February 24, 2024

Tencent Holdings shares took a positive turn on Wednesday, the first day of trading, after Chinese regulatory authorities expressed a willingness to refine proposed rules. 

The draft rules, unveiled on Friday, December 22, aimed at curbing excessive spending and the use of in-game rewards that incentivize video game engagement. The development sent shock waves across the industry, causing stock prices of game industry leaders like Tencent to plummet. 

Implications of The Regulator’s Softening Stance

The announcement initially triggered a significant decline in stocks across the video game industry amid concerns about renewed regulatory crackdowns. Contrary to the initial apprehensions, the National Press and Publication Administration, China’s video game regulator, adopted a more conciliatory tone.

In a surprising move, the regulator declared its intention to enhance the proposed rules by genuinely considering public feedback. Additionally, the regulator approved 105 new licenses for domestic online games in December, surpassing the monthly average.

As a result, Tencent shares rose over 5% rise during morning trade, recovering from a 12% slump witnessed last Friday. Its rival company, NetEase, experienced a remarkable 10% surge, alleviating concerns following a 25% decline recorded on the same Friday.

Reports of renewed talks between NetEase and World of Warcraft-maker Blizzard added further momentum to NetEase’s recovery. The Chinese video game industry, which had only recently resumed growth in 2023 after a prolonged clampdown in 2021 and 2022, now faces renewed uncertainties.

Despite the ongoing positive market response, an analyst from Nomura advises caution. He stated that while the regulatory measures might alleviate immediate concerns, they are insufficient to eliminate the lingering uncertainties introduced by the draft regulations. 

The industry’s return to growth hangs in the balance, and market participants are closely monitoring developments. Share buybacks by several gaming companies, interpreted as attempts to reassure investors, have had a modest impact on boosting share prices.

Possible Regulatory Challenges in the Chinese Gaming Industry

The draft regulations, currently open to public comment until January 24, propose restrictions on common incentive mechanisms in online games. These include barring games from providing rewards for daily logins, initial in-game spending, and consecutive spending. 

While the regulatory initiative surprised both the industry and investors, it aligns with broader efforts by Chinese authorities to address issues such as myopia, internet addiction, and gaming addiction among the youth. 

In 2021, the government implemented a curfew for minor video game players, and in August, the cyberspace regulator mandated a maximum of two hours per day on smartphones for children under 18.

As key players, Tencent and NetEase’s stock price changes reflect the industry’s sensitivity to regulatory shifts. It underscores the broader challenges associated with addressing concerns about youth well-being regarding gaming and internet addiction.

The recovery in share prices highlights the ongoing uncertainty surrounding the implementation and impact of the proposed regulations. 

As the industry awaits further developments, market participants remain vigilant, balancing optimism with a cautious outlook in a regulatory environment that continues to evolve.

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