Roller coaster ride for tech stocks
China is secretly allowing stricter rules for video games to disappear
By Michael Bauer
January 29, 2024, 6:02 p.m
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Video games are extremely popular in China and a thorn in the side of the communist ruling party. Concerned about the health of young people, an authority is making changes to the industry – with financial consequences. Now the role follows very quietly and secretly backwards.
Beijing is backing down: The new rules for the Chinese video game industry sent the shares of the largest developers such as Tencent and Netease plummeting at the end of 2023, cutting their market value by tens of billions of dollars. Almost a month later, the National Press and Publication Administration’s (NPPA) proposed proposals for greater regulation of video games have quietly disappeared. If you want to access the website, you will only see the error code 404.
So was it all just a mistake? In any case, Beijing underestimated the impact of the announcement. The proposal to both regulate gaming time in China and restrict in-game purchases and reward systems had worried the Chinese video game industry and investors. On the trading floors in New York, Hong Kong and Shanghai, the value of the largest Chinese developers shrank by around $80 billion within a few days. A bitter blow for the market leader in online games.
The move surprised the entire industry shortly before the important Christmas business. Although the ruling Chinese Communist Party regularly expresses its concerns about possible online gaming addictions, gaming is extremely popular in society. When the city of Hangzhou hosted the Asian Games last year, e-sports was a medal event for the first time – and also the most successful nation in the new category, with the most gold medals won.
China is practicing damage limitation
Beijing should actually know what such drastic regulations will trigger in the video game industry. Already in 2021, authorities imposed restrictions on the amount of time minors could spend playing. At that time, no new gaming licenses were issued for months. As a result, the number of players fell drastically from 120 million (2020) to 83 million (2022). And yet the gaming business remained lucrative, generating around $43 billion Industry in 2022 on the domestic market alone.
Accordingly, Beijing is trying to contain the industry panic after the latest market disaster. In the first instance, a whole range of game titles were approved by the NPPA at the end of the year – on average around 20 percent more than in the previous months. A scapegoat for the price collapse was quickly found. Feng Shixin, a senior official who oversees China’s video game industry, was forced to resign because he “failed to adequately communicate” the new rules as the person in charge. Meanwhile, the prices of Tencent and Co. have recovered, but have not yet reached the levels they reached before the collapse.
Investors have even bet on the Chinese government’s move backwards. The Federated Hermes Asia Ex-Japan Equity Fund, one of the most successful funds of the last three years, added Tencent to its portfolio after the share price collapsed. “The investment reflects real optimism about the struggling industry,” fund manager Jonathan Pines said in a statement. In May 2023 he removed Tencent from the fund on the grounds that it was lacking in attractiveness. Seven months later, the game developer’s shares were too cheap and the industry was “too big to fail.”
Learning effect in Beijing?
So a certain amount of uncertainty remains. This has already led to a rethink among the developers. Many Chinese developers have already started to focus their projects on games for foreign countries. Netease and Tencent also bought development studios in countries such as France, Japan and the United States.
The fact that new rules are being swept under the carpet could even be interpreted as a positive development – at least when it comes to entire economic sectors. The 2021 regulation in the video game sector went according to plan: in its opinion, Beijing was able to protect younger players, and sales rose despite falling user numbers. At the end of 2023, the renewed attempt went terribly wrong and China is now trying to mend the cracks.
China continues to regulate individual technology companies with a heavy hand. In 2021, Tiktok parent company Bytedance put plans for an IPO on hold after Chinese authorities urged the company to first focus on addressing data security risks and other issues. The same fate could now threaten the online retailer Shein. Here too, Beijing is warning about suspected gaps in data security.