‘Everything Is On Hold’: Xi Crushes China Tech Again

Just when you thought it was safe to buy the dip in Chinese tech, the bottom fell out again.

The Hang Seng Tech Index — poster child for Xi’s sweeping regulatory crackdown — plunged nearly 5% Thursday (figure below) amid reports of a regulatory suspension on approvals for all new online games.

The decision to halt approvals “was revealed during [a meeting] led by the publicity department of the Communist Party and gaming watchdog,” The South China Morning Post reported, citing a source who said “everything is on hold.”

News of the meeting was in the market Wednesday, when Xinhua said gaming companies, including Tencent and Netease, had been “summoned.” (I’m always reminded of Lefty in “Donnie Brasco”: “You get sent for, you go.”)

The agencies will step up supervision and start “checking on illegal behavior,” Xinhua said, noting that regulators believe it’s necessary to “strictly regulate” game promotion, celebrity endorsements and live broadcasts in order to prevent minors from developing an “obsession” with gaming.

This is an extension of existing crackdowns and shows how Xi’s initiatives overlap. Last month, the same regulator decreed that teenagers can only play online games for an hour a day on Friday, Saturday and Sunday. Beijing promised “inspections” and warned that violators will be “strictly” punished. Around the same time, celebrities began disappearing from the internet. Late last week, The National Radio and Television Administration effectively banned dissent of any kind, took aim at vulgar displays of wealth, capped actors’ pay and said Chinese culture will “no longer be a paradise for sissy stars.”

Although Xinhua didn’t mention any moratorium on new gaming approvals, Tencent dove nearly 9% (which, of course, meant Prosus and Naspers dove in sympathy). Netease fared even worse, dropping double-digits (figure below).

Ultimately, the two saw some $60 billion in value evaporate. And not just because investors were “already on edge,” as Bloomberg put it. The same linked Bloomberg article reminded market participants that “a moratorium on new titles would [hit] developers’ wallets directly [and] recalls a ten-month freeze on game monetization licenses in 2018, then intended to combat addiction and myopia among children.” That episode led Tencent to report its first ever profit decline.

Thursday’s rout came just a month after Tencent plunged to a 14-month low following a scathing commentary that appeared in the state-run Economic Information Daily. In that piece, Beijing called online games “electronic drugs” akin to “spiritual opium.” Although the tone was eventually softened, the message was clear enough: More regulation was coming.

On Thursday, Tencent postponed the release of “League of Legends Mobile.” The company said it needs to “improve the gaming experience.”