For China’s video game makers, it must have seemed a case of ‘Here we go again’ when — just before Christmas — regulators announced a new set of draft rules aimed at curbing Chinese gamers’ addiction to, and excessive spending on, their products.

Beijing’s apparently renewed antipathy towards the tech sector certainly spooked investors, wiping out almost $100 billion of the gaming companies’ market value since the draft rules came out on December 22. Industry leaders Tencent and NetEase’s shares remain down 8 percent and 13 percent, respectively, while the share prices of some smaller gaming stocks have plunged by over a quarter, as of Friday’s market close.

Yet on calmer reflection most analysts say the proposals are less drastic than the market reaction suggests, and in line with the concerns of governments in other countries about the impact of video games, particularly on young people.

The Chinese authorities have already responded in uncharacteristic fashion: by backing down. The National Press and Publication Administration (NPPA), which regulates the video gaming industry, pledged on December 23 to revise the draft rules based on public feedback. Days later, it greenlit 105 domestic video games, the most it had approved in a single month all year. Then, shortly before the new year, a top official at the Propaganda Department – which oversees the NPPA – was dismissed, according to reporting by several media outlets. 

These draft regulations do not include caps or limits at this point, which has led to a lot of speculation around a worst-case scenario.

Daniel Ahmad, Niko Partners’ director of research and insights

The episode illustrates the length of the shadow cast by the tech sector crackdown of 2020-22, when Beijing imposed a series of restrictions on the country’s hitherto enormously successful internet companies. In the post-crackdown environment, even relatively modest proposals, unveiled haphazardly, can cause panic among investors — leaving regulators with a delicate balancing act as they try to implement regulations while preserving market stability. 

“The new rules are not as unreasonable as they may seem,” says Angela Zhang, an expert on Chinese tech regulation and associate professor of law at the University of Hong Kong. “[But] the overall sentiment of investors in this sector is extremely fragile, making them prone to overreact to any regulatory changes. This fragile investor sentiment also contributes to the volatility in Chinese tech regulation.”

The draft rules may have caused such a large shock because they target features that are core to how many Chinese video games work. Under the proposals, game developers will have to set in-game spending limits for all players – such limits already exist for minors. Other rules would ban daily login rewards, and the conversion of in-game assets into real cash. Another provision would ban the offering of probability-based luck draw features (better known as ‘loot boxes’) to minors. 

Gaming companies’ reliance on in-game spending incentivizes developers to build in gimmicks that encourage gamers to spend higher amounts and return frequently. Probability-based ‘loot boxes’, for example, lure players in with the potential rewards of rare assets or in-game advantages. About 30 percent of mobile gamers spend money in-game because of discounts or special offers, and about a quarter purchase loot boxes, according to Niko Partners research. 

The vast majority of Chinese video games are free to play, with 93 percent of developers’ gaming revenue drawn from in-game payments, according to Niko Partners, a consultancy focused on the Asian video game market. Players are encouraged to purchase in-game currency which can be redeemed for upgrades, features, or rare assets, which can provide advantages or simply signify status. 

Strict caps on adult players’ in-game spending could thus undercut developers’ revenues, although the consultancy also estimates that just 2.5 percent of gamers constitute ‘high spenders,’ meaning they spend over 300 RMB or $42 monthly.

“These draft regulations do not include caps or limits at this point, which has led to a lot of speculation around a worst-case scenario,” says Daniel Ahmad, Niko Partners’ director of research and insights. “We do not expect restrictions for adults to be as stringent as those currently enforced for minors.”

Besides hurting their revenues, the new rules could also derail companies’ development plans, particularly at smaller firms. 

“For developers, it’s both really hard to turn a profit from games in China and really hard to develop strategy and marketing plans,” says Daniel Camilo, a Shenzhen-based publishing and gaming consultant. Whenever the NPPA introduces new gaming rules, he adds, “[developers] halt their plans, stop hiring, and go back to old games to make sure they fall within the regulations. So they can’t really focus on growing and making new games.”

Other countries are also considering reining in video games’ most addictive features. 

“The Chinese rules are on the stricter side, but still a reasonable policy,” says Leon Xiao, an expert in video game law at the IT University of Copenhagen. “There has been a conversation in Western countries about whether loot boxes fit under the legal definition of gambling, and many parents and NGOs have called for bans on loot boxes for under 18s. But bans are not necessarily as politically achievable in other countries.”

Belgium, for example, nominally banned loot boxes in 2018, after its gambling regulator declared them to be a form of unlicensed gambling — although a lack of resources has made it hard to enforce the ban. Germany has mandated that its entertainment age rating agency account for the presence of loot boxes when evaluating games, but has similarly found it difficult to impose strict restrictions. 

By contrast, China’s gaming regulations carry heavy weight thanks to its position as the largest gaming market in the world, and because the NPPA has full veto power over the release of video games in the country. 

“All markets and countries have their own regulations, but China is kind of its own planet in that way,” says Camilo. 

Gaming analysts say the Chinese government has long signaled it would like to curb excessive spending and gaming time, particularly among minors. Niko Partners reckons only 15 percent of the draft proposal could be considered new or updated. 

“The reaction from investors was driven by both the surprise announcement and the uncertainty around how new amendments will be implemented, as well as what future rules may be introduced,” says Ahmad. “The impact of these draft regulations will be determined by how certain articles are defined, revised, and standardized during the one-month feedback period.” 

That method of regulation is out of step with Beijing’s broader priorities for the economy right now. 

“The directive from the Party to regulatory agencies [this past year] has been to ‘normalize regulation,’ which means regulators should behave predictably, move cautiously, and not spring unexpected moves on industry,” says Kendra Schaefer, head of tech policy research at Trivium China, a consultancy.

“Most regulators have gotten the message, but the NPPA’s actions were a signal that some are still engaging in ‘shock and awe’ regulation,” she adds. “Whereas right now, there needs to be a more bi-directonal discussion on policy and its impact on industry, and consideration from agency heads about whether releasing a policy right now, in this way, is aligned with more important state priorities.”

Whatever form the final regulations take, experts believe that gaming companies can in fact expect long-run government support. Indeed, the draft regulations include a new 60-day service standard for game approvals – a dramatic acceleration from the current process, which can take six months or longer. 

“Gaming is really important for China in terms of soft power,” says Camilo. “While its movies and music are still very weak internationally, gaming has the potential to be a major export.” 

In another encouraging sign for the sector, China’s state broadcaster CCTV applied early this month for a trademark for a new segment known as “CCTV esports” – a signal that Beijing not only intends to support the gaming industry, but to platform it. 

As Camilo puts it: “It’s not in their interest to totally crack down on the gaming industry. Quite the opposite: it’s in their interest to see Chinese gaming succeed.”

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