New proposals brings new challenges for gaming sector in China

China’s gaming industry, valued at $45 billion, is facing significant challenges due to new regulatory proposals aimed at limiting the time and money spent on online games. The regulations, announced last week, introduce spending limits for online games, a ban on rewarding daily logins, and prohibit lucky draw features for minors. These measures have triggered panic among investors, leading to substantial declines in the stock prices of major gaming companies.

Shares in Tencent, a leading gaming company, fell by over 12%, resulting in a loss of more than $43 billion in market value. NetEase, another prominent player in the industry, saw its shares drop by over 24%. The social media site BiliBili, which heavily relies on gaming for about 17% of its revenue, experienced a nearly 10% decline. The regulator, however, appeared to slightly soften its stance in response to concerns raised by various stakeholders.

China’s gaming sector had already come under regulatory scrutiny in 2021, with measures aimed at curbing excessive gaming among young people. The new rules follow this trend, reflecting the government’s efforts to address concerns about the impact of gaming on the younger population. In 2022, the online gaming sector in China experienced its first recorded contraction, despite the ongoing popularity of video games.

Despite regulatory challenges, the gaming industry remains popular, with domestic revenue growing by 13% in the current year. China has a massive gaming audience, with a record 668 million gamers reported in the first half of the year, equivalent to half the total population. However, concerns about the potential negative effects of gaming on youth have prompted regulatory actions.

The latest proposals, subject to public consultation until January 22, include measures that could benefit the industry, such as requiring regulators to process new game licenses within 60 days. Additionally, Beijing recently approved the release of 40 new imported games for domestic consumption, signaling support for the continued development of online gaming. However, the impact of these new regulations is expected to be felt most acutely by smaller game companies, which may struggle to adapt to the changing regulatory landscape.

Analysts anticipate that smaller gaming companies will likely bear the brunt of these new restrictions, as larger industry players like Tencent and NetEase have the resources to navigate regulatory challenges more effectively. This concern is rooted in the experiences of the industry’s response to the 2021 crackdown when thousands of small studios and gaming firms reportedly deregistered after new game approvals were halted for nearly a year.

Vigo Zhang, the vice-president of Tencent Games, has stated that the company is committed to strictly implementing any new regulations. The resilience of the gaming industry is evident in its ability to recover from previous setbacks, but the current regulatory climate adds a layer of uncertainty for investors and industry stakeholders.

It’s noteworthy that the proposed measures, while introducing restrictions, also include aspects that could be perceived positively by the gaming industry. The requirement for regulators to process new game licenses within a specified time frame, along with the approval of new imported games, signals the government’s acknowledgment of the sector’s importance and potential for growth.

China’s gaming landscape is dynamic, with regulatory changes responding to concerns about the impact of gaming on the younger generation. Balancing industry growth with the need to address societal concerns poses a challenge for regulators. The ongoing public consultation period until January 22 provides an opportunity for stakeholders and the public to voice their opinions on the proposed regulations, potentially influencing their final form.

As the gaming industry adapts to these regulatory developments, the broader implications extend beyond financial considerations to encompass questions about the role of video games in society, particularly concerning the well-being of younger players. The outcome of this regulatory process will likely shape the future trajectory of China’s gaming sector and its relationship with both domestic and international stakeholders.

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