China's Tencent shares dive post 'spiritual opium' critique of online games

Tencent Holdings Ltd. dived as much as 11% Tuesday after an offshoot of China’s official news agency decried the “spiritual opium” and “electronic drugs” of games, prompting the country’s largest corporation to declare the possibility of banning kids under the age of 12 from playing altogether.

The twin developments stoked fears Beijing will next set its sights on online entertainment after reining in the e-commerce, ride-hailing and online education industries. Tencent joined rivals NetEase Inc. and XD Inc. in a steep selloff after an outlet run by the Xinhua News Agency published a blistering critique of their industry. The Economic Information Daily cited a student as saying some schoolmates played Tencent’s Honor of Kings -- one of its most popular titles -- eight hours a day and called for stricter controls over time spent.

That sent ripples through the world’s largest mobile gaming arena. The online link to the post was removed hours later without explanation, though the story remains in the print version. Tencent itself followed up later Tuesday with a brief pledge to further limit play time for minors -- to just an hour during weekdays and no more than two hours during vacations and holidays. It also plans to forbid in-game purchases for under 12-year-olds, starting with its signature title. And the company broached the possibility of exploring an industry-wide ban on games altogether for those under the age of 12, without elaborating.

Tencent recouped some of its losses in afternoon trade. But the strongly worded article spooked investors already on edge after Beijing came down hard on online industries, triggering a global selloff of Chinese shares that at one point surpassed $1 trillion. Nervous investors continue to reevaluate their holdings as they ponder the longer-term ramifications of a crackdown on firms from Jack Ma’s Ant Group Co. and Alibaba Group Holding Ltd. to Tencent-backed Meituan and Didi Global Inc. Tencent has now shed more than $110 billion or roughly 17% of its market value since the start of last week, when Beijing sharply amped up its campaign.

“No industry or sport should prosper by eradicating an entire generation,” the article said, citing an academic at a state-backed institution.

The concerns Tuesday are bleeding over to Japanese and Korean gaming stocks as well. Shares of Nexon Co., which gets about 28% of its revenue from China, dropped as much as 10%, the most since May 13 and their lowest since May 2020.

“You can never pay too little attention to any Xinhua story,” said Ke Yan, a Singapore-based analyst with DZT Research. “The word choice of spiritual opium is especially harsh, it would be surprising if the regulators won’t do anything about this.”

China’s most valuable corporation has run afoul of regulators in the past, most notably in 2018 when watchdog agencies clamped down on gaming addiction and temporarily suspended monetization licenses, walloping Tencent’s main business. The term “spiritual opium” has in fact been employed in Chinese media in the past to call attention to the prevalence of gaming among youths, tracing back to the era of PC gaming in cybercafes.

In response, Tencent has restricted playing time for minors and imposed other measures to try and curb addiction. Just last month, it installed facial recognition systems for certain games to prevent kids from using their parents’ IDs to buy in-game items. In the fourth quarter of 2020, minors aged under 18 accounted for just 6% of the company’s Chinese online gaming gross receipts.

What Bloomberg Intelligence Says

Tencent and NetEase’s efforts over the last three years to reduce the play-time of younger gamers and enhance content controls may insulate them from another round of regulatory scrutiny on China’s online game sector, in our view. Yet they may have higher near-term costs on a possible need to accelerate the rollout of ID checks and other systems in games to prevent younger players from accessing inappropriate content.

It’s unclear whether regulators now intend to re-focus on the gaming sector, or other parts of Tencent’s vast media and entertainment empire. On July 27, Tencent said it was suspending new user registrations for its WeChat messaging super-app, prompting concerns about Beijing’s intentions for the gaming industry leader.

Investors fled Tencent and its internet peers in recent weeks after China announced its toughest-ever curbs on the online education industry and issued a series of other edicts governing illegal online activity and food delivery.

Xi Jinping’s government has in the past nine months embarked on a series of crackdowns on China’s most influential private-sector companies over issues ranging from antitrust to data security, as it seeks to rein in the tech giants’ influence.

“The market is on a razor’s edge and is extremely jumpy especially after last week, but I think this will only bring more of a technical adjustment to the way things are done, rather than bring in a new risk factor that has not been already priced in,” said Chen Yicong, managing director at Beijing Chengyang Asset Management Ltd. “But this has happened before and all of the mechanisms to prevent addiction are in place -- though of course there will always be loopholes.”