China’s Risky Regulation of Video Gaming

In January, China removed Feng Shixin, the head of the publishing unit at the Chinese Communist Party Publicity Department, after proposed regulations on video games tanked gaming stocks. (The Publicity Department oversees the National Press and Publication Administration, which is responsible for regulating the Chinese gaming sector.)

The dismissal of a top Chinese official like Feng can usually be seen as a tacit admission that the central government has made a mistake. In this case, it is a mistake to the tune of billions from the market cap of Chinese video game companies. The proposed regulations, released on Dec. 22, would have targeted many of the most common monetization features used in video games, most notably “loot boxes” — a kind of randomized prize draw that critics have likened to legalized gambling — but also daily log-in rewards, bonuses for first-time buyers of in-game premium currencies, and other incentives that encourage users to keep playing a game or spend money on it.

2024 has not been kind to Chinese economic regulators, not just in the gaming industry; the controversy over new video game regulations has happened at the same time as China’s ongoing property crisis, which among other things has resulted in the collapse of Evergrande, formerly the country’s largest property developer. In this economic context, the extent to which the Chinese central government can exercise its regulatory powers is limited. As the Economist put it, “the [Chinese] government is not used to being bullied” by international markets.

Proposed Regulations Caused Chinese Video Game Stocks to Plunge

The day after the draft rules for the gaming industry were released, the stock price for Chinese tech and video game giant Tencent plunged 10.3%. On Jan. 14, over three weeks later, the total market value of Chinese gaming companies was still down by almost $100 billion. The crash in stock prices had already led government officials to backtrack — a stark contrast from previous high-profile disputes over regulations. This time, the central government reversed course and announced a plan to clarify its policies and roll back many of the harsher measures in its proposal. Why, and what does it mean for China and digital industries worldwide?

The market’s extreme reaction to the proposed regulations can be explained, in part, by the Chinese gaming industry’s daunting experience with existing regulations rolled out in 2021. Responding to public concern over the growing amount of time Chinese youth spent playing video games, the government imposed a slate of restrictions, including a rule requiring developers to limit minors’ playing time. These regulations slowed the breakneck pace at which the Chinese gaming industry had been growing, causing the market to shrink in 2022.

It should be noted, too, that unlike other countries that have attempted bans on controversial monetization features in video games, like Belgium, China has both a substantial share of the global gaming market and a regulatory structure that comes with teeth. It has the power to both influence the global video game industry and enforce its rules. Crucially, while the central government has walked back the most extreme of its proposals from Dec. 22, it has still confirmed plans to tighten regulations around monetization features in games.

China’s Gaming Industry: A Boost for Chinese Soft Power

But video games have been a major boost for China’s soft power. Broadly speaking, soft power is a country’s ability to convince other countries to do what it wants through persuasion, rather than force. Cultivating a positive international image through pop culture — as Japan does with anime — is a major element of this. Whereas China’s animation is often overshadowed by Japan’s and its music is upstaged by South Korea’s, China has experienced greater success with its exports of video games. The acclaim of games like Age of Origins or Genshin Impact (whose popularity I wrote about here) have established Chinese developers’ credibility in the global market.

The rise of China’s gaming industry is also closely connected to the expansion of its video game consumer market. The rapid popularity of games like Genshin in overseas markets can be credited to aggressive expansion by Chinese game developers and generous investment. This, in turn, can be attributed to the vast financial resources developers are gaining in the domestic Chinese market. For example, the developer miHoYo is best known around most of the world for Genshin Impact and Honkai Star Rail, another game with a large global userbase. But it had already released a number of popular games in China that received far less international attention; contrast the non-Chinese player base of Genshin Impact, miHoYo’s flagship game, with that of Tears of Themis, the miHoYo game that came before it.

This capital is key to the expansion of Chinese companies overseas — which happens to be part of the Chinese central government’s strategy for increasing Chinese influence internationally. For instance, by injecting greater amounts of money than Japanese companies are able to, China has gained a great deal of influence in the Japanese gaming and animation industries (a phenomenon I have described here). China’s large domestic market has provided much of the capital necessary for these companies to gain inroads into the Japanese and U.S. gaming industries. And if the central government restricts their ability to monetize their domestic userbase, it is also restricting their ability to grow overseas — and, by extension, expand Chinese soft power.

Crucially, the mechanics the Chinese central government took aim at on Dec. 22 did not originate in China. Loot box mechanics, the feature most prominently targeted by the draft rules, have their origins in Japanese “gacha” games. (Named after “gachapon", or toy vending machines that give a capsule with a random trinket inside, gacha games feature items and rare characters that the player can only get by making random “pulls” or “rolls” using special in-game currency that must be paid for with real-world money.) As the cost of producing AAA games — the sophisticated console and PC games developed by major studios — has soared, mobile gaming has expanded as a cheaper alternative market for developers to take on. In an industry where 83% of games fail within the first three years of release, gambling-adjacent mechanics like loot boxes are all the more attractive as a way of maximizing profits from the few successes. Many mobile games look alike and feature similar mechanics; Chinese developers are more likely to have the resources to make their graphics stand out, giving them an edge and helping them to market their games worldwide.

Of course, many of the monetization schemes in video games, especially free-to-play mobile games, are a source of discontent for gamers globally. Streamers commonly make fun of these features in their content. Jason Thor Hall, a streamer and founder of independent game developer Pirate Software, referred to the draft rules as “a rare China [win]” due to the predatory nature of many of the practices targeted by the government.

A New Reality for China and the Global Gaming Industry: Tough Governance

The issues the Chinese central government attempted to address with its latest proposed regulations are not uniquely Chinese problems. China is experiencing the same growing pains with digital technology that other countries are. Like many people around the world, Chinese citizens are experiencing anxieties about phone addiction, the generation of content through artificial intelligence, and overspending by children on mobile games, not to mention fear of missing out (“FOMO”) induced by social media. For gaming and many other nascent industries that lack a robust global regulatory framework, like AI, Chinese regulators are setting important precedents for global governance by advancing new rules.

Thus, one lesson from China’s recent backpedaling is not that the Chinese central government is particularly heavy-handed or incompetent at regulating the gaming industry. Rather, it’s that gaming, like other global digital content industries, is difficult to regulate, and China is one of the few countries influential enough and with a powerful enough central government to try.

What the Crisis Means for the Rest of the World

The crisis is also a reminder for the U.S. and other countries that China’s economic problems are the world’s economic problems. This has been true for a long time, and it is still true, despite what some more hawkish observers might claim. Consider that the global reaction against the proposed regulations was due in large part to the influence of major Chinese tech companies like Tencent and miHoYo. Now consider that most Chinese gaming companies’ revenue abroad comes from mobile games downloaded from the Apple and Google app stores — two major American tech companies. As a reminder of the influence of American tech, the S&P 500 is more dominated by tech companies now than ever before; the seven largest tech companies on the index make up over a quarter of the index’s value, and the 20 largest tech companies make up over a third. In short, China’s loss is not automatically the U.S.’ — or any other country’s — gain.

Finally, it is crucial to understand that global leadership, especially when it comes to creative content industries, isn’t all that it’s cracked up to be. Much of it is less domination and more maintenance. Right now, the Chinese government is increasingly unable to rely on disruption and uncertainty to fuel its rise, instead finding it necessary to shift its focus to governance and stability. Its recent back-track is an early taste of this new reality, for China and for the gaming industry globally.

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