Industry Insights | China's gaming regulatory landscape continues to emit positive signals, and the overall policy environment for the gaming industry remains stable

After years of development, the Chinese online game industry has gradually entered a mature stage. Its market size increased from 193.7 billion RMB in 2017 to 315.1 billion RMB in 2021, with a compound annual growth rate of 12.9%.The growth of the market is mainly due to the popularization of mobile phones, as well as technological advancements in hardware, display, processing, storage, interfaces, network bandwidth, and operating system functions.

As per capita income increases, the demand for entertainment also grows. Additionally, with the implementation of copyright regulations and higher payment willingness among gamers, players purchasing game items, mission skins, and other derivatives have become mainstream consumption choices. Post-90s paying players are the main force, while post-00s players are emerging, driving rapid growth in the online game market.

China is the country with the largest and fastest-growing mobile game market. The market size of mobile games in China increased from 116.12 billion RMB in 2017 to 225.54 billion RMB in 2021, with a compound annual growth rate of 18.1%.With the development of hardware and payment technologies, game refinement, and increasing payment willingness among players, the Chinese mobile game industry will continue to grow in the future.

The overseas game market is vast, and Chinese mobile games have strong competitiveness abroad. Exporting games has become an important trend in the industry.Exiting games into overseas markets allows access to demographic benefits in emerging economies in Latin America and the Middle East, as well as higher user payment rates in developed countries. Sales revenue from Chinese independently developed games in overseas markets have been increasing annually, rising from 3.08 billion US dollars in 2014 to 18.01 billion US dollars in 2021, with a compound annual growth rate of 28.7%. In the future, the overseas market for Chinese mobile games will continue to grow strongly.

The policy environment for the Chinese game industry has been stable over time. Regulatory policies have continued to send positive signals. At the national level, efforts have been made to promote the export of digital culture industries. Local governments have introduced supportive policies for game enterprises. The overall policy environment for the Chinese online game industry remains stable, which is conducive to the sustainable and orderly development of the industry.

i. On March 15, 2021, the Publishing Bureau of the Publicity Department of the CPC issued the "Game Review Scoring Rules." The "Rules" clarify a new game review system:

The "Rules" supplement the existing game review system, further standardizing game review regulations, curbing low-quality and uncreative imitation games, and increasing the proportion of high-quality games.

Under the original game review system, for a game to obtain a publishing license, the publishing management department must review the qualifications of the application unit and the game operation unit. Focus is placed on whether the application unit and game operation institution have the necessary qualifications, as well as basic functions such as the screening word library and anti-addiction systems. The game itself is only required to comply with the "Publishing Management Regulations," with little review of the game content.

The newly issued "Game Review Scoring Rules" focus on the cultural content and value orientation of games, emphasizing the originality, development, and design quality of game content.

Under the "Rules," there are no obvious political orientations or value orientation deviations. The tone is good, allowing for basic value judgments on right and wrong, good and bad. Games that perform well in innovation design, product quality, cultural content, and development level compared to similar games can pass the review. For games with value orientation deviations, lack of originality, and clear plagiarism in overall structure and gameplay, the approval rate will be greatly reduced, and the proportion of high-quality games will increase.

ii. In August 2021, the State Administration of Press, Publication, Radio, Film and Television issued the "Notice on Further Strict Management to Prevent Minors from Being Addicted to Online Games." The "Notice" limits the gaming time of minors, focusing on improving the situation of minors being addicted to online games and helping minors grow up healthily:

The "Notice" strictly limits the time when online game services are provided to minors. All online game companies can only provide one hour of service to minors from 20:00 to 21:00 on Fridays, Saturdays, Sundays, and legal holidays. Other times, no online game services can be provided to minors in any form. The requirement for real-name registration and login of online game user accounts is strictly implemented, and no game services can be provided to unregistered and unlogged-in users. This "Notice" takes stricter measures based on 2019, in line with relevant provisions of the "Minors Protection Law".

