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Hope for business as usual in games industry

The Chinese regulator last week withdrew proposed new regulations for games, but the sector is still holding its breath, writes ARTHUR GOLDSTUCK.

Markets usually respond to announcements from companies or authorities, but it is rare that the absence of an announcement makes a major impact.

Last week’s dramatic recovery in the Naspers share price, in line with a jump in the value of its holding in Chinese games company Tencent, followed immediately on the removal by the Chinese gaming regulator of a set of proposed curbs it had published on its website in December.

The National Press and Publication Administration’s (NPPA) website went down on Tuesday, the day after the expiry of a consultation period on the new rules. Shares in Tencent Holdings immediately jumped by 6%, and continued to rise last week, in tandem with the share prices of Prosus, which holds 26% of Tencent, and Naspers, which in turn holds 43.54% of Prosus.

At the time the regulations were announced, on 22 December, the Tencent share price fell by 17%, and Prosus saw its largest one-day fall yet. The NPPA draft guideline, titled “Measures for the Administration of Online Games”, consolidated gaming regulations into 64 articles, of which 10 contained new guidelines. Primarily, they were geared towards reducing “microtransaction” spending within games – a major source of revenue for the sector – and children’s access to games. This came on top of restrictions imposed in September 2021, which had also battered the market.

However, the scale of the market response appeared to take the Chinese government by surprise.

A week after the Measures document was published, the Chinese government fired Feng Shixin, head of the publishing unit of the Communist Party’s Publicity Department, which oversees the NPPA. While his removal suggested a step back from a more restrictive approach to gaming, the sector held its collective breath for the following three weeks as the consultation period played out.

The removal of the new guidelines as the deadline passed suggested that the restrictions would be completely overhauled. In effect, as some have put it, a spring breeze seems to be stirring after a harsh regulatory winter in China’s gaming industry.

The cold winds of restrictions also meant a months-long freeze on new game approvals that began with a crackdown in September 2021, leading to ongoing industry jitters.  In 2022, the Chinese gaming market shrank for the first time in its history as authorities called out in-game spending, monetisation models, and “inappropriate” content.

Days after the 2023 guidelines had been published, however, on 25 December, the NPPA approved 105 new online games, the largest number of approvals in a single batch in 2023.

That Christmas present, too, suggested an awareness that regulators had overstepped the mark and needed to make amends. It continued approving games during January.

Nevertheless, the industry is not yet in the clear. It once again waits with bated breath, this time for the revised rules, which will still have an impact on areas like data privacy and spending by children.

There is also a likelihood that authorities will incentivise domestically developed games, which have been rising in prominence, can be more tightly controlled, and will probably be more compliant with the government’s preference for “healthy” gaming experiences, implying a focus on educational and “high quality” content, as the Measures document had put it.

The apparent shift in attitude towards the sector in general has come at the same time as efforts by the Chinese government to shore up its economy and falling stock markers. On Wednesday the People’s Bank of China (PBOC) announced a massive 50-basis points cut in required bank reserves, the biggest in two years. According to Reuters, this would pump about US$140-billion of cash into the banking system.

PBOC Governor Pan Gongsheng said the bank would release policies on improving commercial property loans, “giving hope to investors who have been frustrated by China’s efforts to put a floor under a real estate sector that underpins consumption and household wealth”, reported Reuters.

It is probably no coincidence that the step back from harsh curbs on the gaming sector came in the same week, indicating recognition by authorities that constraints of its own making were holding back the market.

This does not mean it will abandon its view that gaming addiction was a “spiritual opium”, as state media declared of computer games in 2021. Such alarmist terms used in newspaper headlines led to the first playtime limits for minors in August 2021, when they were restricted to 3 hours of gaming per week. The state even dictated the days on which they could play: 1 hour per day on Fridays, weekends, and holidays.

The new curbs would have added content control, such as an emphasis on preventing violence, gambling, and historical distortion; stricter age verification procedures and playtime restrictions; a stricter approval process for new online games; enhanced data protection requirements; limitations on in-game purchases; and regulations on monetisation models like virtual currency and “pay-to-win mechanics”.

The last of these was intended to encourage fair play in computer games. It appears that the Chinese government has been forced to take a leaf out of its own book in how it treats the industry as a whole.

* A version of this article first appeared in The Sunday Times.

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