Why Is NetEase Stock Plummeting Friday?

NetEase, Inc NTES stock is trading lower Friday as Chinese regulators introduced sweeping regulations targeting the video gaming industry to reduce spending and eliminate incentives that promote excessive gaming. 

This move, which imposes spending limits for online games, significantly impacted the market, erasing nearly $80 billion in value from China's top gaming companies, Tencent Holdings Ltd TCEHY and NetEase. 

The new rules prohibit online games from offering rewards for daily logins, first-time spending, or consecutive purchases – typical features in many games, Reuters reports.

Also Read: Tencent, NetEase Score More Wins As China Awards More Gaming Licenses: Report

Tencent, the world's largest gaming company, saw its shares drop by up to 16%, while NetEase experienced a plunge of up to 25%. 

Prosus, which owns a 26% stake in Tencent, also saw a 14.2% decline in its shares. 

This regulatory action has raised concerns about policy risks, undermining investor confidence in the gaming sector's fundamentals.

Tencent Games' vice president, Vigo Zhang, assured the company would strictly adhere to the regulatory requirements. 

Since 2021, Tencent has observed a significant decrease in spending and playtime by minors on its games, aligning with Beijing's focus on minor protection. NetEase, on the other hand, declined to comment on the situation.

These developments follow China's history of stringent policies towards video games. In 2021, China imposed strict playtime limits for minors and temporarily halted new game approvals. 

Although approvals resumed last year, the restrictions on in-game spending continued. The new rules set clear spending limits and ban certain features like lucky draws for minors and trading of virtual gaming items. 

However, the regulations propose a positive change, requiring a 60-day processing period for game approvals.

Additionally, they demand that game servers be located within China, reflecting concerns over user data. The public can comment on these rules until January 22, 2024.

Despite the challenging environment in 2022, China's video game market experienced growth this year, with domestic revenue rising 13% to 303 billion yuan ($42.6 billion).

Price Action: NTES shares are trading lower by 21.40% at $82.01 on the last check Friday.

Also Read: Tencent's New Game 'DreamStar' Shakes Up the Gaming Scene: Will it Outshine NetEase's Smash Hit?

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.