The Chinese gaming industry was thrown into chaos on Friday, following the surprise imposition of new gaming restrictions. The regulations, aimed at curbing excessive gameplay and spending, have reignited fears that Beijing will once again target the country’s monumental internet sector. The new rules, drafted by the top gaming regulator, include strict limits on spending within games, a ban on login rewards, and restrictions on game content that could potentially threaten national security.
Tencent Holdings Ltd. led an $80 billion sale of some of China’s biggest internet names in response to the news. The country’s leading gaming company plunged as much as 16%, with smaller rival NetEase Inc. falling a record 28%. Bilibili Inc was also down 14%. Together, the three stocks lost up to $80 billion in market value on Friday, as investors panicked at the prospect of losing substantial revenue in the face of the new gaming rules.
The sweeping restrictions, similar to those seen in a tech sector crackdown in 2021, were implemented with little warning and are so vague and comprehensive that investors couldn’t decipher their intent or potential consequences, similar to the brutal tech sector crackdown of 2021. Friday’s rules have left many in the industry in outrage and confusion, particularly highlighting concerns over the unspecified limit on player spending. Industry players and investors are anticipating more measures targeting the gaming sector, akin to what happened to the education sector in the past.
For gaming companies like Tencent, the restrictions are expected to have a significant impact on revenue. The new rules have prompted skepticism about whether this is the beginning of the end for the current mobile gaming business model. However, Tencent’s vice president of gaming, Zhang Wei, has said that the regulatory measures will not fundamentally change its business model or operations. The company has also announced a HK$1 billion buyback in response to the market turmoil.
The new rules are a response to longstanding concerns over gaming addiction and the potential adverse effects of gaming on young people. President Xi Jinping’s administration has previously sought to control gaming addiction and blamed online entertainment for the rise in myopia among young people. However, the crackdown on gaming predates the latest move, with the first suspensions of gaming approvals beginning around 2018. The government’s apparent thaw in attitude towards the gaming sector in recent months, as it promoted electronic sports as an engine of the post-Covid economy, had given the industry some hope that the two-year crackdown would ease up.
The new regulations threaten to hamper the long-term development of the online gaming sector, with investors now worried about the level of political risk in the market. The virtual ban on gaming imposed by the government has not only sent shockwaves through the gaming industry but has also reminded investors of the nightmare of regulatory scrutiny a few years ago when the government tried to regulate the playtime of mobile games.
The regulations are designed to ensure that game publishers respect Chinese laws, culture, and national security, with requirements for comments on the proposed rules leaving some investors hopeful that regulators will eventually reverse the most unpopular measures. For now, the rules have thrown the booming Chinese gaming market into chaos, leaving industry players and investors struggling to decipher their intent and consequences, and worrying about the long-term impact on the market.