Analysis of the Impact of the System Restrictions Imposed by the Chinese Regulator on the Key Performance Indicators of the Chinese Gaming Industry

Tsymlyakov Aleksei Maksimovich ORCID: 0009-0003-2546-4960 Student, Department of World Economics, National Research University Higher School of Economics 101000, Russia, Moscow, Myasnitskaya str., 20 alextsymliakov2015@gmail.com

Introduction

In the context of an ever-increasing level of digitalization, greater accessibility of mobile and desktop devices, increased Internet connection speed and coverage ^[1], the observed trend towards leveling the distinctions between the real world and its virtual version ^[2], the mechanisms of functioning of the industry – the gaming industry-, which is likely to be immersed more and more more inhabitants of the Planet are of interest and, moreover, require attention, since, of course, the future of the gaming industry is seen as colossal: by 2032, the industry can reach, on a global scale, a volume of 1 trillion US dollars ^[3].

According to the data presented in the report "Global Games Market 2023" ^[4] authored by the research company NewZoo, in 2023 there are about 3.305 billion people in the world who can be considered gamers (those who play video games). At the same time, the Asia-Pacific region is the largest macro market both in terms of the number of gamers (1.73 billion people) and revenue ($84.1 billion with a total global market volume of $ 184 billion).

Within the Asia-Pacific region, the largest market within the gaming industry is China: the largest number of gamers in the region is 710.3 million people and the highest volume of the industry in the region is 47.86 billion US dollars ^[5]

Of interest is the fact that for more than 20 years, the Chinese video game market has been subjected to various types of restrictions related to various aspects of both game development and their sale to consumers.

Within the framework of this article, an attempt will be made to systematize the "foundation", which may indicate the absence or presence of the influence of state restrictions (systemic restrictions – a set of rules, policies and regulations established by the Chinese regulator, limiting various aspects of game content, monetization of games, etc. ^[6]) on the development of the Chinese gaming industry.

Regulation of the Chinese gaming industry

China's gaming industry is hugely regulated: restrictions apply to issues of game development, issues of content presented in games, and issues of gameplay mechanics, and issues of game product sales.

The main functions of regulating the industry are performed by the General State Administration of the People's Republic of China for Press and Publishing (NPPA), however, issues of regulating the industry, among others, lie in the activities of the State Council of the People's Republic of China, the Ministry of Commerce of the People's Republic of China, the Chinese Association of Audio, Video and Digital Publishers and other departments ^{[7, p. 5]}.

Referring directly to the measures aimed at regulating the Chinese gaming industry, we will note only those that, in our opinion, can most influence the development and functioning of the Chinese gaming industry (we will omit such regulatory measures as: cybersecurity regulation, intellectual property rights regulation and other regulation related to the direct legal basis of functioning industries) the following restrictions:

1.                 A mandatory licensing process for newly released games.

The licensing process is carried out by the General State Administration of the People's Republic of China for Press and Publishing.

In particular, as part of the licensing process, content regulation is actually carried out: game products undergo a rather strict selection process, including, in particular, the following criteria, failure to comply with which leads to a ban on access to the game product for sale in China ^{[7, pp. 7-8]}:

-                   The product must not contradict the Constitution of the People's Republic of China;

-                   The product does not question the sovereignty and territorial integrity of China;

-                   The product is not aimed at inciting hatred and enmity;

-                   The product does not contain materials that can be interpreted as spreading information about supernatural forces, cults, etc.;

-                   The product does not contradict the cultural characteristics and morals of Chinese society;

-                   The product does not contain erotic scenes, violent scenes, gambling scenes;

-                   The product does not undermine public order or encourage extremist manifestations.

In particular, the application for a license for a game product includes data on game mechanics, the full game code and engine data, screenshots and gameplay videos. In particular, the game product must ^{[8, p. 10]}: comply with the accepted Chinese view of history and political and ideological course; must have an uncopied, innovative design; must have high-quality game mechanics; must immerse the user in Chinese culture and, if possible, be ready for implementation (completed), which also It is evaluated by experts from the regulator.

Among other things, experts are considering issues related to the player identification system implemented in the game product and the list of censored words.

If we talk about the expert assessment by the regulator as a whole, then we can say that each of the above categories is evaluated on a five–point scale - from 0 to 5 points. The license is issued to those gaming products that have not received 0 points in any of the categories and whose average score in all designated categories is higher or equal to two points.

Sanctions in the form of a fine or complete confiscation of the proceeds from the sale of the game product will follow from the regulator if the developer company decides to publish the game without a license ^{[8, p. 10]}.

