Tencent Holdings Ltd. led a sale of 80 billion dollars on some of the biggest names on the Internet Chinaafter the surprise imposition of new restrictions on gaming will revive the fears that Beijing will once again target the country’s giant internet sector.
The top gaming regulator on Friday published draft rules designed broadly to Crack down on practices that encourage players to spend more money and time online. These rules include limits on the amount each player can spend on a game, a ban on frequent login rewards and forced duels between players, and even a ban on content that threatens national security.
The extensive restrictions, which caught industry players and investors off guard on the last trading day before Christmas, reminded many of the brutal repression of the technology sector 2021. That year, several agencies abruptly imposed restrictions on sectors ranging from e-commerce to entertainment, slowing down Ant Group Co. and Alibaba Group Holding Ltd.supported by Jack Maand decimating the online education industry by making profits illegal.
Just like two years ago, Friday’s rules came with little warning and were so vague and comprehensive that investors couldn’t decipher their intent or potential consequences. Messages of outrage and confusion dominated a WeChat group of hundreds of developers and designers, many of them complaining in particular about the unspecified limit on player spending. Chinese games are known for their clever designs and promotions that encourage players to spend on decorating and polishing their avatars, the main source of income for Tencent and its rivals.
Tencent plunged as much as 16% – its biggest intraday drop since 2008-, while its smaller rival, NetEase Inc. fell 28%, a record number. Bilibili Inc, a social networking service popular with gamers, dropped a 14%. Together, the three stocks lost up to 80 billion dollars in market value on Friday. The actions of Prosus NV and Naspers Ltd.main shareholders of Tencent, They sank in Europe.
“Government measures to stop gambling will hurt the revenue of gaming companies“, said Yang Junxuanfund manager at Shanghai Junniu Private Fund Management Co. “But the biggest concern is that people fear that more measures will come targeting the sector, just like what Beijing did with the education sector in the past.”
Since 2020, the Communist Party has launched a campaign against a private sector that it believes is accumulates too much power and expands recklesslythreatening its control of the world’s second largest economy.
“It has caught people off guard, right before the holidays and hit sentiment hard. “It is also disheartening that this is happening after an already difficult year for the market,” he said. Willer ChenPrincipal Analyst at Forsyth Barr Asia Ltd.
The crackdown on gaming actually predates that move, with the first suspensions of gaming approvals beginning around 2018.
The administration of Xi Jinping has long tried to combat gaming addiction, blaming online entertainment for rising myopia among young people. Chinese users spend more time online on average than in many other markets, which has fueled the rise of services such as Douyin and WeChat. Critics have also linked it to various evils, from unemployment to low birth rates. At the height of the crackdown on the tech sector, the government froze approval of new titles and launched several content investigations, forcing developers like Tencent to modify certain games.
In another WeChat thread, Tencent investors and employees slammed the rules as irrational and misplaced. Cai Wensheng, a prominent Chinese venture capitalist who co-founded photo retouching app Meitu, said on WeChat: “A policy kills an industry”. She later deleted the message. Adding to the confusion, the same gaming regulator on Friday approved 40 new online gaming titles for distribution in China, ahead of schedule.
Although Beijing continues to focus directly on the games, the regulations could represent a radical change in the traditional model “freemium”, in which users download titles for free but spend large amounts on the games to gain benefits or establish virtual identities. This approach has come under scrutiny in countries such as Japan due to its addictive nature and its tendency to encourage younger players to spend.
“The impact in China will end up being greater than the market is estimating, and we believe the results could force other countries to take similar measures against mobile gaming and social media addiction within a few years,” he wrote. Mio Katoan analyst at Lightstream Research. “This is the beginning of the end of the current mobile gaming business model.”
Tencent’s vice president of gaming, Zhang Wei, stated in a statement that the regulatory measures will not fundamentally change its business model or operations. And after the market closed, he announced a buyback of 1 billion Hong Kong dollars ($128 million) which began on Friday.
The latest rules have stung all the more since Beijing seemed to have thawed with respect to the sector.
In recent months, the authorities had promoted electronic sports as an engine of the post-Coviet economy. Xi himself attended the opening ceremony of the 19th Asian Games in Hangzhouwhich for the first time had the professional game among the medals at stake.
In December 2022, Tencent got the green light for a handful of big releases, including Valorant and Pokémon Unite, a milestone that bolstered hopes that China would ease its two-year crackdown on Big Tech. Now, the WeChat operator is fighting a tough battle with NetEase over the launch of casual title Dream Star, hoping to replenish its aging gaming portfolio. Both companies have invested in advertising and other promotional expenses in the so-called party royale genre, at a level never seen in recent years.
China’s gaming market would grow almost a 14% until the 302.9 billion yuan (42.4 billion US dollars) in 2023, reversing a decline in 10% compared to the previous year, according to data provider CNG.
“This makes investors remember the nightmare a few years ago, when the government tried to regulate the playtime of mobile games,” he said. Steven Leung, CEO of UOB Kay Hian. “With these new rules, investors may abandon the market altogether, because the political risk is too high.”
Much of the problem arose from vagueness in the wording. The regulations asked game publishers operating abroad to respect Chinese laws and culture and refrain from endangering national security, without providing further details. Tencent is the world’s largest game publisher, with investments in studios ranging from Epic Games Inc. in the US to Supercell in Europe.
The agency will take comments on the proposed rules for a month, without saying when they will take effect. Some investors are hopeful that regulators will eventually reverse the most unpopular measures.
“Strict regulation will inevitably hamper the long-term development of the online gaming sector, raising questions about whether the Government is contemplating a new round of regulatory direction”he declared Mike Leunginvestment manager at Wocom Securities Ltd.
In collaboration with Charlotte Yang, Ishika Mookerjee, Abhishek Vishnoi, Winnie Hsu and Lulu Yilun Chen.
(With information from Bloomberg)