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‘Fortnite’ Among Games Stalled in China as Tencent, Others Struggle With Regulation

For evidence of China’s impact on the gaming world, look no further than at what’s been happening this week. A move by Chinese regulators to pull a new game splashed cold water on China’s industry leader, and sent a multi-billion-dollar tsunami through games developers and distributors around the globe.

On Monday, Chinese digital giant Tencent, the world’s largest games distributor by revenue, revealed that it had been ordered by China’s General Administration of Press and Publishing to stop selling global hit fantasy game “Monster Hunter: World.” The reason for the move remains murky: Regulators seemed to blame it on unspecified complaints from users, but others suggested that the game and Tencent were the victims of an internal battle going on in China’s shifting regulatory hierarchy.

Two days later, on an earnings call, Tencent further disclosed that regulators had stopped all new video-game approvals since the end of March. That crimped the flow of new games onto the Chinese market and is keeping back other games that have been released only in free play mode.

The bottleneck of approvals helped cause Tencent to undershoot market expectations, although the company has still delivered $1 billion of net profit per month so far this year. As China Renaissance Securities pointed out in its “buy” advisory, Tencent’s profits include its share of portfolio company Epic Games’ smash hit “Fortnite,” which, ironically, Tencent has not yet received a permit to release in China.

The regulatory freeze in China, the world’s largest gaming market, quickly made itself felt on the shares of the world’s game developers, notably Japan’s Capcom, Square Enix, and Nexon, all of which took a dive earlier this week.

Tencent CEO Martin Lau was at pains to suggest that Chinese regulators are trying to be helpful and looking to ease the crunch by creating a “green channel,” or one-month temporary license for new games. But Lau also admitted that he had no clarity on if or when things might revert to normal.

Part of the problem is that nobody knows if China’s entertainment regulators are simply going through a transition period – one that is also affecting the film industry, with a slowdown in import approvals and release certificates – or if the gaming sector’s woes are a harbinger of a wider crackdown by the ruling Communist Party on what it perceives as decadence, pornography and celebrity worship.

It would not be the first time that China chose to go its own way with regard to gaming. While the industry’s early years in Japan and the West were driven by console games, China outlawed consoles until as recently as 2015.

The latest development serves as a useful reminder that all Chinese industry, however brilliant or globally minded that leading companies such as Tencent have become, remains vulnerable at any moment to regulatory fiat or sudden changes in government policy.

Investors have reacted accordingly – and brutally – especially against Chinese technology stocks. Tencent, only recently hailed as the world’s 10th largest company, has lost $187 billion of market capitalization since its share peak earlier this year. China Literature and the world’s No. 3 smartphone maker, Xiaomi, are also now trading below their IPO prices.

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