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China's video game makers come in from the cold as crackdown eases

China’s end to a sweeping crackdown on its video games market is expected to breathe life back into the battered industry this year, but remaining
restrictions on some content and economic headwinds will limit the extent of the recovery.

January 20, 2023
By Josh Ye
20 January 2023

By Josh Ye

HONG KONG, Jan 20 (Reuters) – China’s end to a sweeping
crackdown on its video games market is expected to breathe life
back into the battered industry this year, but remaining
restrictions on some content and economic headwinds will limit
the extent of the recovery.

Beijing's tough curbs in 2021 laid waste to the once-booming
industry, shaving over half of the market value of sector
leaders like Tencent Holdings and NetEase Inc
and shrinking the world's biggest gaming market for
the first time.

Shares of Tencent, the world’s largest gaming company, and
NetEase rose this week after China’s video games regulator
granted the first gaming licences in 2023, the latest sign that
the clampdown is ending.

Analysts expect China to approve between 800 and 900 games
this year, potentially more, topping the 512 titles released in
2022 and 755 in 2022. Between August 2021 and March 2022, no
titles were approved.

“We believe the approvals indicate a more benign regulatory
environment for the China gaming industry,” JP Morgan analysts
wrote in a note on Wednesday. “With rich game supply, we are
more positive on overall online game market growth during
Chinese New Year, a traditional strong season for the China
online game market.”

The crackdown was aimed at curbing gaming addiction among
youth and purging content the government did not approve of,
with companies asked to delete content that was violent, deemed
to celebrate wealth or foster the worship of celebrities.

That sent game sales in China tumbling more than 10% to
269.5 billion yuan ($40.1 billion) in 2022, the first decline
since figures became available in 2003, according to a report by
CNG, a government-backed industry data firm.

In November last year, Tencent, the world's biggest gaming
company, reported its domestic gaming revenue shrank 7% in the
third quarter. Its overall gaming revenue fell 4.45%.

Shares of Tencent, China’s most valuable company, dropped
24.7% in 2022 but have risen 21% so far this year, recouping
nearly all of last year’s losses. NetEase’s Hong Kong stock,
which dropped 27.3% in 2022, is up 21.4% this year.

Tencent and NetEase did not respond to request for comment.


Also providing investors some cause for hope are the larger
budgets of the games now being approved, a sign publishers are
willing to invest more in the improving regulatory environment.

Since December, titles such as Tencent's Valorant, NetEase's
Justice Mobile and miHoYo's Honkai: Star Rail have been granted
licenses, the biggest ticket items since August 2021.

In December, Chinese regulators approved 44 foreign games,
the first to be given the green light in 18 months and widely
seen as the last regulatory hurdle to be removed, inspiring hope
for foreign developers to re-enter China again.

Citi analysts said if approval announcements normalise
further, more games will potentially be approved than their
current forecast of between 800 and 900 licences.

"Among the gaming studios, we see higher upside risks on
game revenue rebound for Tencent," they added.

That said, some regulatory restrictions imposed by Beijing
are here to stay. Most notably, in September 2021, China banned
under-18s from playing games for more than three hours a week, a
rule that has forced Tencent and its peers to give up targeting
youth gamers.

Tencent said in November the total time under-18s spent on
its games had plunged 92%.

For the upcoming Lunar New Year holiday, Tencent and NetEase
have implemented rules to limit under-18s from playing games for
more hours than legally allowed, in line with recent practice
for other major holidays.

Strict control on game content will also remain, barring
popular but violent games such as Grand Theft Auto from entering

Whether the gaming market can return to form also depends on
the recovery of the Chinese economy, which has been thumped by a
surge in COVID infections.

Citi analysts said the unprecedented game sales decline last
year was also likely due to mobile gamers remaining “more
price-sensitive on discretionary entertainment spending amid a
weak” macro economic environment.

However, data shows China's total gamer population remains
stable, slipping just 0.33% in 2022 from 2021 to 664 million.

“In 2023, China's online gaming will get back to growth, but
(it won’t be) huge at all,” Chenyu Cui, an analyst at research
firm Omdia said. “Growth will be slow and gradual.”
(Reporting by Josh Ye; Editing by Anne Marie Roantree and Sam

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