China's New Gaming Regulations Pose Challenges For Small Developers, Warns UBS Analyst

The emerging gaming regulations in China could place smaller developers in a bind, potentially leading to a decline in overall online advertising revenue.

What Happened: The National Press and Publication Administration of China on Friday recently unveiled draft rules that disapprove daily sign-ins for games and other practices that generate revenue. Following the draft’s announcement, shares of Tencent Holdings Ltd TCEHY, NetEase Inc NTES, and Bilibili Inc BILI plunged to a yearly low, CNBC reported.

The rules are up for review until Jan. 24. Kenneth Fong, head of China internet research at UBS, indicated that these proposed regulations would impact smaller developers more than larger ones due to their reliance on revenue-generating practices.

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Fong suggested that big game developers, with their strong R&D capabilities and strategies to enhance gamer engagement, might fare better. He also pointed out the potential impact on the advertising industry, as online games contribute around 20% of the industry’s revenue.

Even with Beijing’s recent efforts to restrict gameplay, particularly among minors, companies continue to develop and publish games in China. The National Press and Publication Administration, the authority overseeing the publication of new games, recently approved over 100 new domestic games.

Why It Matters: The proposed rules emerged unexpectedly before Christmas, triggering a market selloff of $80 billion, with Tencent losing $54 billion. The new regulations, which include spending limits on in-game purchases and bans on rewards for frequent log-ins, have renewed fears of a renewed crackdown on China's massive internet sector.

In a surprising turn of events, China's NPPA approved 105 online games, offering a "positive signal" for the industry’s growth despite the substantial financial losses faced by major game companies due to the regulatory changes.

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