China policy risk returns as stock market grinch

Winter has come. Investors who were starting to think it might soon be time to get back into China have just been given a rude awakening. On Friday afternoon Beijing surprised the markets with new draft rules aimed at stopping people spending too much time – and money – playing video games. Whatever the merits of the directive, it’s a stark reminder that policy risk remains alive and dangerous.

The all-encompassing new rules, which were unveiled by Chinese regulators including the National Press and Publication Administration, will apply to adults as well as children. They prohibit providers from giving players rewards for logging on every day, for example, and effectively set spending limits.

Tencent, the world’s biggest gaming company and one of the top index heavyweights on the Hong Kong Stock Exchange, fell as much as 16% after the news broke. Rival NetEase dived by as much as a quarter. The news changed the festive mood in Hong Kong entirely, prompting the benchmark Hang Seng Index to pare early gains and end the day 1.7% lower.

Both companies had survived relatively unscathed from President Xi Jinping’s earlier sudden crackdowns on tech and internet companies. An edict in July 2021 effectively killed the private tutoring industry, while companies from Didi to Alibaba also felt Beijing’s policy wrath.

The timing of the latest move is intriguing. Many financial professionals in Hong Kong and China were on Friday preparing to leave the office early for dinners – with Winter Solstice traditionally being an important festival for the Chinese. Trading was also thinner than usual as the Hong Kong market is about to enjoy a four-day break thanks to the long Christmas weekend.

Any overindulging in eggnog or baijiu is unlikely to lull investors into forgetting about Friday’s grinch-like move, though. As recently as August, for example, Tencent President Martin Lau was telling investors he thought China’s regulation of industry was heading back towards normalisation. Sideswipes out of the blue were probably not what he had in mind.

Context News

Chinese regulators on Dec. 22 announced a wide range of rules aimed at curbing spending and rewards that encourage people to play video games. Online games will now be banned from giving players rewards if they log in every day, if they spend on the game for the first time or if they spend several times on the game consecutively. All are common incentive mechanisms used by providers. Hong Kong-listed shares in Tencent, the world’s biggest gaming company, closed down 12.4% on Dec. 22, while those of its closest rival, NetEase, fell 24.6% after the National Press and Publication Administrations published the new draft rules.