Chinese gaming stocks on a roller coaster ride after state media denunciation stokes worries over further crackdown

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China’s gaming stocks had a roller coaster ride on Tuesday, after a state-run newspaper published a denunciation of the sector, calling online games “spiritual opium”, only to delete the article hours later.

Tencent Holdings, the world’s largest owner of mobile and computer-based game titles, fell 6.1 per cent at its close to HK$446, clawing back some of the 10.8 per cent loss earlier. It was the biggest intraday percentage drop in more than a year for the publisher of Honour of Kings, the first game to average over 100 million daily active players.

NetEase, publisher of the shooting game Halo, closed 7.8 per cent lower at HK$145.90, recovering slightly from its 15.7 per cent intraday plunge. Youzou Interactive, listed on the Shenzhen Stock Exchange, fell 4 per cent to 12.88 yuan, clawing back some of the 6.9 per cent intraday decline.

The Economic Information Daily, a Chinese-language broadsheet run by the state-owned Xinhua News Agency, published an analysis of school children’s education in the wake of the government’s crackdown on after-hours tuition classes. In an article that ran more than 5,000 characters, the newspaper described online games as “spiritual opium” and “electronic drugs,” while pointing out that Tencent’’s 2020 revenue was more than half of the entire industry’s income in China.

“No industry or competitive skill should be developed through the destruction of an entire generation,” the article said, adding that regulators should step up its investigations and punish wayward publishers. Hours after the article was published, it was removed from the newspaper’s website, as it did not reflect the Chinese government’s stance, according to a source familiar with the matter.

The U-turn reflects the latest scrutiny on games publishers, which added to the woes of a technology industry that is still reeling from more than six months of tightened regulations, from antitrust crackdowns on fintech to the outright ban of for-profit tuition schools.

The crackdown accelerated to the education industry, property and property management segment which caused burdens for parents for raising kids, as birth rate plunged in the nation and many young people are reluctant to having kids amid high costs and pressure of the items and services for children.

The rout has caused foreign investors fleeing the stock markets in China, with Cathie Wood trimming its US$1.66 billion holdings of China stocks, evoking memories of the 2015 market rout Around US$5 trillion had been erased from China’s markets and Hong Kong’s market value fell by 20 per cent during that summer.

Other gaming stocks also fell. CMGE Technology fell 13.6 per cent to close at HK$3.88 after plunging by as much as 22.3 per cent. On the mainland, Wuhu Sanqi Interactive Entertainment Network Technology fell 5.6 per cent in Shenzhen to 18.83 yuan while Hangzhou Shunwang Tech, a service company for internet cafes, fell 12 per cent to 12.70 yuan.

Tencent said Tuesday it would introduce new rules, starting with its flagship “Honor of Kings” game, that will enforce tougher limits on playing time than required by the authorities. Young gamers will be limited to playing for an hour on weekdays and two hours on weekends and holidays, and children under 12 can’t make in-game purchases, it said.

The call for children to spend less time playing games online isn’t new, said Tam Tsz Wang, an analyst at DBS Bank. “But the market is linking it to the recent incidents, especially after what has happened to the education sector,” he added.

Investors had typically viewed social concerns as posing less risk than competition or national-security issues, he said. But the tutoring clampdown shows that China now places a much higher priority than before on social issues, Mr. Tam added. Still, he said the aim was to protect minors, rather than killing an industry that is increasingly successful internationally.

Tencent is an industry powerhouse and “Honor of Kings” was the world’s top-grossing mobile game in both 2019 and 2020. For last year, the company reported the equivalent of $22.7 billion in revenue from smartphone games, and $6.9 billion from PC games, out of total revenue of $74.6 billion.

Tencent’s gaming revenue rose 17% in the first quarter of this year, helped by “Honor of Kings” and newer games such as “Moonlight Blade Mobile.”

Last week, a senior Communist Party official told an industry expo in Shanghai that preventing young people from becoming addicted to videogames was a priority for authorities. “We will keep a close eye on it,” said Yang Fang, the deputy director of the publication bureau of the party’s central propaganda department.

Ms. Yang said authorities had already taken action this year against games with violent, pornographic or otherwise undesirable content, and an industrywide initiative was under way to combat gaming addiction. In its statement Tuesday, Tencent said the new limits on playing time were part of the broader initiative.