Market rout shows regulating China’s video gaming is no child’s play

VIDEO gaming-related companies in China tumbled ahead of the Christmas weekend, after authorities signalled a clampdown on online games.

China’s National Press and Publication Administration on Dec 22 announced proposed draft rules aimed at limiting time spent on online games as well as curbing rewards players receive for logging in daily.

Such incentives are typically employed to entice players to spend money in the game, and are seen as likely to induce game addiction.

Shares of video game giant Tencent Holdings plunged as much as 16 per cent after the announcement before closing 12.4 per cent lower that day, while smaller peer NetEase retreated 24.6 per cent.

The two Hong Kong-listed rivals lost an estimated combined US$80 billion in market value before the exchange closed for the long weekend.

Bilibili, a video platform popular with gamers, fell 9.7 per cent.

Singapore-listed Winking Studios , which provides art outsourcing and game development services for the video game industry, closed flat.

In a swift U-turn, Chinese regulators appeared to soften their stance over the weekend to arrest the collapse in stock prices.

The press and publications authority on Dec 25 announced it has approved 105 new online games.

Video-gaming stocks recovered, as market watchers pointed to the approval of new entrants as a sign that the authority was willing to support the gaming industry.

Investor confidence rose further in January, following reports that Beijing is removing a top official from the government body overseeing the press and publications regulator.

Shares of Tencent have clawed back some losses and closed on Tuesday (Jan 9) at HK$283.60, but remained 9.3 per cent below their closing price of HK$312.60 on Dec 21 before the announcement of the curbs.

“Big Tech crackdown”

This is not the first time Chinese authorities have tussled with the video-game giants, as part of Beijing’s goal of reducing in-game spending and curbing gaming addiction among its youths.

In 2021, regulators imposed a play time limit of three hours per week for children, tightening a 2019 limitation of one-and-a-half hours of play a day on weekdays.

Game developers were also barred from providing services to minors in any form outside of these hours, and must ensure they have real-name verification in place.

Before this, investors had already been spooked by China’s “Big Tech crackdown” that started in late-2020, when heavy fines were meted out to technology companies in the e-commerce and entertainment sectors for various issues ranging from data violations to unfair competition.

Since the start of the regulatory crackdown, over S$1 trillion has been wiped from the market capitalisation of China’s major tech companies, including Tencent, e-commerce giant Alibaba Group, food delivery platform Meituan and search engine provider Baidu.

Property clampdowns

The property sector – long considered one of China’s key growth drivers – has also suffered from clampdowns. 

The Chinese government in August 2020 moved to tighten real estate regulations on the basis that “property should be lived in, not speculated on”.

But these tougher rules resulted in a cap on three crucial debt ratios, which hindered debt-heavy property developers from securing more credit.

While the curbs served to bring property prices down, some property companies crumbled under the pressure.

Hong Kong-listed China Evergrande Group, the second-largest real estate developer in China by sales, defaulted on offshore bonds in 2021, sparking an ongoing real estate crisis. Other developers, including Country Garden – the largest by sales – and Kaisa Group, also struggled to complete their bond payments.

China has since pledged to support the embattled sector and resolve local government debt risks.

In November, the country’s securities regulator said that financial institutions will have to meet reasonable financing needs of property firms and refrain from withdrawing or cutting off loans to them.

Regulatory costs

While the regulatory moves have purportedly been for social good, they have left the market uncertain over the future of Chinese companies.

Sudden shifts in regulation could spell trouble for investors, and China will likely have to weigh investors’ threshold of pain carefully.

Investors are likely to prefer markets with stable government policy, a clear plan for the months ahead and fair warning on future regulation.

Regulators and investors everywhere – including in Singapore – can learn some lessons here.

Regulators must be measured, especially when policies have far-reaching impacts.

Investors, meanwhile, often lament that regulators are slow to act, or insufficiently severe or rigorous.

In some cases, however, a light touch is not so bad.