Are videogame makers next on China's hit list of tech stocks? That's the concern after a state-owned publication slammed the industry as "spiritual opium" profiting from the masses, particularly minors.
The contained scope of the declines for gaming stocks suggests the industry may be able to ward off the kind of harsh regulatory clampdown that has effectively outlawed the for-profit tutoring industry in China. But this state-sanctioned article may also constitute an early alert that the industry is in Beijing's sights.
Investors into Tencent Holdings (TCTZF) and rivals such as NetEase (NTES) , 37Games (SZ:002555) and Perfect World (SZ:002624) have seen the stocks lurch lower over the last two days. That intensifies the drops in July, the worst month for Chinese tech stocks since the Global Financial Crisis.
Tencent shares plunged as much as 10.1% in early Asian trade on Tuesday. After a shaky start, Wednesday saw them recover 2.4% at the close. NetEase lost 11.4% on Tuesday in New York, and its Hong Kong listing (HK:9999) fell another 1.6% on Wednesday.
The selling has been more muted in smaller rivals. That indicates investors believe big names like Tencent and NetEase will bear the brunt of any political attack. Tencent accounts for 54.5% of the Chinese videogame industry, and NetEase makes up another 15.3%. So those are certainly the chief stocks to watch for any regulatory action.
Indeed, Tencent immediately responded on its social-media page on Weibo (WB) that it would change its policies to protect minors. It will cut the time children can spend playing its top title Honor of Kings from 90 minutes per day to 60 minutes on weekdays, and from 3 hours on holidays to 2 hours. The company will also now stop children under 12 from spending on in-game purchases. It is also intensifying efforts to snoop out minors posing as adults to play.
"Opium" is a heavily-loaded term for a nation that fought two wars over dealing the drug with Western forces. Those defeats led to the downfall of the Qing Dynasty, and resulted in Hong Kong, my current home, being signed over to the British.
So it's not a light jest when the headline on a feature story in Economic Information Daily says videogames are a "spiritual opium" that has developed into an industry worth "hundreds of billions." The piece later blames these "electronic drugs" for a litany of woes, from poor eyesight through bad grades and on to "personality alienation," hallucinations and suicide.
Shares in 37Games, which is officially called Wuhu Sanqi Interactive Entertainment Network, dropped as much as 7.3% on Tuesday but have since regained 2.7%. Perfect World dropped 8.3% and has clawed back 2.8%.
While the article would not run in a state publication without the backing of some Communist Party officials, it does not yet appear to be the official party stance. The newspaper, run by official news service Xinhua, pulled the article down from its Web site later in the day.
The article, which still exists here on the Xinhua Web site, paints a dim picture of the videogame industry, asserting that some companies have high-ranking "digital control" departments that study the "psychological weakness of players to design and improve games."
We're left reading the tea leaves over why the article ran, and was pulled down. Such second guessing is bound to happen when "official" policy is often floated quietly, behind the scenes, with no public announcement. It appears at least some officials believe stricter action is required to contain the gaming industry.
The threat of future action against videogame makers is not an idle one. The industry has come under attack before. After President Xi in 2018 said that the "vision health of our country's young people has always been of great concern," China stopped issuing licenses for new games for nine months. That resulted in a backlog of some 7,500 games, as I explained at the time, hurting revenue prospects for the likes of NetEase and Tencent.
Tencent's Honor of Kings is its flagship title, and the world's first game to blow past 100 million daily users. The company, which also runs the superapp WeChat, took over Los Angeles gaming company Riot Games in 2015, and also owns a 40% stake in Fortnite developer Epic Games. It gets one-third of sales from videogames.
The Chinese videogame market rose 20.7% in 2020, benefitting from the pandemic, to hit C¥278 .7 billion (US$43.1 billion). Online gaming is the fastest-growing and fattest slice of that pie, up by one-third last year to constitute 75% of the industry.
"No industry can develop in a way that destroys a generation," the article states. "The growth of minors comes first."
While the article is full of scare stories and surveys of videogame use by schoolkids, it is a confusing issue because China's videogame industry is also a point of national pride. Its development, like that of software and semiconductors, is seen as part of the nation's blossoming as a tech power.
