Where is China’s gaming industry headed next?

China’s gaming industry finally returned to double-digit growth in December after two years of brutal regulatory crackdowns brought the sector to its knees. According to a semi-official gaming industry association in China, video game sales increased 14% year-on-year to reach 303 billion RMB (42.7 billion USD) – a major win after 2022 saw sales decrease 10.3%. Over the year, we also saw the number of licensing approvals handed out to developers steadily return to its pre-crackdown rate, and commentators were cautiously optimistic. The double-digit growth was a sure sign that things were back on a positive trajectory.

But it might be too early to celebrate. Recent policy moves suggest regulators still have concerns about the harmful impacts of gaming – not just in children, but in adults too. Is this the beginning of a new crackdown? And how will gaming companies respond?

The next crack of the whip？

A draft legislation published on the National Press and Publication Administration (NPPA) website in December outlined plans to restrict in-game purchases for all gamers, with the ultimate goal being to curb “obsessive” gaming behaviour. Under-18s are already restricted to a maximum of 3 hours of gameplay on weekends and holidays (no gaming is allowed on weekdays), but this is the first time the NPPA has proposed restricting adults’ gaming habits by law.

With youth gaming addiction “basically solved” (according to self-reported data published in 2022), it is perhaps inevitable for regulators to turn their attention to adult gamers, who are certainly not immune to the lure of “spiritual opium”. Around 55% of China’s gamers are aged 19-25, a pivotal life stage during which a person is legally considered an adult, and possibly financially and functionally very independent, but still has a lot of maturing to do (the brain is not fully developed until 25, with implications for addiction susceptibility, risky behaviour, and emotion management).

Nonetheless, such a policy could have devastating effects on gaming companies. “The removal of these incentives is likely to reduce daily active users and in-app revenue, and could eventually force publishers to fundamentally overhaul their game design and monetisation strategies,” Ivan Su, an analyst at Chicago-based financial service firm Morningstar, told the BBC. Mobile games, many of which rely heavily on in-app purchases, occupy 74.88% of the market share of China’s games industry. Stocks took a huge hit as a result of the news, with share prices of China’s largest game developer Tencent dropping 16%.

Policy confusion

More shocking still, all trace of this policy proposal now seems to have disappeared as of a few days ago. It has now been deleted from the NPPA website and a high-level official overseeing the administration has even been fired, indicating that the draft legislation has now been deemed an error. Did those in charge not foresee such a big hit to the markets and backpedalled when they realised the impact it would have? Or did the policy simply go against larger department objectives?

It’s impossible to know for sure, but either way, China’s games industry must continue to brace for change. The regulatory crackdowns on fintech and gaming, the “double reduction” policy that almost wiped out the private tutoring sector, and zero-COVID were all indicative of a general policy direction of tightening social control – and importantly, in the case of the crackdowns, holding large corporations responsible for these changes.

So the NPPA has been stopped in its tracks for the time being. But that does not discount the possibility of a toned-down version of the policy being introduced in the near future. “I think this type of sentiment [toward gaming] will probably last for quite some time, unless we get a very drastic turnaround in government rhetoric, or unless we get some super supportive policies,” Ivan Su said, speaking to the BBC.

Future directions

To mitigate against these impacts, Chinese gaming companies will have to do more than just diversify monetisation at the product level (this is a strategy that many developers have been pursuing for some time, having turned highly cautious in the face of unpredictable and sweeping policy changes). China’s game developers now must make a bigger push than ever to finally crack the overseas gaming market.

China’s biggest developer, Tencent Games, currently derives only about 30% of its revenue overseas, which it is hoping to bump up to 50% over the next few years. Tencent is now focussing more on console games marketed to a wider audience in a bid to snatch a bigger market share of overseas gaming markets, particularly the US. Its upcoming release The Sentinel, developed by its LA-based studio Lightspeed, is a promising start. But ultimately developers will have to crack this code: how can we meet regulators’ requirements for educational content promoting China’s cultural heritage whilst simultaneously creating a universal piece of entertainment?

The success of Genshin Impact, developed by Chinese company miHoYo, offers a potential example. By weaving Chinese cultural elements within a Japanese anime-inspired package recognisable to viewers worldwide, miHoYo managed to make Genshin Impact one of China’s most successful entertainment exports to date. As this example also shows, these games could be an unparalleled soft power vehicle for China.

With government attitudes towards gaming showing only very weak signs of softening, the crackdown looks more like a long-term project rather than an acute period of scrutiny. Chinese game developers have a huge amount to offer, and now is the time for them to show that to the rest of the world.