Podcast: Charles Yu

I spoke with Charles Yu (俞超), a partner at boutique international law firm Pillar Legal and the Head of its Shanghai office, on the sixth edition of their primer on the regulation of China's gaming industry. Our conversation put 2021's regulatory campaign into the broader context of the Chinese government's fifteen-year struggle to combat gaming addiction among minors; the "murky" process for new games to be licensed; the challenges of maintaining digital privacy; how government policy has become supportive again; and how Chinese firms have responded to regulatory uncertainty by setting their sights on overseas markets.  

You can read an edited transcript of our conversation below:

Graham: Hi, everyone. Welcome to the Longriver Podcast. This is Graham Rhodes, and today I'm speaking with Charles Yu, a partner of Pillar Legal. We're going to be talking about gaming industry regulation in China. Welcome to the podcast Charles.

Charles: Hi Graham.

Graham: Before we go any further, I have to give a disclaimer: nothing in this podcast is investment advice, so please don't take it as such. 

With that, Charles, welcome to the show. It's a real honour to have you here. Could you please introduce yourself and let us know a bit about Pillar Legal?

Charles: My name is Chao Yu, and you can also call me Charles. I'm a partner of Pillar Legal and also the Head of Pillar Legal's Shanghai office. We are a boutique international law firm. We have offices in the San Francisco Bay Area and also Shanghai. The firm was founded in 2008, and our primary practice area is related to the game industry. We have attorneys in the US and China, and we are familiar with the regulatory environment for both countries. And most of our clients are game companies. We help clients with many game regulatory advice and also help with cross-border game licensing, publishing and M&A transactions in the game industry.

Graham: We were all quite surprised by the degree of regulation announced in China in 2021, in the tech industry especially. And Tencent and the gaming industry were right at the heart of that. So Pillar Legal has just released this excellent sixth edition of its primer on regulation in the Chinese gaming industry. Can you please help us understand the regulations of 2021, what they were, and how we should see them in context?

Charles: First, let me give you a brief background on why we write this legal primer. We write this legal primer because China's laws and regulations are usually very murky. And foreign game developers, when they read the actual rules written in the book, they cannot understand what they mean or what the government's goals are.

And so, it is very important to understand how the rules are implemented in practice. That would be the key for a foreign game developer to understand. And the implementation of the rules is also sometimes murky. And the government policy is campaign-styled.

So the practitioner must pay close attention to the government policy and attitude toward a specific industry. In 2021, I don't think the Chinese government specifically cracked down on the game industries. But in the middle of 2021, the Chinese government released a lot of rules, laws, and policies related to minor protections. And many of the rules related to minor protection are related to the real name registrations and the time limitations that would affect games released or to be released in China. And the policies specifically require some special functions to be incorporated into the games before they can get approvals.

With that, since August 2021 or July 2021, new game approval was suspended for about eight months and reopened in April 2022.

So that's a brief background of the crackdown of the game in 2021.

Graham: The way you describe this, Charles, it sounds very dispassionate and rational, but I remember in the summer of 2021, the rhetoric around this move was quite the opposite. People were describing games as spiritual opium. There was a lot of concern about the way a historical figure, Yue Fei, was portrayed in a game and the impact this was having on young people. Can you comment on the political rhetoric and how foreigners or people outside of the industry should interpret that? In contrast to the much more dispassionate motivation that you just described earlier.

Charles: Yeah, so I think, as I mentioned, Chinese laws are murky, and government policies basically drive the actual practice at specific times. 

And the example you just mentioned - it was written by a national background media - criticized the harm that video games bring to young people in China. At that specific time period, the government is not that supportive of the game industry. And it does require the game industry to take more responsibility to help parents in China from preventing kids to addicted to video games.

Graham: Okay. So would it be fair to say then that there's a policy cycle, and the timing of changes in policy depends a lot on the cycle?

Charles: Yeah. And also, the one thing to input China government always says, they are responsible to the people in China. Based on my ten years of experience, we have seen that if there are too many negative voices against one particular industry, the government will always respond.

So before 2021, most people's attitude to video games... they do not think it is a good thing, especially for people who have kids. They do believe that video games have significant impact on kids' studies. And they do think game companies need to prevent kids from playing games.

