China to cut spending on games; Tencent, NetEase slump According to Reuters

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© Reuters. FILE PHOTO: A gamer plays online games at an Internet cafe in Taiyuan, Shanxi province January 23, 2010. REUTERS/Stringer/File Photo

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Author: Josh Ye

HONG KONG (Reuters) – Chinese regulators on Friday announced a wide range of rules aimed at curbing spending and rewards that prop up video games, dealing a blow to the world’s biggest gaming market, which has returned to growth this year.

New rules that effectively set spending limits for online games have sparked panic among investors and wiped nearly $80 billion in market value from China’s two biggest gaming companies as investors tried to gauge the potential impact on earnings and more restrictions on the horizon. .

Online games will now be prohibited from giving players rewards if they log in every day, if they spend in-game for the first time, or if they spend multiple times in-game. These are all common motivational mechanisms in online games.

Shares of Tencent Holdings (OTC: ), the world’s largest gaming company, fell as much as 16% at one point, while shares of its closest rival, NetEase (NASDAQ: ), fell as much as 25% after the National Press and Publication. Administrations have published new draft rules.

Shares of tech investor Prosus (OTC: ) followed Tencent lower, losing 14.2% in early trading on Friday and among the biggest decliners in the pan-European stock index. Owns a 26% stake in Tencent.

“It’s not necessarily the regulation itself – it’s the political risk that is too high,” said Steven Leung, managing director of institutional sales at broker UOB Kay Hian in Hong Kong. “People thought that this kind of risk should be over and they started looking at the fundamentals again. It hurts confidence a lot.”

Vigo Zhang, vice president of Tencent Games, said that Tencent will strictly implement the regulation’s requirements. The new draft rules did not deviate from regulators’ continued focus on ensuring companies have “reasonable business models and operational cadences”, he said.

Zhang added that minors have been spending historically low levels of money and time on Tencent games since 2021, when Beijing focused on protecting minors.

NetEase declined to comment.

Beijing has been getting tougher on video games over the years. In 2021, China set strict playing time limits for players under the age of 18 and suspended the approval of new video games for about eight months, citing concerns about game addiction.

Although the crackdown formally ended last year with the resumption of new game approvals, regulators have continued to hand out restrictions to curb “in-game” spending. The new rules unveiled on Friday are the clearest regulations to date aimed at curbing gambling spending. In addition to banning reward features, games are also required to set limits on how much players can top up their digital wallets for in-game spending.

“Eliminating these incentives will likely reduce daily active users and app revenue, and ultimately could force publishers to fundamentally overhaul their game design and monetization strategies,” said Ivan Su, an analyst at Morningstar.

Games are also prohibited from offering probability-based lottery features to minors and from allowing speculation and auctions of virtual game items.

But the new rules included a proposal widely expected to be welcomed by the industry that would require regulators to process game approvals within 60 days. The new rules also reflect Beijing’s concerns about user data and require game publishers to store their servers in China.

The administration is seeking public comment on the rules until January 22, 2024. As a result of Beijing’s crackdown on gambling in 2021, 2022 was China’s gaming industry’s most difficult year on record as overall revenue declined for the first time. China’s video game market returned to growth this year, with domestic sales rising 13% to 303 billion yuan ($42.6 billion), according to industry association CGIGC.