Technology stocks in China plunged (again) on Thursday after Beijing continued its assault on online gaming companies with a fresh round of government regulations. Tencent and NetEase crashed and dragged down the Hang Seng after the SCMP reported that China will suspend approval for new online games, heating up Beijing’s campaign against gaming addiction
The two gaming giants were already lower following news that Tencent and NetEase had been summoned to a meeting on Wednesday by regulators, led by the Communist Party's publicity department and gaming watchdog the National Press and Publication Administration, to discuss new restrictions on video games for minors, SCMP sources said who gave a grim warning for the world's largest video game market: Regulators are saying "everything is on hold", with the decision to freeze new video game approvals revealed at the meeting.
Another source said new video game approvals would be on hold "for a while," but there was no mention of a timeline. The reason behind regulation was to "cut the number of new games" and "reduce gaming addiction."
As a result of the meeting, Tencent and NetEase plunged as much as 8.4% and 11.7%, respectively, in Hong Kong.
The news was a sharp blow to a tentative rebound that had investors eyeing the return of bull market for Hong Kong-listed tech stocks. It also accelerated a selloff in the Hang Seng Tech Index, which tumbled 4.5%
After edging toward a bull market, the Hang Seng Tech Index is now has 11% up from its Aug. 20 low, and around 40% below its February peak.
“We can see the negative news on the gaming sector also dragging down other tech names, with investors starting to consider the regulatory risks again rather than bottom fishing,” said Bu Jiajie, an analyst at China Galaxy International Securities. “Some tech stocks have had a good rebound in recent days and there is profit taking at the moment.”
“This demonstrates the risk for those attempting to call the bottom with so much uncertainty still hanging,” said Bloomberg Intelligence analyst Matthew Kanterman. “I don’t think the overnight news is a big departure from that which we already knew, but the reaction clearly signifies the skittishness of investors around any regulatory news.” Investors remain torn between enticing valuations and China’s long-term economic prospects on the one hand, and on the other the difficulty of predicting how much further the government will go in its crackdown on private enterprise.
US-listed NetEase was down as much as 5% premarket.
Bilibili falls 6.9%.
The selloff spread to Alibaba which was down 5%.
Beijing's regulatory crackdown from industry to industry has resulted in hedge fund exposure to Chinese stocks to plunge to a two-year low, according to a new client note by Credit Suisse.
Last week, the government announced new regulations for the industry, including restricting the amount of time minors play video games to just three hours per week. Cui Chenyu, a game analyst with global market intelligence firm Omdia in Shanghai, told Bloomberg that he is "concerned that the reported suspension is just the start of a broader crackdown on gaming, and about how bad this crackdown might be."
"The halt will definitely have a substantial impact on gaming companies. The number of new titles approved in the first half of this year may secure their revenue for 2021, but we would see adverse effect starting from late next year if approvals aren't resumed quickly," Chenyu said.
This isn't Beijing's first rodeo in cracking down on the video game industry. In 2018, the communist government suspended new approvals, which resulted in a profit drop for Tencent. Last week, China limited children's exposure to video games to just 3 hours per week.
SCMP's source added that Tencent and NetEase are being forced to purge all video games that are toxic for children, including "worshipping money" and "gay love." The two firms were also directed not to concentrate on maximizing profit at the expense of getting minors addicted to games.