China Builds Wall Around Gaming Sector

Chinese regulators showed they’re not quite ready to embrace the free market mentality, banning foreign investment in domestic online video game firms.

According to yesterday’s report by Reuters, China has banned foreign investment and other cooperative engagements in an attempt to tighten its grip on the lucrative domestic online video game industry.

Regulators were already a thorn in the side of NetEase.com (NADSAQ: NTES), which took over Chinese operations of blockbuster Activision Blizzard (ATVI) franchise World of Warcraft (WoW) in June. Roth Capital Partners analyst Adam Krejcik told The Wall Street Journal, “NetEase is stuck in the middle of an ugly power struggle between two government agencies in China. Therefore, siding with one government department is risky and could result in longer term problems.” The report noted that WoW, which has 11 million global subscribers according to VentureBeat, could go offline again in China if the country’s General Administration of Press & Publication has its way.

As the story develops it will be interesting to follow movements in the Chinese Online Gaming Stocks Index, which is now lagging the S&P 500 by -14% over the last month.

NetEase.com is moving higher today, but most of the sector is in the red. Webzen (WZEN) and Perfect World (PWRD) are both slipping by more than -4%.

Over the last week only GigaMedia (GIGM) remains in positive territory. Giant Interactive (GA) turned negative for the period this morning.

Changyou.com (CYOU) and Shanda Games (GAME), which had a second-best 20% share of the Q2 Chinese online gaming market according to Reuters, are moving higher and lower respectively by less than 2.5% in today’s session. Both stocks can also be found in the 2009 IPOs Index, which is up fractionally on the day.

As of this writing, the Chinese Online Gaming Stocks Index is the worst-performing tickerspy Indexes over the last month, down by -12%.

Tags: ATVI, CYOU, GA, GAME, GIGM, NTES, PWRD, WZEN