Over $43 billion in market value is lost by Tencent after China announces new online gaming regulations.

• Beijing issued draft guidelines to control excessive gaming and spending during the four-day Christmas weekend holiday in Hong Kong, which began Friday mid-morning.
• The shares of Tencent, NetEase, and Bilibili all experienced significant declines, with Tencent falling 12.4%, NetEase dropping 24.6%, and Bilibili sliding 9.7%.
• Tencent Games vice-president, Vigo Zhang, stated to CNBC that the new measures do not significantly alter the online gaming business model and operations.

On Friday, Tencent lost approximately $43.5 billion in market value due to China's announcement of new rules aimed at controlling excessive gaming and spending.

The Chinese government's draft guidelines for online gaming companies, including Tencent, NetEase, and Bilibili, negatively impacted their Hong Kong-listed shares in the world's largest online gaming market.

Beijing's latest regulatory move on the online gaming industry is the last thing the market was hoping to hear, according to Brian Tycangco, an analyst at Stansberry Research.

The move, although well-intentioned, raises questions about the sustainability of current business models that primarily rely on incentives and rewards to retain customers.

Tencent, a Shenzhen-based company that owns WeChat and generated over a fifth of its third-quarter revenue from domestic online gaming, experienced a 12.4% decline in its share price, closing at HK$274, its lowest closing level since end-November 2022.

NetEase's market capitalization decreased by approximately 115.1 billion Hong Kong dollars ($14.7 billion) after its third-quarter revenue came from domestic online gaming accounted for 80% of its revenue, resulting in a 24.6% decline to close at HK$122.

The social media site that generated 17.1% of its third-quarter net revenue from Chinese domestic gaming experienced a 9.7% decline in its shares, closing at HK$80.30, which is its lowest price since November 2022, resulting in a loss of approximately 2.4 billion Hong Kong dollars ($307 million) in market capitalization.

On Friday, the Hang Seng Index fell 1.7% and the China Enterprises Index, comprising the largest offshore mainland blue-chip companies listed in Hong Kong, also decreased by 2.3%, both ahead of a four-day holiday weekend.

Tycangco stated that investors are eager to receive more clarity on the new rules, but they don't want to wait for the dust to settle. He emphasized that better coordination between industry and regulators will benefit everyone in the future.

New guidelines, fresh setback

The new guidelines issued by China's top gaming regulator prohibit owners of online games from engaging in high-value or expensive transactions in virtual entities through auctions or speculative activities.

The National Press and Publication Administration announced that daily login rewards will be banned and recharging limits will be imposed with pop-up warnings issued to users who display "irrational consumption behavior."

"Vigo Zhang, vice-president of Tencent Games, stated that the new measures do not change the online gaming business model and operations. Instead, they provide clear support from the authorities and offer guidance to encourage the development of high-quality games."

The new draft rules were introduced amidst the ongoing crackdown on the Chinese technology industry, which began in late 2020.

In the first batch of foreign game licenses approved by the National Press and Publication Administration since Beijing's crackdown on the video-games sector in August 2021, Tencent secured rights to five of the 45 licenses.

In 2021, at China's annual legislative meetings, President Xi Jinping attributed the increasing myopia and poor psychological health of the country's youth to their addiction to online gaming.

In the following year, the National Press and Publication Administration suggested that kids under 18 should not be allowed to play online games for more than three hours a week, limiting their legal game time to a specific time frame on Fridays, weekends, and public holidays, starting in early September.

The Chinese government proposed rules in August to restrict smartphone screen time for individuals under 18 to a maximum of two hours daily.

— CNBC's Lim Hui Jie and Arjun Kharpal contributed to this story.

The earlier version of this story incorrectly stated the milestone after the slide in Tencent's share price.