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Tencent Shares Hurt as Chinese Government Weighs in on Games and Health

Shares in social media and games giant Tencent slipped by more than 5% in early trading on Friday, after the Chinese government outlined moves to crimp the games industry.

More than $20 billion was wiped off the company’s valuation, as shares declined 4.6% to HK$341, at 11:30 a.m. Friday local time.

The reaction followed an announcement by the Chinese government that it plans to limit the number of new games approved for release, and the total number of titles. The initiative is part of a growing government campaign against games and online addiction in young people.

China’s Ministry of Education announced the move on its website (in Chinese) and said it was intended to tackle myopia (short-sightedness) in children. Describing myopia as “a big issue that affects the future of the country and the nation,” the ministry said that incidence is “high and rising” in young people. It set out targets to reduce myopia by 0.5% per year and established target levels for 2023, and 2030.

In addition to prescribing better general health measures — exercise, daylight, more sleep and less onerous levels of homework — the ministry recommended that the use of electronic products “for non-learning purposes should not exceed 15 minutes, and should not exceed 1 hour per day.”

It recommended that “the State Press and Publication Administration implement regulation of the total number of online games, controls the number of online games operated by new online games, explore the age-appropriate reminder system in line with national conditions, and takes measures to limit the use time of minors.”

Earlier this month, Tencent stock was badly shaken when the company revealed that regulators had been limiting the number of new game approvals since the end of March, and in other cases not giving approval to the paid versions of games. Evidence of that regulatory intervention became apparent a few days later, when the company published its first half financial results. They showed games revenues to be essentially flat, which resulted in Tencent’s first quarter on quarter profits slowdown in several years.

On a conference call with analysts following the results Tencent CEO Martin Lau said that he was confident that China’s games regulators would remove some of the recent blockages, but could not say when that might happen. In the light of the Education Ministry intervention, that perspective may now be too optimistic.

On Friday morning analysts were divided. One said that “investors are exposed to unpriceable risks.” Another said that high-quality companies such as Tencent and Netease, which have already taken measures to limit game playing time might be less affected.

“The new rules/guidelines will create another overhang for the gaming industry’s growth outlook, adding further uncertainty on top of the hold-up of the games approval process,” Alicia Yap, an analyst with Citigroup, said in a research note.

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