Chinese gaming stocks regain some ground as Beijing softens rhetoric

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Chinese gaming stocks regained some ground on Wednesday after Beijing appeared to soften its rhetoric on the sector in the wake of new regulations for the world’s biggest gaming market that triggered a record sell-off last week.

Shares in Tencent had tumbled more than 12 per cent on Friday after regulators rocked markets with a plan to curb how much money and time adults spend while playing online games — a reminder to investors of the risks from unpredictable policies in the world’s second-biggest economy.

But they clawed back some of those losses, rising more than 5 per cent in Hong Kong on Wednesday, in their first trading session after official rhetoric appeared to soften Beijing’s stance. Rival NetEase rose about 10 per cent after closing the previous session down almost a quarter. 

After Friday’s rout, the National Press and Publication Administration, China’s gaming regulator, sought to assuage concerns, approving the release of a batch of new games and stating on Saturday that it would study responses to its plans to curb how gaming is monetised, and support “healthy development” of the industry.

Zhang Xueqing, an analyst from China International Capital Corporation, a leading Chinese brokerage, said the regulator’s statement should “soothe the concerns of capital markets” and showed a more “gentle” attitude on the part of Beijing.

However, analysts and fund managers said the weak recovery highlighted concerns about policy uncertainty in China.

Liqian Ren, who manages China investments at WisdomTree Asset Management, a US-based fund, said that many China-focused investors had concentrated on macro trends in housing and consumption, and had taken “on this narrative” that regulatory risk for tech platforms had subsided. In this context, Friday’s announcement had been a big shock.

“People are definitely reassessing how much discount should be given for these sudden regulations . . . the sell-off is part of this broader reassessment,” she said. “Capital markets just do not like surprises.” 

Robin Zhu, a gaming sector analyst with Bernstein in Hong Kong, described Friday’s sell-off in a note as “The Nightmare Before Christmas”, and warned that the impact on smaller game developers could be worse than bigger groups such as Tencent and NetEase.

Many smaller groups ceased operations when Beijing stopped approving new gaming licences for almost a year in 2021. “It wouldn’t surprise us if a strict implementation of [Friday’s] consultation draft has a similar impact (perhaps it’s a good thing youth unemployment numbers are no longer published),” he wrote.

Zhu added that while markets had probably overreacted to Friday’s proposals, “almost any reaction feels justifiable in the present moment, given the vagueness of the consultation draft, and Chinese policymakers’ track record in the last few years”.

China’s online gaming industry is the biggest in the world with annual revenues of about $45bn from 650mn users.

Morgan Stanley analysts were less concerned about the hit to the sector. They said in a note that over the past five years, regulators have slowed the pace of new game releases, restricted content and curbed use by minors. However, the wave of regulations has ultimately had “minimal impact on the industry”, which has seen revenues surge almost 50 per cent since 2017, from Rmb204bn ($28.5bn) to Rmb305bn this year. 

The bank’s analysts added that big companies, through “innovation” or “workarounds”, could mitigate the risk from the latest regulatory proposals. 

Still, China’s stock market has sharply underperformed global peers this year on the back of a disappointing economic recovery from years of harsh zero-Covid restrictions and a rolling liquidity crisis among systemically important property developers. The MSCI China index is set to finish the year down more than 17 per cent, compared to a rise of more than 24 per cent for the S&P 500 in the US.

Gary Ng, a senior economist at investment bank Natixis, said the latest gaming regulations have “sparked fear” among investors that the period of regulatory crackdowns is not over, denting China’s efforts to bring in more foreign investment.  

“It may be boring to talk about policy risk again and again, but this is really the core factor behind the weak sentiment in Hong Kong and China-related assets, especially equities,” he said, adding: “Why would investors return from Asian markets, like Japan and India, if they all have a better story to tell?”