China Clamps Down on Gaming

The screws are tightening in China. Regulators are cracking down on the country's booming online gaming industry, by committing to heavier policing of fringe content and beefing up the approval process. Authorities are also prohibiting foreign companies from participating in the market.

All five of China's largest players in delivering multiplayer role-playing games saw their shares take a hit yesterday. It was just one more lamentable trading day in what has started out as a disappointing October.

Investors are nervous, but what else is new? We are 28 months removed from when China began to battle against Internet cafes. It prohibited new openings and shuttered some existing ones in an effort to restrict minors' access to the potentially addictive diversion of online fantasy games.

When Activision Blizzard (NASDAQ:ATVI) chose to switch operators of its World of Warcraft juggernaut in China, from The9 (NASDAQ:NCTY) to the larger NetEase, the game was taken offline for several months as Chinese regulators scoured the game and demanded changes to fit the country's stringent decency standards.

China makes up the world's largest nation of online users, but the government is clearly going to keep its Internet on a short leash. There will always be the fear that China snuffs out the industry, but all five of these rapidly growing companies are trading between 10 and 14 times next year's projected profits. In other words, the geopolitical risk is already priced into these shares.

Shouldn't this help the established players, though? Keeping foreign competitors out and burdening any upstarts should benefit the companies that already have successful games on the market. As long as those who are tightening the screws know when to say when -- and the last thing China wants is rebellious youth stripped of a diversion -- October's pain will pay off in the end.

Three more ways to play in China:

• Game Off in China
• Let's Play a Game in China
• Here's Your Shot to Score Big