Netease, Tencent and other big names in the Chinese games market are seeing big stock losses, following statements by the Chinese government alluding to game regulation.

According to South China Morning Post reporter Josh Ye, the Propaganda Department of the China Communist Party issued a statement at ChinaJoy that games would need to be “Good, clean and secure”.

Following the statement, Netease has seen its share price drop 15%, with Tencent dropping 9%. At the time of writing the two companies seem to be bouncing back, with Tencent down 10% and Netease down 11%, respectively.

The Extent of the Statement

Of course, there was more to the statement than asking for better games. According to the SCMP the tone of the presentation was explicitly anti-video game, blaming one of the fastest-growing industries for a variety of social ills.

The statement also likened video games to “opium” and “electronic dope”, blaming video games for what they claim is reduced academic performance among youths (We have no means of verifying Chinese test scores).

To add to the bombshell they even singled out Tencent’s Honor of Kings, one of the highest-grossing mobile games in the world responsible for putting Tencent on the map when it comes to mobile games.

This isn’t entirely new behavior by the Chinese government- last year, they introduced regulations introducing an age-rating system aimed at protecting minors from predatory monetization practices.

Why Does It Matter?

For those not in the loop, statements like these are a huge deal when it comes to investors and stock traders. Considering the people issuing the statement are government-backed, attacking video games publicly is a good sign that further regulation is coming, with the potential for dramatic changes in how games will be allowed to operate.

Naturally, if a company like Tencent or Netease isn’t going to make the absurd amounts of money it usually makes anymore, investors would get nervous and pull their money out from the companies, thus causing the stock fall.

SCMP’s report also includes a quote from The Capital Company explaining the gravity of this statement:

“The uncertainty surrounding Chinese tech firms will remain high in the near term,” said Aleksey Mironenko, managing director at The Capital Company. “Investors’ anxiety on regulatory uncertainty will mean that the required risk premium on Chinese stocks is now higher. The authorities will have to clarify their true intentions to win back market confidence.”

In short, investors typically like sure bets- stock traders would want, say, Tencent stock as long as they know it’s going to continue putting out games that generate a lot of revenue. The threat of regulation means a possibility that these companies won’t be able to make as much money as they used to, meaning a possibly reduced user spending, leading to the investor pull-out.