China's Gaming Guidelines Cause Stock Plunge for Tencent and NetEase

In an effort to maintain control over the virtual economy, China released draft guidelines on Friday aimed at curbing excessive spending on online gaming. As a result, the country's biggest gaming companies, Tencent and NetEase, saw their shares plunge in the Hong Kong market.

The National Press and Publication Administration, China's gaming regulator, issued guidelines stating that online games are prohibited from offering incentives for daily log-ins or purchases. Additionally, the guidelines impose limitations on the amount of money users can recharge and require warnings for "irrational consumption behavior."

The announcement had an immediate impact on the stock market. Tencent, the largest gaming company in China, experienced a sharp decline of approximately 16% initially, although it managed to recover some ground and eventually closed 12% lower. NetEase, a rival company, saw its stock price drop by around 25%.

This is not the first time that Beijing has taken measures to regulate the online gaming sector. In 2021, regulators implemented strict restrictions on the amount of time children could spend playing games, limiting it to just three hours per week. Furthermore, state media referred to online games as "spiritual opium," drawing parallels to a time in China's history when addiction to the drug was widespread.

The gaming industry has also faced challenges in gaining approvals for new video games. Approvals were suspended for approximately eight months, only resuming in April 2022 as authorities began to ease a broader crackdown on the technology industry.

The latest set of guidelines is seen as a continuation of the Chinese government's efforts to exert control over the virtual economy. By curbing excessive spending and implementing restrictions, authorities are aiming to address concerns of addiction and promote healthier consumer behaviors within the gaming sector. However, the impact on the stock market demonstrates the potential financial consequences for major gaming companies as a result of these regulations.