CCP video game industry crackdown, worsening epidemic situation heightens political risks in China

     SinoInsight  1     

OUR TAKE

1. The CCP’s targeting of the video game industry, like its recent crackdown on the tutoring sector, appears to be part of a broader effort to reverse the ills of its anti-natalist population policies, moral degeneracy, apathy in youths, and other societal problems. Also, the Party is currently finding scapegoats (who are by no means innocent parties) to blame for its failed population policies, and avoid being held accountable by the masses. Beijing undoubtedly hopes that the implementation of tough measures now will help the regime boost productivity, stem economic deterioration, mitigate societal ills, and weather the demographic crisis.

The CCP earlier supported the video game industry as it sought to curb the influence of foreign ideologies and culture at home, gain ground against strong foreign competition, and further its external influence operations. Today, some Chinese tech giants have become major players in the global video game industry, with Tencent owning stakes in several big-name foreign video game companies. Replacing foreign games with locally-developed ones may resolve some superficial ideological issues, but they do not resolve the fundamental ills associated with gaming, like addiction and falling productivity.

Like the PRC, other countries and societies are also struggling to deal with societal and economic problems caused by video game addiction. However, the social and political environment created by decades of Party rule has arguably made the video gaming problem more acute in China. Chinese millennials and Gen Z tend to be apolitical, materialistic, hedonistic, and mostly self-interested because the CCP either directly or indirectly encouraged such behavior through its policies. Moral degeneracy is exacerbated by the Party’s promotion of atheism and unending war on religious faith (Muslims, Christians, Buddhist, Falun Gong, etc.) since seizing power in 1949. Materialism and the prioritization of self-interest worsened after the Cultural Revolution, with Deng Xiaoping promoting, “to get rich is glorious” (致富光榮) and “making a fortune while keeping a low profile” (悶聲發大財) being the zeitgeist of the Jiang Zemin faction’s nearly two decade-long dominance in the regime. Mass pro-democracy protests in 1989 and the subsequent massacre in Beijing also convinced the Party of the need to condition the Chinese people to focus on living the good life and not caring about politics or broader social issues.

The manner in which the CCP sought to condition the Chinese people was driven by political crises of the day. But in its haste to resolve short-term problems, the Party ended up sowing destructive seeds that are now flowering and seriously endangering regime security. Under CCP conditioning, China’s millennials and Gen Z are focused chiefly on personal pursuits and are far less socially-minded and responsible than previous generations. The internet age has worsened this problem, with Chinese youths developing poor social skills, remaining immature into their adult years, and being more interested in becoming social media celebrities or esports stars than engaging in occupations that contribute to the real economy and thus complement the regime’s aims.

China’s millennials have also developed a utilitarian mindset (“laying flatism,” or “躺平”) that makes them more inclined to put in the bare minimum by doing food deliveries, participating in the gig economy, and just get by in life rather than go into manufacturing and other labor-intensive jobs. Playing video games is another way in which Chinese millennials and Gen Z cope with (or rather, escape from) the external environment created by short-sighted CCP policies and ideology. Meanwhile, families with the means transfer their assets overseas and send their children abroad for education and work to escape Chinese society altogether.

2. Tencent is a leader in the online gaming industry, with video game sales being a main source of the company’s revenue. Tencent’s 2020 financial report shows an annual revenue of 572.8 billion yuan (YoY increase of 36 percent), with online games bringing in 156.1 billion yuan or 27.3 percent of the total revenue. Tencent Game’s revenue is expected to grow by 13 percent in the second quarter of 2021 to 43.3 billion yuan, according to a forecast by Everbright Securities; mobile game revenue is forecasted to grow by 21 percent to 42.47 billion yuan, and game client revenue is forecasted to grow by 1 percent to 11.02 billion yuan.

However, the proportion of Tencent’s video game revenue from sales to minors is not high. Per its 2020 annual report, game sales to those under the age of 18 only accounts for 6 percent of Tencent’s domestic online game sales, while sales in the under-16 cohort was just 3.2 percent. The company reflected the proportion of video game sales to minors for the first time in its 2020 annual report, probably because it anticipated a coming crackdown and wanted to be “politically correct” first to better weather the regulatory storm. (Tencent’s data consisted of users it could identify, but the actual number of minors playing Tencent games could be much higher if users overstate their age to circumvent usage restrictions.)

The CCP’s own data also shows that video games are not the main thing that people indulge in online. Per the PRC National Copyright Administration’s annual report for 2020 (中國網絡版權產業發展報告 [2020]) released on June 1, the bulk of internet users preferred to watch short videos, not play online games. Other key data points from the report include:

• In 2020, the number of online gamers in China decreased 2.6 percent YoY to 518 million, while the market size increased 20.7 percent YoY to 278.69 billion yuan.
• In 2020, the number of esports players in China increased 9.7 percent YoY to 488 million, while the market size increased 44.2 percent YoY to 136.56 billion yuan.
• At the end of 2020, the number of video game streamers in China decreased 26.5 percent YoY to 191 million, and the market size increased 44.3 percent YoY to 30.03 billion yuan.
• In 2020, the number of video streamers in China increased 15.5 percent YoY to 239 million, and market size increased 17 percent YoY to 56.5 billion yuan.
• In 2020, the number of people watching short videos increased 12.9 percent YoY to 873 million (or double compared to 2018), and the market size increased 49.6 percent to 150.6 billion yuan. Of the 873 million people, 36.6 percent (320 million) consumed online content for an average of 30 minutes to 60 minutes per day, 25.7 percent (224 million) for 60 minutes to 120 minutes, and 19.1 percent (167 million) for over 120 minutes.

