BEIJING — China’s top internet companies suffered steep losses on Friday after regulators unexpectedly unveiled sweeping new restrictions on the gaming industry, reviving fears that the government was resuming its crackdown on the country’s technology sector.
Tencent Holdings, China’s most valuable publicly traded company and the world’s largest gaming business by revenue, saw its stock plunge nearly 16%, shedding around $60 billion from its market capitalization in a single day. The selloff also hammered Tencent’s main rival, NetEase, whose shares fell 28% for their biggest one-day decline on record.
The sharp declines came after China’s National Press and Publication Administration published new draft rules aimed at curbing gaming addiction among minors. The proposed regulations include hard limits on the amount of money and time players can spend in a game, bans on gambling-like mechanics that entice spending, and prohibitions on content that threatens national security.
While gaming has long been in regulators’ crosshairs, the sweeping nature of the rules caught many off guard, reminiscent of the crackdowns in 2021 that decimated the private tutoring sector and severely hampered major internet platforms. The lack of clarity around provisions banning games that “harm national security” or “national honor” further unsettled investors already on edge about the arbitrary nature of recent regulatory actions.
“The government gaming curb measures will hurt gaming companies’ earnings,” said Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management. “But the more important concern is people are worrying that more measures targeting the sector will come, just like what Beijing did to the education sector in the past.”
The selloff vaporized over $80 billion in market value from Tencent, NetEase and other gaming-exposed internet firms like livestreaming site Bilibili. Tencent bore the brunt of the damage, with analysts estimating the new rules could wipe out up to a third of its gaming revenues.
Regulators Deliver Body Blow to China’s Gaming Sector
The gaming restrictions land as a body blow to China’s online entertainment companies already weakened by a tech industry crackdown and pandemic-related economic doldrums.
Tencent and NetEase have grown into global gaming giants thanks to their sophisticated monetization techniques cultivated in China’s uniquely lucrative mobile gaming market. Their so-called “freemium” model offers games for free but encourages players to spend liberally on in-game items and perks, generating billions in recurring revenue.
But Chinese regulators have long blamed online games for social ills like addiction and near-sightedness among youth. In 2018, authorities froze all new game approvals for nine months, hamstringing studios’ ability to generate hit titles. Approvals resumed in 2019 but remained limited, crimping Tencent and NetEase’s content pipelines.
The approval freeze finally thawed this December after Beijing signaled a softened stance on tech regulation. Tencent won its first license for a major new title, tactical shooter game Valorant, in over a year. Investor sentiment had just begun recovering when Friday’s bombshell proposal disrupted the detente.
This makes investors remember the nightmare from a few years ago, when the government tried to regulate mobile games’ playing time,” said Steven Leung, an executive director at UOB Kay Hian brokerage in Hong Kong. “With these new rules, investors may just leave the market totally, because the policy risk is too high.”
Industry Left Guessing at Vague Rules’ Intent, Scope
Much of the panic stemmed from ambiguities in the proposed gaming restrictions. Regulators provided no specifics around spending caps, leaving companies guessing as to the revenue impact. More cryptically, they called for games to uphold national security and not “threaten national unity” — echoing justifications for broader tech industry crackdowns.
“The impact in China will eventually be bigger than the market is pricing in and we believe that results could force other countries to similarly take measures against mobile gaming/social media addiction within a few years,” Lightstream Research analyst Mio Kato wrote in a note. “This is the beginning of the end for the current mobile gaming business model.”
Tencent earns over 60% of its gaming receipts from China, heightening its vulnerability. But as the planet’s largest gaming publisher, its interests span the industry’s spectrum worldwide. Tencent owns full or majority stakes in companies behind globally popular titles from League of Legends to Call of Duty.
It remained unclear whether authorities intended the new rules to apply strictly to games operated in China or extend to Tencent’s international portfolio. The lack of clarity chilled investor confidence in Tencent’soperations abroad.
