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Tencent stock drops as Chinese regulatory concerns threaten gaming

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Akiko Fujita joins Myles Udland and Brian Sozzi to discuss the controversy surrounding Tencent as regulatory pressures continue to build after Chinese media voiced concern over 'gaming addiction.'

Video Transcript

MYLES UDLAND: Shares of China gaming giants Tencent, in the net ease under pressure this morning. Tencent shares off some 6% in Hong Kong. Net E's shares down some 9.5% in early trading here in the US. This after Chinese State Media branded online gaming, quote, "Spiritual opium." Tencent quickly announced new restrictions on how long minors can play its digital games.

Now, that article in question was later taken down. Yahoo Finance's Akiko Fujita joins us now for the latest on this story, Akiko. Which, really, I think the story fits into the broader context of what to make of Chinese-based companies listed in the US. But on this story specifically, what do we know, given the last 18 hours of news flow?

AKIKO FUJITA: Yeah. I mean, Myles, some context here. Tencent is the world's largest gaming company in the world's largest gaming market, which is why we're talking about the broader impact on the industry. But as you noted, this all started with an article that was published in state-run media that detailed what they deemed to be the negative effects of gaming.

Specifically, it talked about gaming addiction being on the rise, it was causing alienation, impeding on the studies of children, and quoted experts who said that greater regulation was necessary to crack down on companies that were chasing profits. And there's one line in particular in this article that got a lot of investors a little rattled here. Let's show you what that is.

It said specifically that, "Society has come to recognize the harm caused by online gaming and it is often referred to as 'opium for the mind' or 'electronic drugs.'" This specifically from that article in the "Economic Information Daily." That led to speculation that a broader regulatory crackdown on the industry may be coming, sending Tencent's Hong Kong traded shares to plummet 10% in this session.

But as you noted, it did come back here, partly because the state-run outlet later removed that line and replaced it with some softer language. Tencent, though, has quickly moved to address some of the concerns that were raised in that article. On Tuesday, the company said it would start limiting playing time for its flagship game, "Honor of Kings." Young gamers will now be limited to just an hour during the week and two hours on weekends and holidays. And children under the age of 12 will not be able to make in-game purchases.

If all of this sounds familiar, it's because Tencent has undergone this kind of crackdown before. Back in 2018, Chinese officials halted the approval of all video game licenses, citing concerns about the impact on gaming on younger children. At the time, it caused the stock to plummet 40% from its peak and wiped out more than $1 billion in lost sales.

Now since then, Tencent has been working with these regulators who approve the gaming licenses. Back in 2019, they push for a ban on late night gaming between 10:00 PM and 8:00 AM. Earlier this year, they also launched a facial recognition system to limit that late night gaming.

The latest shake down though, really dragging down other shares or other competitors of Tencent. As you noted, Net E was down significantly in the session over in Hong Kong. But I would say, guys, this is something that is quite familiar for those who've been watching this space closely in China. But in the context of the broader regulatory crackdown, it's going to get a lot of investors, at least here in the US, a little more rattled to say, well, what's the next shoe to drop?

MYLES UDLAND: Yeah, Akiko, I think it cuts both ways, right? On the one hand, as you note, if you follow the Chinese gaming sector, this shouldn't be, in theory, all that much of a surprise. Now, it's an O-Ed, you don't know what's the publishing schedule. So it's always a surprise when the news comes out.

But within the context of continue, it seems like it's an everyday event that US investors wake up and there's something new coming out of, whether it's Chinese media or an announcement from Chinese regulators. And, I guess, following the story closely from your vantage point, does it seem like this deluge of negative news around Chinese tech companies, does it feel like it's anywhere near an endpoint at all?

AKIKO FUJITA: No. I think that's the short answer. I don't think anybody who's watching this space will think that this is it. We don't want to conflate all of the regulatory issues together. But clearly, there is a message the Chinese government is trying to send right now. With Tencent and gaming, this is something that we saw before. But it's never a coincidence when you see an Op-Ed, an article published in state-run media. That's clearly a way for the government to try to get its message across. And this time around, you could argue it has worked because Tencent's already moved quickly, even if that harsh language has been removed from the initial article.