Graham: Yeah, I agree with you. The policy itself is very rational and much needed. It's the reason for its timing that confused or shocked many people, myself included. But let's move on from the kind of politics and talk a bit more about the licensing regime again. 

So we talked about licenses for new games. Can you share with us the quotas for new games, or what are some of the considerations the regulator will have before issuing a license for a new game?

Charles: So the primary thing before the government will issue a game approval is reviewing the content of a game to ensure there will be no illegal content. And Chinese laws do have some very general principles. For example, the content shall not violate China's constitutional laws; for example, it shall not have content inconsistent with history.

Everything is very murky. If you take a look at the rules, you may not understand how these will be strictly implemented. In 2016, the game industry association released specifications on the game content, how each of these general principles will be interpreted, and what content is not allowed.

For example, content with violence with blood will be implied as violent content and will not be allowed. 

But the content review standards are developing each year.

For example, the most recent update is that the games will have no 'boys love'. But we do not see that in the game content specifications.

Graham: Okay. In the primer, you talk about a couple of other characteristics that the regulator will look at, and those include ideological orientation, original design, production, quality, cultural connotation, and development progress. Could you tell us a little about, a little bit about those?

Charles: Yeah. For those, these are the new requirements issued after the 2018 government reorganization. And these standards are very general, and they just laid out some of the principles that would allow one to review the games and how they scored like the games based on these new standards. And for these standards, the elements are very general. And the reviewers will have significant discretion in scoring the games. 

Graham: So there's a lot of discretion involved. And you've said several times that the process is very murky, which I interpret to mean that it's very subjective.

Charles: Yes.

Graham: How do game developers approach the process of licensing, then? How do they ensure that they maximize the chance of success?

Charles: Yeah, so China government will regularly hold training for China game companies employees to tell them what content is allowed and what content is not allowed so that they, these people, after training, they can tell those new policies or new requirements to their game development team so that they can change the game elements before submission to the game approvals. 

And it would be hard for foreign game companies to understand these standards. We have a Shanghai office and have contacted the local game industry association to see if we can be a member. But they said no, this association is only open to the local China game companies.

So, for foreign game companies, the only thing they can have is the public news. Sometimes the public news will have disclosed some of the reviewing standards, the written rules, and the game content specifications I just said. And also, foreign game companies are not allowed in China to operate and publish a game alone. So under Chinese law, they have to cooperate with a local publisher. And it's the China local publisher's responsibility to make sure the foreign game's content meets the China game content censorship requirement.

Graham: If I try to summarize, it sounds like there's a licensing regime for new games to ensure the quality of the content, let's call it. And at the same time there's been a move to Protect minors from becoming addicted to games. So these seem to be the two big shifts in the last couple of years.

Can I ask, what kind of statistics do you know, Charles, about, like the success rate of companies applying for new game licenses? Do you know how many are approved? What percentage and on average how long it takes to get a new game [licence]?

Charles: So the Chinese government [regulator announces] the approved games every month. So right now, basically for domestic games and every couple of months for the foreign games, But the tricky thing is that we do not know how many game has been submitted for approvals. Yeah. For that statistic, we don't have that [data].

Based on my understanding, it's not a one-time submission process. So normally, the companies finalize a game and submit it for the government's approval. The government will have experts review the games, and then they will provide comments and suggestions on how to revise the games to get the approvals.

So there will be back and forth. Sometimes, the review process can be very long, especially for foreign games.

Graham: Yeah. I remember reading that some Korean developers had waited years to get a license.

Charles: We previously helped one client look into these issues before the 2021 game suspension. We checked some of the games and we talked with some game developers. So the average for domestic games, the game developer by the game studios, normally takes six to eight months to get the game approvals.

But for the [foreign] games, the average time to get the game approval before 2021 suspension is around 12 to 18 months.

Graham: Okay, so it's considerably longer. I wanted to ask as well, so we talked about one of the key changes being the anti-addiction measures for minors. Do you think that's been a success? Has the industry managed to actually stop younger people from playing games so much?

Charles: So, So let me first answer your question briefly. I don't think it's very successful. The reason is because there are so many ways for the kids to circumvent these restrictions because right now. Every parent [has a] mobile phone and most of the parents have game accounts and [also] play games.

