HONG KONG, Jan 20 (Reuters) – China’s sweeping crackdown on its video game market is expected to revive the battered industry this year, but continued curbs on some content and economic headwinds will limit recovery Degree.
Beijing’s tough curbs in 2021 have left a once-booming industry in ruins, with industry leaders such as Tencent Holdings (0700.HK) and NetEase Inc (9999.HK) losing more than half their market value and shrinking the world’s largest gaming market for the first time time time.
Shares in Tencent and NetEase, the world’s largest gaming companies, rose this week after China’s video game regulator awarded the first gaming licenses in 2023, the latest sign that the crackdown is coming to an end.
Analysts expect China to approve 800 to 900 games this year, possibly more, surpassing the 512 games released in 2022 and the 755 games in 2022. No games have been approved between August 2021 and March 2022.
“We believe the approvals point to a more benign regulatory environment for China’s gaming industry,” JPMorgan analysts wrote in a note on Wednesday. “We are more bullish on the growth of the overall online game market during the Lunar New Year period due to ample supply of games. This is the traditional peak season for China’s online game market.”
The crackdown is aimed at curbing gaming addiction among young people and weeding out content that the government does not sanction, requiring companies to remove violent content that is seen as celebrating wealth or fostering a celebrity cult.
That would cause game sales in China to plunge by more than 10% to 269.5 billion yuan ($40.1 billion) in 2022, the first decline since data began in 2003, according to a report by government-backed industry data firm CNG.
In November, Tencent, the world’s largest gaming company, reported that its domestic game revenue fell 7% in the third quarter. Its overall gaming revenue fell 4.45%.
Shares of Tencent, China’s most valuable company, are down 24.7% in 2022 but are up 21% so far this year, recouping almost all of last year’s losses. NetEase’s Hong Kong stock has fallen 27.3% in 2022 and is up 21.4% this year.
Tencent and NetEase did not respond to requests for comment.
Regulatory thaw
There is also some hope among investors that the increased budgets for games now being approved show that publishers are willing to spend more on improving the regulatory environment.
Since December, games such as Tencent’s “Valorant”, NetEase’s “Justice League” and MiHoYo’s “Henghuai: Star Trail” have all been authorized, which is the largest ticket item since August 2021.
In December, Chinese regulators gave the green light to 44 foreign games for the first time in 18 months, widely seen as the last regulatory hurdle to be removed, sparking hopes of foreign developers re-entering the country.
Citi analysts said that if approval announcements normalize further, the number of approved games could exceed their current forecast of 800 to 900 licenses.
“Among game studios, we see higher upside risks to Tencent’s game revenue rebound,” they added.
That said, some of the regulatory restrictions imposed by Beijing are here to stay. Most notably, in September 2021, China banned minors under the age of 18 from playing games for more than three hours a week, a rule that forced Tencent and its peers to abandon their targeting of young gamers.
Tencent said in November that the overall time spent by under-18s on its games had dropped 92%.
For the upcoming Lunar New Year holiday, Tencent and NetEase have implemented rules restricting minors under 18 from playing games for longer than allowed by law, in line with other recent major holidays.
Tight controls on game content will also remain in place, with popular but violent games such as Grand Theft Auto banned from entering China.
Whether the gaming market can return to normal also depends on the recovery of the Chinese economy, which has been hit hard by a surge in COVID infections.
The unprecedented decline in game sales last year may also be due to mobile gamers being “more price-sensitive to discretionary entertainment spending amid a weaker” macroeconomic environment, Citi analysts said.
However, data shows that the total number of gamers in China remains stable, falling only 0.33% from 2021 to 664 million by 2022.
“Online gaming in China will return to growth by 2023, but (not) by a large amount,” said Chenyu Cui, an analyst at research firm Omdia. “Growth will be slow and gradual.”
Reporting by Josh Ye; Editing by Anne Marie Roantree and Sam Holmes
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