Just when China’s gaming market was bouncing back from a government crackdown, regulators have announced new rules that aims to limit in-game spending and rewards that encourage the same. The new regulations were announced on Friday, December 22, 2023, as reported by Reuters. Tencent and NetEase took a serious hit from the announcement.
Chinese regulators want to set spending limits on online games. The panic that followed the announcement erased almost $80 billion in market value from Tencent and NetEase, China’s two biggest gaming companies, as investors analyzed the potential impact on earnings as well as the possibility of more restrictions.
One of the techniques that online games deploy to retain players and have them come back every day is offering daily rewards. The new regulation in China will ban online games from offering daily rewards to players for simply logging into the game.
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Personally, I think daily rewards and loot boxes are two core online game mechanics that promote addiction. Once you get hooked on daily rewards, it is hard to break free because you unconsciously create a routine that involves logging into the game every day, just to have a share of the daily loot.
In addition to that, Chinese regulators also want to ban online games from offering rewards to players if they spend on the game for the first time or spend several times on a game. They also want games to cap how much players can transfer to their digital wallets for in-game spending.
“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, a Morningstar analyst.
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Tencent saw its shares plunge by 16% while that of NetEase dipped by 25% after the publication of the draft rules by the National Press and Publication Administration. Regulators also proposed a process of game approvals within 60 days, which should excite key players in the industry.
Tencent downplays the impact of the draft law by Chinese regulators on its operations
Although NetEase declined to comment on the new draft publication by Chinese regulators, their bigger rival Tencent has downplayed the impact it may have on their operations while maintaining that they always abide by regulatory requirements.
The vice president of Tencent Games Vigo Zhang said the company doesn’t have to fundamentally change “its reasonable business model or operations” for games. Zhang also added that spending by minors on the company’s games dipped to historically low levels since 2021 when Beijing prioritized minor protection.
Chinese regulators tightened restrictions on video games in 2021 and set a strict playtime for gamers under 18 years. Also, the regulators suspended the approval of new video games for almost eight months, a decision they claimed was a way to curb gaming addiction.
Last year, regulators started approving new games for the Chinese market signaling the end to the crackdown. Nevertheless, regulators have continued to introduce rules to curb in-game spending. The December 22 draft rules are the toughest yet in the Chinese regulator’s drive to limit in-game spending.
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“It’s not necessarily the regulation itself—it’s the policy risk that’s too high,” said Steven Leung, executive director of institutional sales at Hong Kong’s broker UOB Kay Hian. “People had thought this kind of risk should have been over and had started to look at fundamentals again. It hurts confidence a lot.”
However, it wasn’t all gloom for the Chinese video game industry on December 22. Chinese regulators announced on the same day that 40 new imported games have been licensed for domestic release. Perhaps, this signals Beijing’s willingness to allow more foreign games into the country.