Strict regulation will inevitably hinder the long-term development of the online gaming industry, raising doubts about whether the government is contemplating a new round of regulatory direction,” said Mike Leung, investment manager at Wocom Securities.
Gaming stocks also reacted severely because they were seen as bellwethers for the tech sector’s regulatory outlook. After last year’s crackdown eviscerated internet companies, investors hoped Beijing would shift focus away from tech and onto reviving economic growth.
Friday’s surprise gaming broadside upended that narrative, raising the specter of tech returning to the penalty box.
“It caught people off guard, right before the holiday and hitting sentiment hard,” said Willer Chen, senior analyst at Forsyth Barr Asia. “It feels disheartening as well for this to happen after a year that is already so difficult for the market.”
Competitive Gaming Scene Braces for Impact
The gaming curbs came just months after competitive video gaming debuted as a medal sport at the Asian Games held in China, which many viewed as a milestone in legitimizing esports. And the restrictions surprised because Beijing had recently encouraged gaming firms to pursue opportunities in virtual worlds and the so-called metaverse.
But under Xi Jinping, minors’ gaming addiction has remained an intractable concern. In 2019, the government mandated gaming companies implement real-name verification and playing-time limits of just 1.5 hours per day for youths. The harsh controls prompted Tencent to launch its successful mobile battle royale game Honor of Kings as a more muted version called Game for Peace for Chinese audiences.
Friday’s proposal did not provide comparable guidance around playing time limits. By capping minors’ monthly spending without specifying permitted hours, some analysts speculated rules could tighten further.
“A policy kills an industry,” said Cai Wensheng, a prominent Chinese venture capitalist, in a WeChat post that swiftly went viral.
The selloff deflated a rally that Tencent and NetEase shares enjoyed in recent weeks. Both stocks soared in early December after regulators approved their slates of previously backlogged games for monetization.
Tencent specifically won a green light for its console game Valorant and mobile title Pokémon Unite — milestones taken as a sign Beijing was relaxing its two-year freeze on gaming approvals. Investor enthusiasm sent Tencent and NetEase shares climbing 18% and 29%, respectively, over the first three weeks of December.
The euphoria now appears short-lived. Beijing’s gaming regulator approved 40 new titles on Friday concurrent with announcing the restrictions — earlier than expected in the approval calendar. But the bad outweighed the good for investors fixated on looming revenue losses.
Gaming Industry Confronts Wrenching Changes
For China’s gaming sector, the new rules could necessitate wrenching changes to business models tailored over decades specifically for domestic players.
Mobile titles produced for Western markets typically monetize through upfront purchases or subscriptions. But Chinese hits like Honor of Kings rely on complex in-game economies keeping players hooked. Players collect and upgrade items like weapons and outfits to gain advantages. Top performers get perks like temporary discounts on in-game purchases.
New restrictions around play-to-earn schemes and limiting “cash burning” events like giveaways threaten to dismantle the incentive structures underpinning these virtual economies. Limits on daily charges will also force companies to completely rethink monetization.
“This makes investors remember the nightmare from a few years ago,” said Leung of UOB Kay Hian.
Still, some investors clung to hope that gaming stocks were oversold given the uncertainties. Authorities have solicited public feedback on the rules through Jan. 20 before enacting them. There is room for gaming leaders like Tencent to lobby for relaxing provisions seen as too extreme.
“Strict regulation will inevitably hinder the long-term development of the online gaming industry, raising doubts about whether the government is contemplating a new round of regulatory direction,” said Leung of Wocom Securities.
How Beijing reconciles its concerns around gaming addiction with the growth of gaming as a strategic industry remains to be seen. But for now, uncertainty reigns dominant as the country’s tech giants once again find themselves subject to the unpredictable whims of regulators.
Friday’s surprise rules are the latest reminder that under Xi Jinping, no company — however large, global or strategically significant — is immune.
