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Tencent shock: Beijing's tighter grip leaves game sector in cold

Tech giant takes hit as Communist Party turns focus to social ills

Tencent's booth is pictured at the Global Mobile Internet Conference in Beijing.   © Reuters

GUANGZHOU -- The Chinese government's renewed clampdown on video games has rattled tech giant Tencent Holdings as well as the global gaming industry.

Once a gleaming symbol of the Chinese tech boom, the operator of the WeChat messaging platform and the world's biggest video game company by revenue has lost more than $170 billion in market capitalization since January. In the latest hurdle it has faced, regulators have held up approval of in-game purchases on Chinese mobile versions of South Korea's "PlayerUnknown's Battlegrounds."

Tencent's shares fell 3% on Aug. 16, the day after it reported a surprise drop in quarterly profit.

The heavy hand of Beijing was seen in Tencent's surprise decision on Aug. 13 to pull the personal computer version of Japanese company Capcom's "Monster Hunter: World" from its WeGame platform on China, less than a week after its release, despite having received more than 1 million preorders. The ruling Communist Party has tried to cleanse games, websites and traditional media of content promoting violence, gambling and addiction.

Tencent said the game failed to comply with regulations, specifically the ones overseen by a new body that came into being in March after the Communist Party broke up the State Administration of Press, Publication, Radio, Film and Television into separate agencies.

The "Tencent shock" has been spreading to other Asian markets.

Japanese game companies Nintendo, Konami Holdings, GungHo Online Entertainment, Gree and Colopl all touched year-to-date lows in Tokyo on Aug. 16.

Asian chip stocks also took a hit. Taiwan Semiconductor Manufacturing Co. -- the world's biggest contract chipmaker -- and South Korea memory supplier SK Hynix fell. So did Japanese wafer supplier Sumco.

While Tencent is best known for its vast social network WeChat and the associated digital payment platform, games form an integral part of how the group cashes in on users' time online.

While the predecessor agency was attached to the State Council, the newly created game watchdog was put under the direct control of the Communist Party's Publicity Department. The party itself said the move was to "strengthen" its ability to control information.

The new agency acted immediately by suspending reviews for every game in the regulatory pipeline. Publishers that requested reviews after early March were out of luck.

The Communist Party gave no reason for the stoppage. But a clue could be found in a 2017 editorial from its People's Daily newspaper. The piece put Tencent under fire for allegedly profiting off its highly successful game business at the cost of fueling social ills.

The party is apparently responding to how consumers might spend an inordinate amount of money on gameplay, or how the content will spread negative influence among young people. Some say that youths raised on games will be guided in an unexpected direction beyond where the state wants them to go.

What happened with "Monster Hunter" was almost certainly in line with the Communist Party's intentions.

The freeze on game approvals has rocked China's game industry and Tencent's earnings along with it. The company reported on Aug. 15 that net profit fell 2% on the year to 17.8 billion yuan ($2.58 billion) for the second quarter ended June -- the first quarterly decline since 2005, the year after it went public.

"It could be said to be the first profit decrease ever, in effect," a senior executive at a midtier Chinese brokerage said, calling it "shocking."

Second-quarter revenue jumped 30% on the year to about 73.6 billion yuan, equating to a healthy net profit margin of 24%. Yet Tencent's shares still stumbled to a level 20% below the start of the year. They were down roughly 12% from before the "Monster Hunter" ban.

"The entire gaming industry is being impacted by the freeze on audits," a Tencent executive said on Aug. 15.

"The situation is that we cannot foresee when reviews will restart," the executive said.

If the Communist Party maintains its tight grip on games over the long term, the impact on relevant sectors will be significant. China's video game market amounted to $32.5 billion last year, and such innovations as virtual reality and wearable devices are expected to emerge from the industry. The restrictions could end up stifling many sectors besides games.

Tokyo-based Sega Games officially entered the Chinese game market last year. It developed a smartphone title with a Chinese partner, releasing it in August. State authorities apparently gave it the green light, and Sega reported no problems.

But Japanese game developers are cautious about technology leaks. There has reportedly been a surge in cases of Chinese partner companies demanding source code.

Nikkei staff writer Takashi Ueda in Osaka contributed to this report.

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