China’s new rules targeting ‘inappropriate’ online games send NetEase’s shares down

China’s leading internet portal and gaming company NetEase saw its shares drop by 3.23% on NASDAQ (in Chinese) on Thursday US time after Xinhua reported that the government plans to clean up “illegal” and “inappropriate” online games.

China’s publicity department, cyberspace management department and other relevant ministries jointly released a statement (in Chinese) on Thursday outlining the government’s plan to regulate explicit and inappropriate online games. The statement specified that it is targeting games with large numbers of players which have significant social influence. The statement also said that the government will strictly ban games that contain illegal content from going abroad.

NetEase and Tencent are the companies that are most likely to be affected by the newly released guidelines. During the first three quarters of 2017, Tencent’s online gaming arm pocketed RMB 73.52 billion (roughly $11.28 billion) in revenue while revenues for the entire year are expected to exceed RMB 100 billion ($15.34 billion). For the first half of 2017, NetEase’s net profit reached RMB 6.89 billion ($1.05 billion). Tencent and NetEase are undoubtedly the two major players in China’s online gaming market, holding up 49% and 18% of the market share respectively, according to a report from GPC.

The state’s move may also get in the way of Tencent’s smash-hit game Honour of Kings. The game reportedly has over 100 million daily active users, and was criticized by state media earlier this year for “spreading negative energy.” The game, also known as Kings of Glory and Strike of Kings, has already debuted in Europe and is now available in the US under the name Arena of Valor.