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China gaming stocks took another hit on Thursday, as a second government-linked media outlet came out swinging against the industry.
Shares of Tencent
700,
NetEase
9999,
and XD
2400,
lost around 3% each. Those stocks took a hard hit at the start of the week after the Economic Information Daily, which has links to state-controlled news agency Xinhua, reportedly likened them to “spiritual opium” for the nation’s addicted teens.
U.S. listed shares of NetEase
NTES,
fell 4%, while Tencent’s music arm,
TME,
fell modestly. The Hong Kong-listed shares are down from 8% to 10% for the week so far.
The latest salvo stemmed from state-owned national financial newspaper, Securities Times, where an opinion column criticized the gaming industry for not paying its fair share of taxes, according to a Google translation of the article.
“The game industry has now grown. In order to encourage the development of the information industry, the government had preferential tax policies for the software industry, and some local governments gave subsidies. This is also an important reason for the high net profit rate of software companies, which is far beyond the ability of hardware companies,” the article read.
The commentary went onto say that the industry is now at an advantage, and should be taxed equally like other industries. “In this regard, the game industry should be mentally prepared,” it said.
Jeffrey Halley, senior market analyst at OANDA, said investors need to wake up. “Now admittedly, China’s online gaming industry is part of the broader tech space, but this is the second government mouthpiece to take a shot at the sector this week, and you ignore the non-too subtle warning at your perils,” Halley wrote in a note to clients.
“From IPOs to tech to after school education, the list of ‘targets’ seems to get longer every week. Unsurprisingly, China equities have headed South today, bucking the trend in Asia. It seems we still have some way to go before the price discount on China equities offsets the regulatory risk from China’s government,” he said.
China last month shook markets by announcing it would tighten up rules for companies listed overseas or seeking to sell shares abroad. As of May 5, 2021, there were 248 Chinese companies listed on U.S. exchanges with a total market capitalization of $2.1 trillion, according to data from the U.S.-China Economic and Security Review Commission.
The U.S. Securities and Exchange Commission countered China’s move with a statement that American regulators will require more disclosures from Chinese companies before allowing them to list. Recently listed ride-share giant Didi Global
DIDI,
is one company that has been subjected to Beijing scrutiny and those shares have lost 32% in the current quarter.
Some strategists have taken a wait-and-see approach, banking on hopes Beijing won’t take things too far. JP Morgan told clients in a note earlier this week that China will “stop short of changes that cause an economic growth shock,” nor will those regulatory moves spread to other emerging markets.