The same Economic Information Daily had a story in July praising the boom in the e-sports industry, with some 25 universities now offering degrees in e-sports management. The 18,714 e-sports companies operating in China rose by one-third in 2020 alone.
That story noted the achievements of Chinese e-sports teams, with China picking up gold and silver at the Asian Games, which unlike the Olympics already includes e-sports in the medal events. China recognized e-sports as an official sport as far back as 2003, and has a national team.
"The e-sports industry has taken off at the speed of light, allowing many people to see this emerging career track," the July story states. "E-sports is never equal to [physical] games, and jobs in e-sports don't always mean 'playing games every day.' The players sitting in front of the computer are just a small part of the most eye-catching part of the industry chain."
You can hear the conflict in those words. "Yay, we're great at e-sports and winning!" "This tech industry is booming." "And oh, wait, it's not just about playing videogames."
E-sports is about playing videogames, of course. The support staff wouldn't have their jobs if there weren't teams out there wining prize money. Yes, there are coaches, broadcasters, team managers, nutritionists and personal trainers for that matter. But they are there to support the winning of digital titles.
I'm not alone in feeling conflicted about e-sports. Should they really be in the Olympics? That's a tough sell. As a gamer myself, I appreciate the prowess of top players. I don't totally understand the way my kids can watch YouTubers play Minecraft for hours on end, instead of just playing the game themselves. But I can understand how it can become a spectator sport.
We are also in conflict with how we teach and parent our children. It's tough to tell kids that, "Boo, videogames will rot your brain," and then add "Why don't you hop on your iPad to do your homework?"
So the preachy nature of the Economic Information Daily is no surprise. Videogames and screen time join vaping, the "blackout challenge," TikTok, hard drugs, teen sex and rap in a long list of behaviors sure to scare certain parents silly.
Is that really accurate? We need a more nuanced view. An Oxford University study released late last year found that playing videogames can be good for your mental health. And of course "open-world" games like The Legend of Zelda: Breath of the Wild, The Witcher 3 and the Elder Scrolls V have proved a way to explore new worlds even when you can't leave your four walls during lockdown.
Andrew Przybylski, the lead researcher of the Oxford study, says he has no doubt that research will uncover and document "toxic" aspects of games. But he is also demanding a greater scientific understanding of a significant leisure activity that to date has scant academic and health-policy research.
At least when it comes to discussion of topics like videogame addiction, or digital harm in general, he hopes to introduce a higher standard of evidence.
"You have really respected, important bodies like the World Health Organization and the NHS [British National Health Service] allocating attention and resources to something there's literally no good data on," Przybylski says, according to the Guardian. "It's shocking to me, the reputational risk that everyone is taking, given the stakes."
I agree. Chinese politicians and soccer moms in the American suburbs (plus this Gen X dad) could do with some data and level-headed analysis of one of the world's most-popular past times. Knee-jerk across-the-board condemnation isn't warranted, and doesn't get us anywhere.
"For them to turn around and be like, 'Hey, this thing that 95% of teenagers do? Yeah, that's addictive, and no, we don't have any data,' that makes no sense," Przybylski adds.
It is unlikely that Chinese policymakers will wait for that kind of research before acting. It's a commonly held view in China, often repeated by officials, that videogames cause short-sightedness. It's unclear whether that's the case.
In fact, there's evidence that all "near-work," including studying and reading as well as screen time and videogames, is correlated with myopia. But that's a "loose association" with near-work activities, which require people to focus on a nearby object, and doctors don't understand the mechanism.
It may equally be that what near-workers are not doing, such as spending time outside, is the driving factor. A lack of natural sunlight also correlates with nearsightedness. The American Academy of Ophthalmologists recommends giving your eyes a break by looking at something 20 feet away for 20 seconds for every 20 minutes of near-work, whether that's beating a videogame or reading a book.
The view being floated in Chinese official circles carries little of that nuance. China is experimenting with facial recognition as a way of controlling who plays games, and as of November already banned kids under 18 from playing games between 10 p.m. and 8 a.m.
"In the face of the powerful attraction of online games, few children can actively resist temptation," the article quotes an expert as saying. It also cites "relevant people" who believe videogame platforms must "increase their awareness of social responsibility, and should not simply pursue benefits." Faced with poor conduct by for-profit companies, "the intensity of penalties must be kept up."