In the long term, this measure further promotes the hidden "age classification" of online games, setting clear standards and red lines for game companies, which is beneficial to the sustainable and orderly development of the game industry.At the same time, for online game companies as a whole, minors contribute little to the company's game revenue. Most paying players are adults, so it will not have a significant impact on the company's business.

Tencent Holdings (00700.HK) disclosed the proportion of consumer flows of primary school students (under 12 years old) on its game platforms. In the second quarter of 2021, the share of players under 16 years old in Tencent's game flows in China was 2.6%, and the share of players under 12 years old was only 0.3%. Therefore, the impact on the company's performance is relatively limited.

iii. In 2022, the issuance of game licenses in China became more regular, guiding the game industry towards higher quality and refined products:

Since the normalization of the approval process for domestic game licenses in 2022, both the approval efficiency and the number of approved licenses have been moving in a stable and sustainable direction, with the number of licenses increasing each batch.Restricting the game industry or companies has never been the intention of the license approval system. The purpose of the license approval system is to improve the quality of domestic games and the content and quality of imported games from the source, thereby regulating the development of the Chinese game industry and promoting its high-quality development.

The continuous recovery on the supply side of the game industry is beneficial to the stability of game company product lines. As a major industry for advertising placement, the acceleration of new game launches will drive the recovery of related advertising platform businesses.For companies, license restrictions are no longer the core issue in industry development. The focus of market competition will return to core competitiveness such as product and content quality, as well as whether cultural confidence is emphasized, thus promoting the long-term healthy development of the game industry.

i. The state fully supports cultural export. Departments such as the Ministry of Commerce jointly issued the "Opinions on Promoting High-Quality Development of Foreign Cultural Trade," and domestic game exports will benefit first:

Twenty-seven departments including the Ministry of Commerce jointly issued the "Opinions on Promoting High-Quality Development of Foreign Cultural Trade," proposing to enhance the international competitiveness of China's cultural products and services, promote more excellent Chinese culture to the world, enhance the country's cultural soft power and influence, develop digital culture trade, innovate digital content processing, strengthen international brand building, and support game companies in developing game products for overseas target markets.

The overseas game market has broad potential. Domestic game manufacturers have strong R&D capabilities, rich distribution and operation experience, and mature business models for game exports.The game industry is one of the main forms of digital culture. Game exports will benefit first. Using games as a medium, China's excellent traditional culture can be spread globally, enhancing China's influence in the international digital culture field.

i. In line with the national digital economy plan, local governments have actively introduced policies and plans related to the game industry to support the development of the game industry:

ShanghaiIn the "Several Opinions on Promoting the Healthy Development of Shanghai's E-sports Industry," it is proposed to build a "Global E-sports Capital" within 3-5 years.

BeijingIn the "Several Opinions on Promoting the Healthy Development of Beijing's Game Industry," it is mentioned that Beijing will be built as a global leading game R&D center, aiming to exceed 1,500 billion yuan in game output by 2025.

Guangdong ProvinceIn the "Action Plan for Cultivating Strategic Emerging Industries of Digital Creativity in Guangdong Province (2021-2025)," it is proposed to promote the healthy development of the game and animation industry. In the "14th Five-Year Plan for the Development of Strategic Emerging Industries in Guangzhou," it is mentioned to consolidate the advantages of mobile games and client games, encourage game design and operation innovation, optimize the game interaction experience ecosystem, accelerate the layout of cloud gaming market, build cloud gaming platforms, vigorously develop game e-sports industry, accelerate the creation of a "World E-sports City," and actively cultivate a game e-sports industry cluster worth tens of billions of yuan.

ChongqingIn the "Special Support Measures for Promoting the Development of the Game Industry in Chongqing Economic and Technological Development Zone," it is proposed to attract the development of digital culture industries such as games. Nan'an District and Chongqing Economic and Technological Development Zone aim to become important game industry centers in central and western regions by 2030, with the game industry output exceeding 10 billion yuan.