Not a game: How China’s proposed new games laws will tighten restrictions on online games industry

On 22 December, the National Press and Publication Administration of the People’s Republic of China (NPPA) published proposals to further regulate online games in the world’s largest market for games developers and platforms. 

Despite a recent tightening of the regulation of internet activities in mainland China and globally, analysts at the Game Publishing Committee of CADPA (China Audio-video and Digital Publishing Association) reported a 13% rise in domestic revenue from China's video game market this year — a green shoot for a sector that is still recovering from 2021’s shock of not-dissimilar regulatory moves seeking to curb video game addiction among minors. 

However, last Friday’s proposals seem to have undone any positive investor sentiment with a US$80bn drop in the value of Chinese games stocks taking place in the following 24 hours.

Industry concerns

Monetisation strategies of some of China’s most popular games revolve around incentives for screentime. This is a common driver for digital networks worldwide — from short video to e-commerce platforms — and China’s free-to-play games have seen huge growth leveraging a reward-based model. 

For regulators, however, a problem arises at the intersection of tech and ESG where incentives lead to overindulgence — particularly where excessive playing time impacts the youngest demographic of gamers. Having previously targeted this perceived societal issue in rules released as far back as 2010, China’s regulators reiterate some of their earlier curbs in the new proposals and double-down with the introduction of others. 

Here is a snapshot of the new and existing sets of restrictions: 

Whatever the good intentions behind the authorities’ proposals, investors clearly fear that removal of incentives will reduce the number of active gamers and in-game revenue. Especially given that most new curbs are not restricted to minors, but apply to all players. 

If the rules are enacted in their current form, developers of “pay to win” titles will have to use all their savvy to adapt game designs and monetisation strategies to stay on top.

Other key operational hurdles 

Some of the other proposals that jump out of the draft rules include: 

• Licensing requirements: Two types of licences apply: (i) a game publishing entity must have a NPPA internet publishing permit with a business scope of online game publishing, and (ii) a game operating entity must have a NPPA internet publishing permit with a business scope of online game operation issued by the NPPA’s provincial branch. There are different market views on whether a game operating entity is required to obtain an IPP. In practice some games operating companies have been operating games without obtaining this permit (although separate telecoms licensing requirements apply). If the proposals are implemented, games industry businesses will need to reassess which licensing requirements apply to them and rectify any gap.
   
• Extraterritorial impact: Publishers that distribute games overseas must also abide by the proposed rules (if enacted in their current form), including in respect of adhering to Chinese national security and cultural content requirements in their foreign titles. In particular, this could require Chinese-headquartered games giants to censure foreign games like those distributed in the domestic market. Presumably this requirement would not flow down to overseas games studios invested in by these household names, but the soft influence of this requirement could in time impact games published by their vast global networks.
   
• Server localisation: In keeping with the raft of data-related rules released in China over the last few years, the proposals stipulate that publishers must store game data on servers in mainland China. While this localisation requirement might not be surprising to those tracking Chinese — and indeed other markets' — policies around operators of critical information infrastructure and other businesses boasting vast databases of consumer data, its explicit inclusion could maintain a barrier-to-entry for foreign publishers that do not already operate servers in China, and an operational hurdle for all publishers that operate in and with China on a cross-border basis.
   
• Content review system: Each publisher must run a review team to filter out offensive content disseminated by players. While not new to games or uncommon for internet platforms more broadly, this requirement would inevitably result in a huge operational cost that could preclude the growth of smaller publishers and open them up to liability where they fail to apply filters adequately. Marketing content must similarly be scrutinised.
   
• Financial supervision: As the nexus between games and digital currencies continues to grow in the wider global fintech industry, the proposals require publishers to implement robust controls on the issuance and exchange of in-game currency (which must be in the form of real-name digital RMB) and report to regulators where there are suspicions of illegal activity. Publishers will have to act like mini-financial institutions — with the associated costs — if they are to benefit from the in-game monetisation options that remain after the proposal’s restrictions are effective. 

Not all doom and gloom

More in line with the festive season, Chinese regulators did offer some positives to the industry.

Within 72 hours of releasing the draft rules, the NPPA confirmed publication licences for 105 domestic games and another 40 imported titles. This was celebrated by the Game Publishing Committee of CADPA as an unprecedented approval rate and range of featured games companies.

Some have seen these signals as representing the Chinese authorities' appetite to permit more games in the country, despite the negativity felt with the draft proposals. Only time will tell.

What's next?

The Chinese authorities are seeking comment on the draft rules until 22 January in the new year. Gauging the immediate reaction from the market, the NPPA has said that it will study feedback carefully.

We are here to help with questions on the draft rules or submitting comments on clients’ behalf. 

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(Thank you to Diana Ji for her support in preparing this update.)