So the kids do not need to use their own ID cards. They use their parents' phones, and they can still play games, and they still can play the game without time limitations. But from the government's perspective, that's all the things they and the game company can do.

So if the kids use their parents' ID to register a game account, then there's no way for... or it's very hard for a game company to, to see if, if... because game companies, they won't know if it's the adult or kids to use adults ID once they have [completed the] account registration process.

Graham: Yeah, and presumably, kids who use their parents' IDs must have sought permission from their parents, so the parents can't complain to the government. 

Charles: So actually, for the minor protection, real name registration, and anti addiction, they are not new. China started requiring this in 2007, 15 years ago. But previously all these requirements are not... [they're] not very strictly implemented.

Previously ten years ago, we had an informal conversation with a government officer in [the Ministry of Communications], then one of the regulators of the game industry in China. What they told us is that it is, at that time, ten years ago, it was very hard to implement this because the government... there's no way for them to check if the ID number that the players submitted to the game company is real or not.

Because China has 1.4 billion people, it requires a huge server to save all this ID data. And ten years ago, no server could have this amount of data. And also, at that time, checking an ID card, if it is real or not, it requires paying five renminbi to check that. And for example, if a game company has millions of game players, they cannot pay this amount of cash or this money to check their ID card.  

But with the technological growth, right now, it has become possible for the government to check that. And, I think the government's... one of the new requirements is every game needs to incorporate [an] SDK with the anti-addictions system and real name registration system before submitting it for approval.

Graham: In the primer as well, Charles, you explain that privacy is now an issue. Can you tell us a bit about that?

Charles: Yeah. Privacy is a new problem for the game industry, especially in China. This question may be more sensitive than the other game companies on the other side of the world. One reason is that, for example, after the 2018 GDPR [came] into effect, more and more countries implemented and released their own data privacy laws.

Like China. The personal information protection law [is in effect] now. And based on our study of the various data privacy laws, we saw a [trend] [where] many countries are requiring data localization. 

So, for example, that means a game company collects various personal information from their players. And for this kind of information, the law requires it to [be stored] on a server inside of China. And this issue is more sensitive to Chinese companies because China has this real name registration requirement. That means every player, when they register a game account, they have to provide their real names, their ID card, and sometimes their phone numbers to the game companies.

And all this information is considered sensitive personal information under China's information protection laws. So since the game companies are collecting all this sensitive personal information, there are more, under more requirements [under] the cyber securities and the personal information protections.

And these new rules also affected the cooperation between Chinese companies and foreign game companies for publishing foreign games in China.

Graham: I don't think many people outside of China would appreciate just how strong the privacy regulations are in China. So I'm glad we touched on that.

Charles: So our firm recently released an article talking about... we discussed some of the issues related to the recent issues related to NetEase and their cooperation in China for many good game titles like World of Warcraft. One of the key reasons they cannot get into an agreement for the extension is data privacy.

Graham: Oh wow, I didn't know. That's interesting.

Charles: Yeah. In September 2022 China released guidelines for Chinese companies to transfer data outside of China. The guidelines are for the security assessment and how the China companies can submit the security assessment if they want to transfer sensitive personal information to our foreign game companies.

And the deadline to complete this cross border data transfer security assessment is March 1st, 2023. Based on our analysis... based on the previous contract between Netease and Blizzard, Blizzard probably takes control and has access to various game data and some of the personal data collected inside of China.

And Netease [would] like to change [that]... that is, [they] want to keep all this personal data inside of China. But Blizzard probably would not want to give up that right.

Graham: Wow. That's an interesting take. I'll have to go and read the paper to, to find out more. 

I was curious. If you look at other markets, when regulation comes in it often raises the cost of doing business, which actually favors the incumbents because they have the scale and the revenues to support the additional expense. Do you think that's gonna be the case in China as well?

Charles: I think that's an interesting question because for basically all China game companies, I believe they do need to have a close relationship with the government, as I just said. There are local game industry associations, and basically, all of the local game companies are members.

And those associations will help build the connection between the government, the regulators and the game companies. 

I think for big game companies, definitely, they will have more resources to, have more connections with the regulator for them to understand better the government's attitude on a specific game, a specific question... but I think this game industry association also helps the small game companies to comply with various requirements.

