Opium Wars

It was another disastrous day for one of the world’s most influential stocks.

Tencent plunged double-digits to a 14-month low at one juncture, before trimming losses to “just” 6% amid more regulatory rumblings out of Beijing (figure below).

Online games are “electronic drugs” akin to “spiritual opium,” the state-run Economic Information Daily said, in a scathing article calling for more regulation, including enhanced content review and unspecified “punishments.” Among those cited: A student, who said some school children currently spend eight hours a day playing “Honor of Kings,” a popular Tencent title.

Later, the paper removed a link to the article. Around an hour after that, Tencent said it was poised to introduce stricter time limits on games for underage players, starting with — wait for it — “Honor of Kings.” In addition, in-game purchases by users under 12 will be banned, according to a statement on WeChat. The company also suggested the industry consider a total ban on children under 12 accessing online games.

To reiterate: All of that happened in the space of just a few hours. That’s not to say Tencent wasn’t alerted beforehand (i.e., before the article was published), but to western audiences, this type of thing often comes across as wholly incredible.

The response time between the government issuing a rebuke of an entire industry and that industry’s largest player instituting concrete measures aimed at ameliorating the situation, isn’t weeks or months or years and it certainly doesn’t depend on the outcome of any lawsuits. Rather, the Party speaks, and the industry responds immediately — “within one business day,” as it were. That’s fear. That’s autocracy.

Failing to appreciate that dynamic is why western investors continually find themselves aghast. We simply can’t fathom the idea that power can reside outside of capital and that societal imperatives might totally outweigh “the market” in the minds of a country’s leadership.

As I never tire of reminding folks, Tencent doesn’t just dive in a vacuum. In addition to Naspers and Prosus (both of which plunged mechanically on Tuesday), Nexon and NetEase got hit (figure below). And, as Bloomberg ominously wrote, “Tuesday’s rapid-fire developments stoked fears Beijing will next train its attention on an arena that’s pivotal to the bottom line of media giants from Apple and Activision Blizzard.” Nintendo and Capcom may be at risk too. Tencent uses licensing deals to assist foreign game developers anxious to tap the Chinese market.

As one economist told Bloomberg for the linked article (above), “a lot of the recent market volatility is, in my view, a result of investors not knowing what Beijing is up to.”

If you think that’s frightening for market participants, just imagine being an executive at one of the domestic companies in Xi’s crosshairs.

“Chinese authorities are prioritizing social welfare and wealth redistribution over capital markets in areas that are deemed social necessities and public goods and/or important elements to strategic goals by policymakers, consistent with their repeated emphasis of promoting fair growth and ‘broad prosperity’ since late last year,” Goldman remarked.

There it is again: In order to navigate a global, interconnected market over which China wields significant sway, investors need to come to grips with the fact that power can reside outside of capital. That’s ironic. Mastering capital markets now requires understanding why and where they’re of secondary concern.

The figure (below) is an updated version of Goldman’s regulation proxy indicator.

A trip down memory lane found Bloomberg readers reliving the 2018 episode, when regulators turned the screws on alleged “gaming addiction,” a push that involved the suspension of monetization licenses.

Note that since Jack Ma’s infamous critique of regulators last October, Beijing has cracked down on mega-tech, ride-hailing, food delivery, education technology and now online gaming (again). And therein lies the real risk. Goldman spoke of “areas that are deemed social necessities and public goods and/or important elements to strategic goals by policymakers.” That gives the Party wide latitude. Virtually any business could be described as at least tangentially related to a social necessity, a public good or some strategic goal.

While this isn’t the first time state media has resorted to drug references to describe the perils of online games, one analyst based in Singapore noted that “the word choice of ‘spiritual opium’ is especially harsh.”