China’s video game makers come in from the cold as crackdown eases
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[January 20, 2023]
By Josh Ye
HONG KONG (Reuters) - China's end to a sweeping crackdown on its video
games market is expected to breathe life back into the battered industry
this year, but remaining restrictions on some content and economic
headwinds will limit the extent of the recovery.
Beijing’s tough curbs in 2021 laid waste to the once-booming industry,
shaving over half of the market value of sector leaders like Tencent
Holdings and NetEase Inc and shrinking the world’s biggest gaming market
for the first time.
Shares of Tencent, the world's largest gaming company, and NetEase rose
this week after China's video games regulator granted the first gaming
licences in 2023, the latest sign that the clampdown is ending.
Analysts expect China to approve between 800 and 900 games this year,
potentially more, topping the 512 titles released in 2022 and 755 in
2022. Between August 2021 and March 2022, no titles were approved.
"We believe the approvals indicate a more benign regulatory environment
for the China gaming industry," JP Morgan analysts wrote in a note on
Wednesday. "With rich game supply, we are more positive on overall
online game market growth during Chinese New Year, a traditional strong
season for the China online game market."
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The crackdown was aimed at curbing gaming addiction among youth and
purging content the government did not approve of, with companies asked
to delete content that was violent, deemed to celebrate wealth or foster
the worship of celebrities.
That sent game sales in China tumbling more than 10% to 269.5 billion
yuan ($40.1 billion) in 2022, the first decline since figures became
available in 2003, according to a report by CNG, a government-backed
industry data firm.
In November last year, Tencent, the world’s biggest gaming company,
reported its domestic gaming revenue shrank 7% in the third quarter. Its
overall gaming revenue fell 4.45%.
Shares of Tencent, China's most valuable company, dropped 24.7% in 2022
but have risen 21% so far this year, recouping nearly all of last year's
losses. NetEase's Hong Kong stock, which dropped 27.3% in 2022, is up
21.4% this year.
Tencent and NetEase did not respond to request for comment.
REGULATORY THAW
Also providing investors some cause for hope are the larger budgets of
the games now being approved, a sign publishers are willing to invest
more in the improving regulatory environment.
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![](../images/012023PIX/news_k97.jpg)
View of a video game store
following a COVID-19 outbreak in Shanghai, China October 23, 2022.
REUTERS/Aly Song/File Photo
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Since December, titles such as Tencent’s Valorant, NetEase’s Justice
Mobile and miHoYo’s Honkai: Star Rail have been granted licenses,
the biggest ticket items since August 2021.
In December, Chinese regulators approved 44 foreign games, the first
to be given the green light in 18 months and widely seen as the last
regulatory hurdle to be removed, inspiring hope for foreign
developers to re-enter China again.
Citi analysts said if approval announcements normalise further, more
games will potentially be approved than their current forecast of
between 800 and 900 licences. “Among the gaming studios, we see
higher upside risks on game revenue rebound for Tencent,” they
added.
That said, some regulatory restrictions imposed by Beijing are here
to stay. Most notably, in September 2021, China banned under-18s
from playing games for more than three hours a week, a rule that has
forced Tencent and its peers to give up targeting youth gamers.
Tencent said in November the total time under-18s spent on its games
had plunged 92%.
For the upcoming Lunar New Year holiday, Tencent and NetEase have
implemented rules to limit under-18s from playing games for more
hours than legally allowed, in line with recent practice for other
major holidays.
Strict control on game content will also remain, barring popular but
violent games such as Grand Theft Auto from entering China.
Whether the gaming market can return to form also depends on the
recovery of the Chinese economy, which has been thumped by a surge
in COVID infections.
Citi analysts said the unprecedented game sales decline last year
was also likely due to mobile gamers remaining "more price-sensitive
on discretionary entertainment spending amid a weak" macro economic
environment.
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However, data shows China’s total gamer population remains stable,
slipping just 0.33% in 2022 from 2021 to 664 million.
"In 2023, China’s online gaming will get back to growth, but (it
won't be) huge at all," Chenyu Cui, an analyst at research firm
Omdia said. "Growth will be slow and gradual."
(Reporting by Josh Ye; Editing by Anne Marie Roantree and Sam
Holmes)
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