2. Restrictions on playing time and gaming expenses of minors.

As part of the fight against the gambling addiction of minors, the Chinese government has limited the time that minors are allowed to spend in the gaming process to three hours a week: 1 hour on Friday, Saturday and Sunday ^{[8, p. 7]}.

The restriction, in particular, is ensured by the need to introduce a user identification system into the game mechanics: a potential player, upon entering the game interface, enters his identification number, according to which the age of the gamer is determined and the appropriate restrictions are included.

Similarly, monthly gaming spending by minors is limited to a range of $30 (for 8-16 year olds) to $60 (for teenagers aged 16-18).

3. Regulation of the monetization of games.

The regulation of game monetization in China includes rules that restrict the sale of goods and services inside the game interface.

In particular, game developers, in relation to users, should provide information on the prices of in-game goods and services, and the conditions for making an in-game transaction should be set out in detail.

In particular, the Chinese regulator regulates advertising in games: As with the criteria for licensing games, advertising inside gaming products must not violate Chinese cultural norms and laws, contain erotic scenes, information about gambling, and so on.

4. Regulation of online game development.

To release online games that can be monetized, developers must have specialized licenses issued by the General State Administration of the People's Republic of China for Press and Publishing.

5. Regulation of the use of AR/VR technologies.

The scope of application of AR/VR technologies in gaming products is regulated in the context of the use of these technologies by developers within the framework of the norms adopted by the Chinese regulator regarding content and other issues voiced above. The use of AR/VR technologies in gaming products is regulated by the Ministry of Industry and Informatization of the People's Republic of China.

For greater clarity, the restrictions ever imposed by Chinese regulators on the local gaming industry will be presented by year in table 1.

Table 1 – System restrictions imposed on industries. China Games

Regulation of the gaming industry, as can be seen, in particular, based on the data presented in Table 1, is mainly aimed at:

1. Protection of children and adolescents from gambling addiction declared by the Chinese government;

2.                 The non-admission of content that may in any way affect the political situation in China, or in any way affect the social structure of Chinese society.

Actually, despite the fact that the Chinese government declares the goal of systemic restrictions to be the fight against child gambling addiction, as well as the preservation of national identity, a number of researchers note ^[7] that censorship restrictions imposed against the local gaming industry can serve as a tool to preserve political stability within China, avoiding possible externalities on Chinese society through gaming products developed by foreign companies.

Analysis of the impact of systemic restrictions on the performance of the Chinese gaming industry

Summarizing the available data on the volume of the Chinese gaming industry ^[9], it seems possible to present a graph that will reflect the dynamics of growth rates and impose data on the restrictions imposed in each specific year (Figure 1).

Figure 1 – The growth rate of the Chinese gaming industry, broken down by periods of introduction of systemic restrictions

Based on the illustration shown in Figure 1, it can be noted that as the restrictions imposed on the Chinese gaming industry accumulated, the growth rate of the Chinese gaming industry decreased by an order of magnitude: if in the period between 2009 and 2014 the average growth rate of the industry was 35.5%, then in 2015-2017 the average growth rate decreased to 21.19%, and in 2017-2022, the average growth rate of the market completely collapsed to 8.78%. However, in absolute terms, from 2008 to 2022, the Chinese gaming industry grew in volume by 14.3 times (from $2.59 billion up to $37.22 billion.

It is interesting to compare the global average growth rate of the gaming industry with a similar indicator of the Chinese gaming industry.

Data on the volume of the global video game market are presented in Table 2.

Table 2 - Global video game market volume ^[10]

The global gaming industry grew by an average of 16.81% over 6 years from 2017 to 2022. In general, the market has grown by 116.1% in 6 years.

Comparing the performance of the Chinese gaming industry over the same period, it can be noted that since 2017, in which the volume of the gaming industry was $28.5 billion, the market has grown by only 30.6% with an average volume growth rate of 5.94%, as indicated above, reaching a volume of $37.22 billion in 2022. (Table 3) ^[9].

Table 3 – Data on the volume of the Chinese gaming industry

Indirectly, based on a comparison of data between the growth rates of the Chinese gaming industry and the global one, one can make an assumption about the possible impact of government restrictions on the development of the Chinese gaming industry.

Let's look at the number of players in the Chinese gaming industry by year (the data is presented in Table 4).

Table 4 – Data on the number of gamers in China ^[11]

Based on the data presented in Table 4, the number of gamers in the Chinese gaming industry increased by 61.95% from 2012 to 2022, reaching a value of 664 million people. The average annual growth rate of the number of players over the specified period was 5.18%.

