Tencent, a major player in the global gaming industry, experienced a significant setback, losing approximately $43.5 billion in market value on Friday. This drastic decline followed the surprise announcement of new regulations by China aimed at curbing excessive gaming and spending.
The rules, presented by China’s National Press and Publication Administration, had a ripple effect on Tencent, NetEase, and Bilibili, impacting some of the largest online gaming-related companies in the world’s foremost online gaming market.
The unexpected regulatory move from China dealt a blow to Tencent, leading to a 12.4% drop in its Hong Kong-listed shares, closing at HK$274—the lowest since November 2022. NetEase, heavily reliant on domestic online gaming for 80% of its third-quarter revenue, experienced a more substantial plunge of 24.6%, wiping out about HK$115.1 billion ($14.7 billion) off its market capitalization. Bilibili, with 17.1% of its total third-quarter net revenue from Chinese domestic gaming, saw a 9.7% decline in its shares.
Analysts, including Brian Tycangco from Stansberry Research, expressed concern about the regulatory impact on existing business models. Tycangco highlighted the potential doubt on business viability, given that many models rely on incentives and rewards to attract users and build loyalty. He emphasized the need for better coordination between industry and regulators.
The new draft guidelines from China’s gaming regulator prohibit high-value transactions in virtual entities and daily login rewards. Additionally, restrictions on recharging limits with pop-up warnings for “irrational consumption behavior” aim to address concerns about excessive spending in the virtual gaming. Vigo Zhang, vice-president of Tencent Games, acknowledged the guidelines but noted that they do not fundamentally alter the industry’s business model and operations.
These regulations come at a time when the broader China technology industry is still recovering from a crackdown that began in late 2020. Tencent’s previous success in securing game licenses just over a year ago is now overshadowed by the latest measures, reflecting a broader effort to address concerns about the impact of online gaming on the well-being of the younger population.
In essence, the unfolding situation underscores the need for a delicate balance between industry innovation and regulatory oversight.