenses to game publishers and oversees the industry, unveiled a proposal Friday aimed at effectively reducing how much people spend playing games. The plan took the industry by surprise, and investors dumped tens of billions of dollars in company stock.

The regulator issued a statement Saturday stressing that the draft rules aim to “promote the prosperity and healthy development of the industry” and said it is “listening to more opinions comprehensively and improving regulations and provisions.”

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Then on Monday, the agency announced that it had licensed about 100 new games, after licensing 40 others Friday. And a semiofficial association affiliated with the agency said that the additional game approvals were “positive signals” that the agency supports the industry. The new regulations would cap how much money users could spend within games on things like upgrading the features of characters or procuring virtual weapons or other things used by the characters. It would also ban rewards that companies use to entice players to return. The proposal did not specify a spending cap.

“The draft regulations would inevitably lead to changes in current practices and potential short-term revenue losses,” said Xiao Lei, assistant professor at the University of Hong Kong’s business school.

But, he added, their impact might be less than feared, as authorities could adjust or drop some of the provisions. Consumer demand for games and the social interactions they allow would remain unaffected, he added.

Analysts from Nomura, a Japanese bank, said in a report Tuesday that the rules could “significantly impair” Chinese video game companies’ ability to make money.

The “fire-quenching measures” the government has rolled out since Friday, Nomura added, will ease investor concerns but won’t remove the shadow it has thrown over China’s video game sector.

The industry is still reeling from earlier restrictions first imposed in 2019 aimed at what the government deemed was an online gaming addiction among minors, as well as a broader crackdown against tech companies. Regulators also stymied publishers by not issuing any new game licenses for an eight-month stretch that ended in April 2022.

For their part, Tencent and NetEase have downplayed the impact of the proposed regulations.

The draft rules did not “fundamentally change the game’s business model, operating rhythm, or other key elements,” Vigo Zhang, vice president of Tencent Games, said in a statement Friday. NetEase said over the weekend that the proposal would not have any substantial impact on its business, adding that it would share its views with authorities.

The regulatory agency said it would accept comments on the proposal until Jan. 22.

Since the weekend, regulators have attempted to calm the market after shares of the two largest video game companies, Tencent and NetEase, plunged Friday.

When trading resumed after the four-day holiday weekend in Hong Kong, Tencent rose about 4%, and NetEase jumped 12%, recovering some of their losses. The companies’ shares rose again on Thursday, although more modestly.

The events of the past several days underline the push-and-pull forces in Chinese policymaking. The country’s top leaders have acknowledged they need to stabilize the economy, which has been slow to recover from being virtually locked down during the COVID pandemic. But the government’s tight control of how companies do business continues to inject uncertainty into the markets.

China’s National Press and Publication Administration, which issues licenses to game publishers and oversees the industry, unveiled a proposal Friday aimed at effectively reducing how much people spend playing games. The plan took the industry by surprise, and investors dumped tens of billions of dollars in company stock.

The regulator issued a statement Saturday stressing that the draft rules aim to “promote the prosperity and healthy development of the industry” and said it is “listening to more opinions comprehensively and improving regulations and provisions.”

Discover the stories of your interest

Then on Monday, the agency announced that it had licensed about 100 new games, after licensing 40 others Friday. And a semiofficial association affiliated with the agency said that the additional game approvals were “positive signals” that the agency supports the industry. The new regulations would cap how much money users could spend within games on things like upgrading the features of characters or procuring virtual weapons or other things used by the characters. It would also ban rewards that companies use to entice players to return. The proposal did not specify a spending cap.

“The draft regulations would inevitably lead to changes in current practices and potential short-term revenue losses,” said Xiao Lei, assistant professor at the University of Hong Kong’s business school.

But, he added, their impact might be less than feared, as authorities could adjust or drop some of the provisions. Consumer demand for games and the social interactions they allow would remain unaffected, he added.

Analysts from Nomura, a Japanese bank, said in a report Tuesday that the rules could “significantly impair” Chinese video game companies’ ability to make money.

The “fire-quenching measures” the government has rolled out since Friday, Nomura added, will ease investor concerns but won’t remove the shadow it has thrown over China’s video game sector.

The industry is still reeling from earlier restrictions first imposed in 2019 aimed at what the government deemed was an online gaming addiction among minors, as well as a broader crackdown against tech companies. Regulators also stymied publishers by not issuing any new game licenses for an eight-month stretch that ended in April 2022.

For their part, Tencent and NetEase have downplayed the impact of the proposed regulations.

The draft rules did not “fundamentally change the game’s business model, operating rhythm, or other key elements,” Vigo Zhang, vice president of Tencent Games, said in a statement Friday. NetEase said over the weekend that the proposal would not have any substantial impact on its business, adding that it would share its views with authorities.

The regulatory agency said it would accept comments on the proposal until Jan. 22.