Chinese Game Stocks Drop Amidst Virtual Currency Legal Worries

Current Stocks for The9The Chinese government has banned the sale of virtual currency for real money, which has caused some repercussions in the Chinese gaming industry. According to a report from Seeking Alpha, in three days since the ban, the stock prices for Chinese online game operators dropped as much as 10 percent.

Considering the size of the Chinese market (which earns more than $2.8 billion per year from virtual goods alone), this is obviously a significant decrease. The companies that experienced a drop included Shanda Online, Changyou, The9, NetEase, Perfect World, and Giant Interactive, all of which trade within the United States.

Can most of the drop in these companies’ value can be attributed to investor panic? The ban on virtual currency sales was aimed at combating online gambling, which is illegal in China. This leads to a serious issue for most online MMOs within the country because they serve as a conduit for virtual gambling. For example, players can purchase virtual keys with game currency to open treasure chests. The chests contain either something good or bad (thus, it’s a gamble). Due to the court case that set precedent on the real value of virtual goods and currency, the contents of these chests can be tied to real money.

Currently, more than 90 percent of Chinese MMOs make use of this virtual chest concept, and many will now have to remove it. According to Beijing Business Today, the annual revenue loss is expected to be between 5 and 7 percent.

In addition, the official statement of the Chinese Ministries stated that virtual currency “will only be allowed to trade in virtual goods and services provided by its issuer.” In the US, small companies often use larger companies to handle payment systems for their virtual items (Mochi Media’s new payment platform being a recent example). It is no different in China. An example from Virtual Goods News highlights Shanda Online, a major provider of such services to small Chinese companies. Based on the contracts between Shanda and its partners, users can use Shanda Points to purchase various goods and services from the smaller companies’ games. Now, under the new law, those contracts are illegal.

Fantasy Westward JourneyThe same article post also points out a relatively unknown problem stemming from the new law: There are a number of games that utilize two forms of currency. NetEase is one such example. It makes use of the freemium model in a rather unorthodox way; using both “game points” and “game coins” that can be exchanged for one another.

Here’s how it works (and where the problem lies): Players could once buy time cards that would determine how long they could play. They could also buy game points (for real money) that could be used for the same result. This is where freemium comes into play: Users could earn game coins by doing quests and killing in-game creatures. These coins could then be traded for points, and the points traded with other players. Other players could then redeem these points for more game play time. This allowed for a tremendously large user base (1.76 million peak concurrent users), which is likely going to drop significantly in the near future.

The adverse affects of the new legislation in China are quite apparent. However, it is important to emphasize that the online market for Asia is roughly 25 times larger than it is in the US. A vast majority of that market ($2.8 billion out of $5 billion) stems from China alone. Though 70 percent of that market is virtual goods, its sheer size demonstrates how strong it has become. It will have to evolve to handle the changes it is now forced to deal with.