Era of lax rules for tech companies in China is over: Expert

Tencent (TCEHY) and NetEase (NTES) shares were hit on Friday, December 22 after China imposed new gaming rules to curb consumer spending and engagement. But these stocks are seeing a rise in late trading as Chinese authorities approve over 100 new games. China Beige Book International Managing Director Shehzad Qazi joins Yahoo Finance to discuss China's new rules.

"Investors need to understand that the era of lax rules or no rules around the tech industry, generally speaking, in China are completely over," Qazi notes. "The paradigm has shifted and we are now in an era of more rules and more regulations coming down the pipeline."

"It's a far more uncertain and unpredictable environment, but one thing's for sure. We're not going back to business as usual, as it used to be pre-2020," Qazi adds.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JOSH LIPTON: Investors in Chinese video game companies, including Tencent and NetEase, got hit hard on Friday as news broke of new draft rules intended to rein in time and spending on games. But then today, they're seeing a bit of a reprieve as Chinese authorities approve more than 100 new games. For more on what to make of the back and forth here, we're joined today by Shehzad Qazi, China Beige Book International managing director.

So Shehzad, great to see you. Help us, kind of, walk through this here and make sense of it. So Chinese authorities they've now approved more than 100 new video games, but then, of course, that's after we heard of these new draft rules that really hit names like Tencent and NetEase. So Shehzad, how do you think about this? Do Chinese authorities, do they support the video game industry, or are they opposed to it, or something in between?

SHEHZAD QAZI: Yeah, I think-- let me first of all say that for the last couple of years, there has been no end to a range of China watchers getting up on TV channels and saying things like Beijing is becoming pragmatic, the tech crackdown is over. And over the last two years they've been proven wrong over and over again. Investors need to understand that the era of lax rules or no rules around the tech industry, generally speaking in China, are completely over. We are in-- the paradigm has shifted and we are now in an era of more rules and more regulations coming down the pipeline.

They may not be as harsh as what we got in the beginning with Alibaba and the rest. And now we're seeing things like draft rules being introduced and we're also seeing simultaneously things like other gaming companies or other games being licensed out. It's a far more uncertain and unpredictable environment. But one thing's for sure, we're not going back to business as usual as it used to be pre-2020.

JULIE HYMAN: Well, you mentioned that it is uncertain and unpredictable, Shehzad. So if you're an investor in one of these companies, what do you do in terms-- like, is there any level of predictability with these rules and how they're affecting these companies?

SHEHZAD QAZI: Quite frankly, predictability is very impossible. Because unless you're in the minds of the top leadership in the Communist Party, you really, quite frankly won't know what's coming down, which is why a lot of folks have gotten-- failed to misread I think what the regulatory environment or the change was going to be because they were quite frankly just guessing. I think rule number one moving forward needs to be, are we invested in a company or in a sector, which is essentially, from a regulatory standpoint, completely ungoverned or very limited governance is being applied currently? And number two, how does this jive with the broader social platform that the Communist Party has laid out? Anything that is seen as a threat to social control, anything which might be challenging the power of the party or perhaps pushing young people into areas that are seen unproductive by the party, you are in a dangerous spot there and you better think about your risks accordingly.