Tencent and NetEase shares fall more than 3% after China tightens gaming rules for kids

A directive issued Monday by China’s National Press and Publication Administration—and reported in state media outlet Xinhua—said that minors will only be allowed to play online games for up to three hours a week and only during specific times.

The announcement was a big hit for gamers around the country, sending shares of two major gaming players, Tencent Holdings Ltd. and NetEase Inc., tumbling as much as 3%.

But don’t worry too much, China’s video game industry isn’t going anywhere anytime soon. On the contrary, regulators are likely to overlook such games as “Fortnite” and “League of Legends,” which can only be played online.

Such electronic games, which are played on computers or smartphones, have long been banned in China unless they were approved for release by the government. China has a long history of shutting out foreign companies that it deems as a threat to national security or to traditional culture.

However, in recent years Beijing has made some exceptions and allowed some of the world’s largest video game makers to do business in the country. That was especially true under Xi Jinping’s leadership. Addressing the country’s declining birth rates, the Chinese leader said in 2015 that electronic games should be made accessible for minors. He also ordered a campaign to promote games that have “a positive direction.

But regulators are also concerned about video games having a negative impact on the mental and physical health of children, sparking fears among parents about internet addiction. In response, China has been trying to limit children’s time using online games and set strict age limits for online players.

The new directive only established stricter guidelines to limit time spent online but didn’t impose fines or punishment on violators who exceed the time limits.

Shares of Tencent and NetEase—which are also two of the most widely-held stocks in Hong Kong—tumbled on Monday after Xinhua published the new rules. Tencent slumped as much as 3.7% and closed down 1.6% on Tuesday. NetEase, China’s second-largest gaming company, shed more than 3% and closed 1.9% lower on Tuesday. Both companies have been under pressure since the government started tightening its grip on online games this year.

Shares of China Literature Ltd., a major online literature platform controlled by Tencent, have dropped as much as 59% since January amid the government’s increased crackdown against online content.

Analysts said that despite the latest directive, regulators won’t have much of an effect on the major players in China’s rapidly-growing gaming industry, both in terms of market share and earnings.

Gao Jianchun, a Shanghai-based analyst at Bocom International Securities, told Bloomberg News that companies like Tencent can handle the most recent measure. The influential gaming company has over 90% market share and its operating margins are as high as 7%. He added that NetEase is also likely to be spared from any regulation as it is not among the top three companies by revenue.

“NetEase’s business is so diversified that it can be treated as more of a conglomerate,” Gao said.

In a research note, Sanford C. Bernstein analyst Kai Yang wrote that the latest regulation will mainly affect small players in the gaming industry and won’t have a substantial impact on Tencent or NetEase.

On Monday, China also released new rules restricting the amount of money young people can spend on games for consoles such as Nintendo Co., Sony Corp., and Microsoft Corp.

The new regulations require game developers to ensure that children who are below the age of 14 can’t access the virtual goods in games and can only use them after the developers complete a government-approved training course. The regulations only apply to online games but don’t cover mobile games.

China has already been tightening its grip on video games. In January, it said that it was lifting a ban on “Fortnite,” which is developed by Epic Games Inc., and other similar titles which allow users to play against each other online across multiple platforms.

At the time, a spokesperson for Tencent said that the company would continue its cooperation with regulators so as not to cause problems for their users.

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