Graham: Okay. I was just curious to ask that. And then I guess on the subjective side again we talked about new game licenses resuming in April 2022, but I think it wasn't until November. October or November, that Tencent and Netease got new game licenses.

Charles: Yeah, I think a lot of people mentioned that to me. And also I discussed this with many of our clients. So I do know many people are concerned about Tencent and Netease, these large companies. They do not get the game approvals. But I think many companies that have the game approvals are Tencent-invested or Netease-invested companies. I won't say it's technically true that Tencent does not get the game approvals. Even I think there are some of the studios Tencent are majority shareholders, some of the studios who get the game approvals.

Graham: I want to go back to the idea of the policy cycle. And you said earlier that the government changes its Tone or the degree of support it shows to the gaming industry in China. Two years ago, we were at the bottom of the cycle and the government wasn't very supportive.

But now you think maybe the government is in a more supportive phase of the cycle. What makes you think that? What's the kind of evidence to suggest that?

Charles: Yeah. Yes. I think one month... Two months ago, there was one article posted by people.com, which is another [state-owned] media in China. They posted an article saying that the government should pay attention to the game industry and its value to society.

So because that article is written by our [state-owned] media, that's one sign. I think the government may already change their attitude toward the game industry. 

The other thing is that game approvals are becoming more and more regular. For example, the domestic games. Each month, the government will release a batch of approvals for domestic games. And it also has restarted issuing foreign game approvals. These, I think, are good signs.  

And also, in one of the recent reports prepared by another industry association, they made a statement saying that the anti-addiction problems have basically [been] resolved.

And there's a minor, the [time] that [minors spend] on video games has [seen] a significant decrease. In my opinion, the biggest challenge for the game industry has been resolved, which is minor protection.

So, in my opinion, in the next few years, there won't be any significant unsupportive policy will come out to against the game industry.

Graham: Okay. That's that's good to know. I'm curious what will be the next issue that does come up, do you think? Are there any other burning problems that need to be addressed? Or inconsistencies that need to be resolved. What should we be watching for as people in the industry or following the industry?

Charles: It's hard for me to think of any specific issues that may come out in the future that the government may want to put more thought or put more eyes on that. But the biggest issue is the minor protection and the anti-addiction. And the Chinese government has been trying this for almost 15 years, and finally, they resolved these issues. So I think in a short period [there probably] won't be big impact or big negative policies against the game industry. That's what I thought.  

But I think perhaps NFT games probably will [require] additional attention [from] the regulators. And also I think right now many companies are also doing these cloud games. And I think many cloud games probably do not have a game license. And also there are a lot of VR games, VR platforms... and based on my recent check, many of their... the VR games published on China VR game distribution platforms do not have a game license.

So perhaps for these new types of games when they have more customers or more game players and they impact a larger amount of people in China, then the government may pay attention to that.

Graham: I really think the point that you've been making is quite important. That it might have looked like these measures came out of the blue or were put forward very suddenly. But actually, in the case of anti addiction, the government's been trying to figure that out for 15 years, if not longer.

Charles: Yeah. And also, previously, let's say ten years ago, most of the games were only PC or console games at that time because not that many people had PCs. Because China is a large country, [with] so many people [but] only a small amount of people [had] PCs. And most people did not have PCs. They can go to the internet cafe to play games. At that time, the Chinese government prevented people under 18 from going to internet cafes. And that's their main tool to prevent minors from playing games.  

But since 2013 and 2014, there have been more and more people playing mobile games, and everyone in China has some mobile games.

So the real name, registration and also anti-addiction became a real issue from the China government's perspective and also from parents' perspective. They do not have that much control over how their kids play mobile games because when they go to school, there's a lot of time the kids are not under the supervision of their parents.

And we also saw some news saying that kids play mobile games until late [at] night after their parents [go] to sleep. Which significantly affects the kids' studies.  

And also there is a time [when] the kids go back from school to when they get off the schools, they'll go back to their home. There [is a] period of time, and the kids can play games with their friends. So in this period, because of mobile games, everyone has it. And even the kids, a lot of the kids, has it. It's very hard for the parents to supervise how the kids are playing the games. So since 2016 or two 17, more and more parents have criticized the China government and game companies for allowing their kids to play their games.