Data on the number of gamers in the world are presented in Table 5.

Table 5 – Data on the number of players in the world ^[12]

It can be noted that the average growth rate of gamers in the world in the period from 2015 to 2022 was 6.19%, while the number of players increased from 2.03 billion. people up to 3.09 billion. people – by 52.2%.

During the same period (2015-2022), the average increase in the number of players in China year-on-year was 3.32%, and the total increase in the number of players from 2015 to 2022 was 24.35% - from 533.96 million to 664 million people.

It is likely that the Chinese government's restrictions on the gaming industry could lead to a decrease in the growth rate of the number of players in comparison with global indicators.

Regarding income per gamer, the growth rate of this indicator in China was lower than when considering industry indicators on a global scale during 2017-2022. (Table 6).

Table 6 – Data on average income per video game user ^{[10, 13]}

In this context, it is important to mention that the Chinese regulator introduced restrictions in 2019 regarding the spending of underage players on games. In particular, as mentioned earlier, spending was limited for people from 8 to 16 years old in the amount of $30 per month, for people from 16 to 18 - $60 per month.

In general, a lower rate of increase in average income per user may be an indicator by which it is possible to analyze user interest in gaming content. The more content there is on the market, the higher the user's interest in this content is expected to be.

Turning to the statistics on the issuance of licenses for gaming products by the Chinese regulator, it can be noted that the number of licenses issued for foreign gaming products is several times lower than the number of licenses issued for domestic gaming products (Table 7).

Table 7 – Data on the issuance of licenses by the Chinese regulator ^[14]

The fact that there are a small number of licensed foreign games is most likely due to the rather high technical requirements for the product and, along with this, the need for deep localization, which is required for the game to enter the Chinese market. In particular, the researchers note that the required localization changes the game enormously, sometimes leading to a complete leveling of its original plot idea ^[15].

A special example of the game "Civilization IV": for the Chinese market, the game had to be localized quite deeply. In particular, China was renamed the "Qin Empire", MaoZedong was replaced by a character who never existed in reality, and the Mongolian Empire was renamed altogether, replacing, at the same time, the ruler of Mongolia in the world release – Genghis Khan - with Ho-Orluk, since, apparently, the latter never intervened in China. In particular, as part of the localization of the game for the Chinese market, the ideology of "communism" was replaced by the "Doctrine of National Welfare" ^[16].

It can be assumed that it is a change in the original idea of games, a change in a number of important plot characteristics, that can lead to a decrease in user interest in games, since they cannot get the original product, which is distributed all over the world. This fact, of course, leads to a decrease in revenue within the Chinese gaming industry, as user interest in gaming products in the local market as a whole decreases. Actually, with a decrease in total revenues in the markets, combined with the enormous technical and content requirements of the Chinese regulator, international gaming companies are also losing interest in entering the Chinese market.

It seems possible, in particular, to pay attention to an interview in China Business Daily, in which an analyst from one of the Chinese gaming companies pointed out a decrease in interest in games from users ^[17]. Of course, a decrease in user interest may be the effect of censoring game content.

The concept promoted by the Chinese authorities should also be outlined

"neo-technonationalism" within the framework of which, among other things, protectionist measures are applied to the local gaming industry ^[18], which are expressed in the following:

1.                 VAT has been abolished for games intended to be "exported" (in particular, promoting Chinese values and culture in their plot. The whole promotion of companies whose gaming products are aimed at creating a positive image of China);

2.                 Encouraging the creation of local companies operating within the gaming industry;

3. The use of a licensing mechanism to make it difficult for foreign companies to access the local market.

Conclusion

Within the framework of the article, an overview of the system limitations was made, which, according to the author, directly affect the development of the Chinese gaming industry.

As part of the analysis of the potential impact of restrictions imposed by the Chinese regulator, by reviewing statistical data, the primary conclusions concerning the possible negative impact of systemic restrictions on the functioning and development of the Chinese gaming industry are presented.

In summary, it should be noted that by introducing bans on gaming for children and adolescents, negative prerequisites are being created for the further development of the Chinese gaming industry. New generations of Chinese will probably not be in the habit of spending time playing video games and, thus, the Chinese gaming industry will "lose" potential users.

Regarding the investment attractiveness of the industry, in the long term, it is also worth noting some caution, since excessive regulation and a potential decrease in the user base of games undermines the investment potential of the Chinese gaming industry.

Further research within the framework of this issue can be aimed at quantifying the systemic restrictions imposed by the Chinese government against the local gaming industry and building a regression model that illustrates quantitatively the impact of these restrictions on the development of the Chinese gaming industry.