China is set to implement new regulations curbing both the expenditure and duration of time individuals can allocate to video games, with the primary objective being to restrict in-game purchases and mitigate excessive gaming habits.
This proposed legislation deals a setback to the world's largest online gaming market, still grappling with the aftermath of a prior regulatory crackdown. Consequently, the announcement resulted in a sharp decline in the stock prices of major tech companies, erasing tens of billions of dollars from their market value.
The new rules also repeat a ban on "online game content that could harm the unity of the country" and "pose a threat to national security or damage the country's reputation and interests."
Beijing first moved against the gaming sector in 2021, ruling that online gamers under 18 could only play for an hour on Fridays, weekends and holidays.
Online games must not offer rewards that entice people to play and overspend, including those for daily logins and topping up accounts with additional funds, said the industry regulator, the National Press and Publication Administration (NPPA).
"The removal of these incentives is likely to reduce daily active users and in-app revenue and could eventually force publishers to fundamentally overhaul their game design and monetization strategies," said Ivan Su, an analyst at Morningstar. Pop-ups warning users of "irrational" playing behavior are also set to come into force.
China is the world's largest gaming market and Tencent is the global leader in the sector in terms of revenue. The company dominates the Asian market and has invested in game studios across the world.
After the announcement by the NPPA, Tencent witnessed a 12.4% decline in its share price. Vigo Zhang, the vice president of Tencent Games, assured that Tencent would rigorously adhere to any upcoming regulatory requirements. Zhang emphasized that the newly proposed rules align with regulators' continuous emphasis on ensuring companies maintain "reasonable business models and operating practices."
He added that minors have been spending a historically low level of money and time on Tencent's games since 2021, when the protection of younger players became a focus for Beijing.
Shares of Dutch tech investor Prosus lost more than 14%. Prosus's stock performance is closely linked to that of Tencent, which is its biggest investment in a wide-ranging portfolio of technology stocks.
The shockwaves were felt throughout Hong Kong's Hang Seng Index, which dropped more than 4% at one point, and was down 1.7% by the close of trade.
Gaming consultant Daniel Camilo told the BBC that both Tencent and NetEase have a lot of free-to-play games that are "pay to win" where gamers are "actively incentivized to spend money on their games."
The restrictions could affect those types of "monetization models," which would then have to be restructured, and "some of the games might have to be pulled out from the stores," he said.
However, Camilo thought that both Tencent and NetEase would recover in the long run. But, the same cannot be said for smaller gaming companies.
"If a small company is affected in a few million, then it might mean that they have to close their doors," he said.
He continued: "2023 has been a year full of layoffs and a lot of struggle, particularly for the gaming industry in China. So this is a severe blow, I would say, especially for the medium and smaller publishers."
The government's new gaming rules would also potentially speed up the process of giving games the green light in the country by requiring regulators to process approvals within 60 days.
Game publishers must house their servers processing and storing user data in China rather than elsewhere.
According to Reuters, the administration is seeking public comment on the proposals by Jan. 22, 2024.
