Tencent's stock falls more than 5% after Chinese ministry proposes increased regulation

  • Tencent's stock dropped on Friday as the company faces yet another headwind from Chinese regulators.
  • On Thursday, China's education ministry issued a statement proposing a curb in the number of new online video game approvals to address the growing number of eye problems in the country's youth population.

Just weeks after running into trouble with China's content regulators over the release of a highly anticipated video game, tech giant Tencent is in government crosshairs once again.

On Thursday, the Ministry of Education of the People's Republic of China released a note on its plan to curb the increasing rise of eye problems among the country's youth population. It noted — in a Chinese-language document — that myopia was becoming a "very severe" issue that could lead to big problems for the country in the future.

Some of the causes the document attributes to the rising trend of short-sightedness in Chinese youths include a heavy study load, the proliferation of mobile phones and other electronic devices, as well as a lack of outdoor activity and exercise.

In its recommendations, the Chinese education ministry suggested controlling the number of approvals for new online video games, implementing an age ratings system for games, as well as restrictions to the amount of time minors are allowed to play games online.

In an afternoon note, market research company Niko Partners said two of those recommendations "have been stated before," but the suggestion to restrict the number of new online video games was new, and will "possibly have the highest impact."

Saying that the text was "not as detailed as we expect to see," Niko Partners said game licensing in China will likely resume in some form after more policy details are released, adding that "at this point it is unclear if the policy will ultimately be restrictive or not."

In the event of the recommendation to restrict approvals of new video games going through, "smaller game companies with only a few potential hit titles would suffer more than larger ones," it said.

In the trading day following the announcement, Tencent's stock fell by more than 5.6 percent compared to Thursday's closing trade. It subsequently rebounded from that point.

"I think the news that came out (Thursday) regarding monitoring gaming usage is similar to a number of times where gaming restrictions on youths in China came out before, so in this sense, I think it is just a short term reaction," said Kevin Leung, an executive director of investment strategy at Hong Kong-based Haitong International Securities.

"But in the bigger picture, this is in line with China's policy of putting a stronger clamp on gaming," Leung said, adding that the trend is likely to continue for "at least" the next two quarters.

The latest news comes as Tencent recently reported a fall in profits for the first time in almost 13 years.

– Reuters contributed to this report.