China's Gaming Industry Faces Investor Panic as New Regulations Trigger Market Turmoil

China's gaming industry is facing a significant upheaval as regulators announced new rules, causing notable concern among investors and impacting major players like Tencent and NetEase. The regulations, unveiled last week, bring forth various restrictions, including spending limits for online games, a ban on rewarding daily logins, and prohibiting lucky draw features for minors. The immediate fallout was stark, with Tencent's shares experiencing a drastic decline of over 12%, resulting in a loss exceeding $43 billion in market value. Similarly, NetEase shares plummeted by more than 24%, indicating the severity of the market reaction. BiliBili, a social media platform heavily dependent on gaming revenue, saw its shares dip by nearly 10%.

This regulatory move is not the first aimed at China's gaming sector. In 2021, authorities sought to limit the time young people spent playing video games, characterizing them as "spiritual opium." Under-18s were then restricted to one hour of gaming per day on Fridays, weekends, and holidays, though enforcement of this rule proved challenging. Despite regulatory efforts, video games remain immensely popular in China, with domestic revenue growing by 13% this year. A government-run industry association reported a record 668 million gamers in the first half of the year, equivalent to half of the total population.

The latest regulatory proposals also include measures that might be perceived positively by the industry. Among them is a requirement for regulators to process new game licenses within 60 days, providing a more streamlined approach to approvals. Additionally, Beijing recently approved 40 new imported games for domestic release, signaling a nuanced approach that balances regulation with support for the development of the online gaming sector.

While major players like Tencent and NetEase experienced a partial recovery in their shares on the Hong Kong stock exchange by Wednesday, they still remain below their pre-regulatory announcement levels. Vigo Zhang, the vice-president of Tencent Games, stated that the company is committed to strictly implementing any new regulations.

Analysts anticipate that the impact of these new restrictions will likely hit smaller game companies the hardest. This echoes the trend observed after Beijing's initial crackdown in 2021, during which about 14,000 small studios and video game firms reportedly deregistered, and new game approvals were halted for nearly a year.

The proposed regulations are currently open for public consultation until January 22, allowing stakeholders to provide input and potentially influence the final form of these measures.

By fLEXI tEAM