The Lex Newsletter: China will soothe zero-Covid misery with Korean media

Dear reader,

As Covid-19 restrictions in China widen, regulatory restrictions on entertainment are relaxing. Beijing has lifted its six-year ban on South Korean media content. The country’s gaming industry association has, meanwhile, declared that China has resolved the problem of game addiction among its youth.

That stretches credulity. But China now has a far more serious crisis to deal with. Popular discontent with lockdowns and inadequate local coronavirus vaccines is spiralling into civil unrest. Moral panics over children playing video games or watching South Korean soap operas seem trivial in comparison.

The relaxation of curbs on media companies and the zero-Covid policy means a pandemic trade is about to get a revival. Shares of gaming and content businesses such as Netflix and Nintendo more than doubled from 2020 to their 2021 peak as social distancing kept people at home. Investors now have a second chance to enjoy a slightly smaller windfall via Asian stocks.

The first surprise was a movie that started showing on Tencent’s online streaming platform. The Chinese tech giant began distributing the 2018 South Korean film Hotel by the River, the first time content from that source has been offered since a suspension six years ago.

Meanwhile, Tuesday’s report claiming victory over gaming addiction suggested more content is about to come to market. Beijing froze all game licensing last year and implemented stringent new rules including game-playing time restrictions.

In China, game companies need regulatory approval to monetise new titles and playing time is directly correlated to game revenue. Thus, the restrictions threatened the future of about a third of Tencent’s total revenue, and much more for peer NetEase.

Shares of Tencent and NetEase are down more than 40 per cent in the past year, while smaller peer Perfect World has fallen 30 per cent. A more lenient official tone paves the way for game licence approvals and gaming time limits to return to pre-crackdown levels and a revenue boost.

South Korean content and entertainment stocks also fell because of their high reliance on China, which has historically accounted for a fifth of total revenues for such companies.

In July 2016, South Korea and the US announced a decision to deploy the Terminal High Altitude Area Defense (Thaad) anti-missile defence system in South Korea to protect it against North Korea’s missiles. The move angered Beijing, which perceived Thaad as a security threat directed at China. After that, Beijing effectively banned K-pop and media content imports.

Shares of local content and entertainment groups have never fully recovered from the years-long plunge that started then. Profits have suffered too. One of the largest studios, ContentreeJoongAng, for example, had operating margins of 11 per cent in 2015. Those are now negative. Margins at peers CJ ENM and Showbox have also continued to decline.

So it is no surprise that stocks in those businesses rallied on Wednesday. Shares of local content group KidariStudio rose by their daily limit of 30 per cent. Stocks in film distributor and producer Showbox and peer Studio Dragon are up more than a tenth.

The sudden reversal in sentiment towards Korean content stocks follows last week’s meeting between South Korean president Yoon Suk-yeol and Chinese president Xi Jinping at a summit in Bali. Xi’s comments that a halt in cultural exchange does not benefit anyone suggest the beginning of a return to normality is nearing.

China’s new Covid cases are nearing their previous record in April. This had resulted in the drastic lockdown of Shanghai that sent ripple effects through the world’s supply chains.

Covid curbs are expanding rapidly amid a surge in new cases, this time especially concentrated in the capital of Beijing and the country’s main manufacturing hub of Guangzhou. Beijing has shut down public spaces such as shopping centres and parks.

Guangzhou’s most populous district Baiyun is under lockdown for five days. People travelling into Shanghai will be barred from public venues for five days, including restaurants, pubs, shopping malls and supermarkets.

With access to entertainment venues restricted, time spent watching streaming videos and playing video games will increase. It grew by double digits in all global regions in 2020.

The six-year backlog of Korean content also has a silver lining. Films and dramas that have already aired in other countries and have been subtitled in Chinese make it past Chinese government censors faster than new shows.

Meanwhile, strict mobility controls and lockdowns have been fuelling discontent and unprecedented riots. Beijing already has more than enough on its plate. The highly politicised sectors of gaming and media will benefit from a distraction that takes the focus away from them.

Enjoy the rest of your week,

June Yoon
Lex Asia editor