Graham: Fair enough. I think all parents would say the same. 

I'm curious, right. So one of the biggest trends in the Chinese gaming market at the moment is the expansion into international markets like Chinese gaming companies going overseas. How do you see the issues that Chinese gaming companies face when they leave China?

For example, if they've grown up in an environment where content is regulated so tightly, is it difficult for them to operate outside of those controls, like maybe their games don't have the same appeal in other markets, or maybe they're not used to dealing with other regulators? 

Charles: In the past year, the most frequent words I've heard [Chinese] industry practitioners talk about is "go overseas". And there are a lot of meetings [to] talk about how to help China game companies publish their games outside of China.  

One thing many Chinese game companies [find] challenging is the regulatory environment. Because right now most of China companies their target markets are North America and Southeast Asia and Europe. And each of these jurisdictions has many countries, and each country has its own rules about a specific issue. For example, like India, they probably also have some kind of content restrictions.

So one challenge for Chinese game companies is how to address these concerns from the overseas and local governments. And they cannot address every issue for every jurisdiction they have. So they, the legal team, need to evaluate the risk on the most urgent one we need to fix right now, what's not so important and we can put it on later. Yeah. So that's one challenge. We have the, I have seen people talked about.

And then the other thing that people talk about is this because right now, more and more Chinese companies are going overseas. So the overseas market right now are full of Chinese players. So they are... it's becoming more and more competitive. So it's not easy right now... it's not an easy place for China game companies to go overseas. Right now, too many people are already in that. In in, in there, yeah. 

Graham: Sounds like a red ocean.

Charles: Yeah. Red Ocean.

Graham: What's motivating them to go overseas?

Charles: So one thing we think is the suspension of the game approvals. Since August or July 2021, no game approval has been made. And it significantly impacted the bottom lines of China companies. So, the Chinese company is now seeking to publish their game outside of China, which does not have that many regulatory challenges.

And also I think China government is also encouraged China game companies to publish their game outside of China. One thing is that many of China's game companies... the games built by Chinese game companies... they have many elements of China's traditional culture and [the] government likes [to] use games as a tool to bring Chinese culture to the world.

Graham: Yeah. I've actually seen a number of Western games recently based in the three kingdoms universe, and it's interesting to, to see that like in English, .

Charles: Yes. And also I think do you know Genshin Impact developed by Mihoyo?  

Graham: Of course.  

Charles: And I, yeah, so for that game also I'm a player of Genshin Impact and a lot of my friends also play. Many people that I know, they all think it is very good for Genshin Impact to bring Chinese culture to the world because they have so many characters designed based on traditional Chinese characters or Chinese history... and bring that to the world. And I do believe the government also thinks that is a good thing.

Graham: I agree with you, that game has been phenomenally successful, and it really does showcase like the best of the talent in China. I think it's probably the most successful Chinese game internationally ever actually.

Charles: Yeah, I do. I do think.

Graham: So I think that's one reason why the government should be supportive if I just had to speculate because yeah, as you say, it is a important cultural export. In the same way that like America exports Disney, China can maybe export its culture through video game.

Charles: Yeah. Yeah, probably.

Graham: Okay I highly recommend to everyone that they read the sixth edition of your gaming primer, because it's very well researched and very easy to read, and very informative too. So great work with that Charles.  

And I'm sure anyone who needs help navigating the uh, the gaming.

Industry and the regulations in China would do well to speak with you. So thank you again. I just have one, one final question for you. So you mentioned you play Genshin Impact. What other games do you like to play?

Charles: Yeah, I think right now Genshin Impact is probably the only mobile game in my cell phone. I used to play World of Warcraft and PC games like Guild Wars. So the traditional RPG games on PC. But right now, since I have become a lawyer, there's less time to play games. 

Graham: I can understand that. I can totally understand that! Alright, thank you again, Charles. It's been such a pleasure to speak with you, and I'll put your contact details in the show notes so that anyone interested can reach out to you.

Charles: Okay. Thank you Graham.

Graham: Great. Thank you. And, if you enjoyed this podcast and would like to hear more, come check out my site too. www.longriverinv.com. Thanks everyone and safe investing.

Disclosure: At the time of posting, clients of Longriver Investment Partners Limited owned shares of Tencent. This may have changed at any time since.