3. The CCP is resorting to classic authoritarian methods to turn millennials and Gen Z away from playing video games. Video-streaming and short videos could be next on the chopping board. Concurrently, the Party is stepping up ideological education in schools and workplaces to create a more politically-conscious populace that is (at least theoretically) willing to sacrifice themselves for the betterment of the regime. Beijing needs to change the political and social environment in China to weather a “perfect storm” of domestic and foreign crises facing the regime.

Party nature and historical precedent, however, suggest that Beijing will not attain its ideal outcome and will instead create greater problems for itself. Approaches that are heavy-handed, “prefer left rather than right,” and “one-size-fits-all” are consistent with communist ideology and the self-interests of officials, but have rarely worked in practical situations and usually resulted in disaster in the PRC’s history (Great Leap Forward, “one-child” policy, etc.).

In moving to rein in the video game industry and reverse the ill-effects of its earlier population policies, the CCP will likely end up alienating and losing support among the younger generation of Chinese. Beijing also risks losing access to foreign capital as investors hesitate from putting their money in China to mitigate their exposure to political risks.

     SinoInsight  2     

• On Aug. 1, Beijing raised the level of control for entry into the city, including restricting the entry of people from medium- and high-risk epidemic areas or areas with known cases, and suspending flights, trains, and buses to the city.
• On Aug. 3, China State Railway Group announced that it will not charge a refund fee to passengers who purchased train tickets from stations or online (the 12306 website) before 2400 hours that day. In the evening of Aug. 3, the Civil Aviation Administration of China announced that passengers who purchased domestic air tickets for flights between Aug. 4 and Aug. 31 can get a free refund if they have not already boarded their flight before 0000 hours on Aug. 4.
• On Aug. 3, the Wuhan local government carried out city-wide nucleic acid testing, suspended 23 bus lines, and suspended all offline education and in-person gathering activities. The local government also noted that 26,100 of its 31,300 quarantine rooms are currently occupied, and the city will add another 9,000 quarantine rooms in the next couple of days.
• On Aug. 3, the Zhangjiajie local government announced that all residents and tourists in the city are forbidden from leaving. Previously on July 29, the local government said that it had “persuaded” 754 tour groups leading 11,900 tourists to depart the city.

• On Aug. 3, the Macau government required all persons leaving the territory from 1530 hours to possess a negative 24-hour nucleic acid test certificate and “enter a state of immediate prevention.” The government also scheduled territory-wide nucleic acid testing to begin from Aug. 4 and the closure of some entertainment venues.
• On Aug. 3, the Hong Kong government announced that Hong Kong residents who were in Macau in the previous 14 days would not be able to return to the territory under the “Return2hk” program from Aug. 4 in light of the developing epidemic situation in Macau. On Aug. 4, the Hong Kong government announced that Hong Kong residents returning to the territory from parts of the mainland aside from Guangdong Province from Aug. 5 will not be exempted from quarantine under the “Return2hk” program, and will be subjected to mandatory 14-day quarantine arrangements.

OUR TAKE

1. From the CCP’s rush to impose tough lockdowns and other epidemic control measures to the partial absence of face-saving measures (rapidly punishing officials who failed in epidemic prevention and control work and acknowledging a spike in cases), it appears that the latest outbreak of COVID-19 on the mainland is much more severe than official numbers depict.

As we wrote in our China 2021 Outlook: “Coronavirus epidemic conditions could worsen in China, and new, harder to treat contagious diseases could emerge. In response, the CCP will seek to cover up the truth and blame other countries for the epidemic situation on the mainland. By the time the CCP finally admits that the crisis is serious, the epidemic will likely be beyond its control.”

2. On July 8, PRC National Health Commission deputy director Li Bin bragged that the original epidemic wave in China had been dealt with and existing cases were all imported. However, the Nanjing outbreak and the fact that vaccinated persons were infected has forced the CCP to change its “zero-COVID” narrative to “learning to live with the virus.”

The questionable effectiveness of PRC vaccines has already made things awkward for the authorities. When asked whether those originally infected at the Nanjing airport had been vaccinated during a press conference in Nanjing, the local leading officials looked embarrassed and exchanged glances before responding in an evasive manner. The Nanjing authorities later noted that of 180 cases in the city, only one involved an unvaccinated person, who has since recovered. By contrast, there were eight severe cases among the vaccinated people who contracted COVID-19.

Per our China 2021 Outlook: “New variants of the virus could emerge, rendering newly developed vaccines useless. Vaccines could also prove to be less effective than originally announced.” Also, “China-produced vaccines may have serious quality defects, leaving those vaccinated susceptible to the coronavirus.”

3. The Nanjing coronavirus outbreak and the return of lockdowns will inevitably hurt China’s economic recovery and affect growth in the second half of 2021. Economists are already cutting forecasts, with Japan’s Nomura Securities dialing back its third quarter predictions of 6.4 percent to 5.1 percent, and fourth quarter growth from 5.3 percent to 4.4 percent. Nomura also lowered its China annual growth rate forecast from 8.9 percent to 8.2 percent. We remain pessimistic about China’s economic prospects under the CCP.

The return of the pandemic will heighten China’s economic and financial risks, which will in turn intensify political risks for the CCP and Xi Jinping. Beijing is wont to adopt stricter societal controls to deal with the resurging coronavirus and preserve regime security. However, investors spooked by the CCP’s recent regulatory crackdown and rectification of the tech industry could easily misinterpret Beijing’s intentions and start panic selling. Meanwhile, heavily indebted Chinese companies like real estate developer Evergrande will find it even harder to raise capital and meet its debt obligations amid fresh lockdowns, increasing the probability of defaults and the triggering of China’s debt crisis.