Chinese authorities continue to look for new ways to regulate online business and video games. In just a day, the shares of local giants like Tencent and NetEase have sharply lost in price. This is due to an article in a state newspaper that equated games with drugs and called for stricter control measures of the industry.
What happened?
The Economic Information Daily published an article about the problems of gambling addiction among teenagers. The authors called video games “electronic drugs” and “spiritual opium”.
“No industry or sport should flourish by destroying an entire generation,” the article says.
Economic Information Daily named Tencent, which accounts for 40% of the total revenue of the local industry, as the main source of the problem. The newspaper called for new measures to regulate the gaming industry and conduct investigations against large companies.
The article itself was based on a survey of primary school students. One of the children told the publication that many of his classmates play Honor of Kings for eight hours a day. Also in the material there were cases when online games destroyed families and the lives of adults.
It is worth noting that Economic Information Daily belongs to the state news agency Xinhua. That is why many have suggested that the information presented in the article partially or completely reflects the position of the Chinese authorities on the regulation of games.
However, the words of Economic Information Daily are at odds with the latest statements of local officials. In particular, with the statements of Yang Fan, deputy director of the publishing bureau of the Propaganda Department of the CPC Central Committee (it is responsible, among other things, for issuing licenses to games).
Last week, she gave a speech at the ChinaJoy exhibition and spoke positively about video games. According to her, the authorities should help developers create good projects that would promote Chinese values and culture.
At the same time, China has long been concerned about the problem of online gaming among teenagers. The authorities have repeatedly made attempts to regulate the industry, and therefore the rhetoric of the Economic Information Daily article has raised concerns about the tightening of existing measures.
In 2008, China became the first country to officially recognize Internet addiction – especially online gaming — as a clinical disorder. Since then, special rehabilitation centers for “difficult” teenagers have appeared in China. According to the South China Morning Post, in particularly severe cases, shock therapy is applied to them.
The Economic Information Daily material was unexpectedly removed from the newspaper’s website just a few hours after publication. However, investors of Chinese technology companies had time to read the article and took it as a wake-up call.
How did the market react to this?
The effect of the publication of Economic Information Daily was felt by many Chinese giants.
- Tencent shares sank by 10.8%, after which the fall was adjusted to 6.1% — this is the biggest collapse for the company in more than a year.
- NetEase shares lost 15.7% in value, but at the close of trading the fall was adjusted to 7.8%.
- The initial drop in the shares of CMGE Technology (a local investor and mobile publisher) was 22.3%. After that, the cost reduction was adjusted to 13.6%.
- Shares of the South Korean company Nexon, which accounts for 28% of its revenue in China, also lost in price. The drop was 8.1%.
The market reaction is caused not only by an article about the problems of gambling addiction. Investors were already concerned about the latest statements by the Chinese authorities about tightening regulation of the Internet sphere – from e—commerce to taxi aggregators.
According to Bloomberg, this year China’s actions have already led to the sale of shares of local technology companies totaling over $1 trillion. This was caused by the problems faced by the online business over the past nine months. Among them are antitrust proceedings, allegations of bribery and unsafe data storage.
The Economic Information Daily article was only a catalyst for a new outflow of funds in the field of gaming. At the same time, some companies have already reacted to the fall in shares.
Today Tencent announced new rules for its online games. The Chinese giant will limit the number of hours that children under 12 can spend playing. The company also announced the possible introduction of a new age rating system.
Despite investors’ concerns, analyst Daniel Ahmad notes that local authorities are unlikely to tighten regulation of the entire gaming industry. China supports video games, esports and cloud gaming because it sees great economic potential in them. The main measures are likely to be aimed specifically at combating addiction and limiting playing time among teenagers.
Other problems of the Chinese technology industry
According to the South China Morning Post, in March, Chinese President Xi Jinping spoke about the negative impact of gambling addiction on the psyche of teenagers. In the same speech, he mentioned the sector of extracurricular online education, calling it a “social problem”.
Last week, the State Council of the People’s Republic of China published a document regulating extracurricular education. In fact, the Chinese authorities have banned companies providing services in the field of tutoring and other additional education from making money on it, entering the stock exchange and attracting foreign investment. Now they can only work in the NGO format.
According to Bloomberg, the market value of many large companies in this area has fallen to the level of liquidation. Among them are TAL Education Group and New Oriental Education & Technology Group. The capitalization of the latter dropped from $10.9 billion to $3.3 billion in just a day.
Experts note that the Chinese authorities are not concerned about the problems of education or the security of user data, but only about the huge influx of monetary capital. Most large technology companies are traded on foreign exchanges and receive investments abroad.
So far, China has not officially announced new regulatory measures specifically for the gaming industry and sanctions against gaming companies. However, amid problems with other online industries, investors are afraid of a possible tightening and are selling shares.