The Government-Approved Way for the Chinese to Kill Their Friends

An ongoing problem that the Chinese ruling party can't eradicate... How officials shook this industry in 2018... The government-approved way for the Chinese to kill their friends... Why one company swapped its global blockbuster for a patriotic alternative...

Editor's note: The Stansberry Research offices will be closed Monday in observance of Memorial Day. After this weekend's Masters Series, we'll resume our normal coverage on Tuesday. Enjoy the long holiday weekend.

They've been accused of 'distorting history and damaging China's sovereignty'...

They've been charged with "smearing the image of China and the Chinese army." And they've even been condemned for causing "potential harm to the physical and mental development of the young."

The punishment is often a death sentence or a long-term banishment. But occasionally, "reprogramming" is the solution... The accused is rebuilt in the image of the state and becomes a model citizen.

As I (Vic Lederman) will explain in today's Digest, the latter is happening right now in China. And sometimes, that's exactly what it takes to forget the past and focus on the future...

It might sound like the latest spy novel, but the charges are actually against video games in China...

You see, China has an ongoing problem with video games. In short, the ruling party doesn't like them... But the people love them.

Gaming in China accounted for estimated revenue of nearly $38 billion last year. That puts it among the biggest markets in the world. And there's still room for a ton of growth...

That's because less than 60% of Chinese people use the Internet, as of last year. About 75% of the folks in the U.S. have Internet access. In other words, China still has hundreds of millions of citizens who haven't yet come online – and who could boost video-game revenue even further.

China can't simply ban video games. It would be like trying to ban alcohol... History tells us you can't take a favorite drug from the masses. It just doesn't work. The masses will find a way to get access.

In fact, China did try to ban some video games in the past. Except it missed the mark...

From 2000 to 2015, the government banned foreign gaming consoles – like Sony's PlayStation 2 and Microsoft's Xbox 360 – from being made and sold in the country. But it didn't ban video games entirely. As a result, folks rushed to play computer-based games instead.

That leaves the Chinese government in a tough spot today...

Officials still want to crack down on video games, but they can't completely take them away.

Regulation is the next best option... And as the world's premier autocratic country, China knows how to regulate. (Look no further than the country's "one-child policy" for proof of that.)

The government's rules can be ambiguous and unusual. And they're often enforced arbitrarily.

It doesn't seem like a position any business would want to be in... But if you can successfully navigate the rules, your business can tap into the seemingly limitless Chinese market.

In March 2018, China shook the video-game industry when it quietly stopped approving new titles...

And then in August, the government made the move official.

Chinese President Xi Jinping said in a speech that officials would need to do something because too many of the country's kids suffer from poor vision. Within days, China's Ministry of Education issued a plan that limited the number of new games for distribution.

After flexing its muscles, the government loosened its grip. In December, China started approving new licenses again. But the government's message was loud and clear...

China is getting stricter about video games. And it won't be shy about its enforcement.

For many smaller developers, the months without new approvals was the end of the line... Their revenue dried up, forcing them to cease operations.

And for industry titans, the new path was clear... Their only option was to comply with the government's rules – no matter how absurd or onerous they were.

Tencent (TCEHY) finds itself in that position...

As regular readers know, Tencent is one of China's most influential companies. It touches just about every part of daily life for many of the country's 1.4 billion residents through its super app WeChat.

In the May 9 Digest, my colleague Chris Igou noted that WeChat is like Facebook on steroids. Folks in China use WeChat to talk to friends, make purchases, and much more...

WeChat does everything you could possibly want to do on your phone. And now, more than 1 billion people use it. It is the backbone of China's social infrastructure. It's a big part of why my colleague Steve Sjuggerud believes Tencent will soon become the world's largest company.

But WeChat isn't the key revenue driver for Tencent. Video games are.

Tencent is the world's largest video-game publisher and developer. As of 2018, about one-third of the company's annual revenue – more than $15 billion – came from video games.

One of the company's smash hits is called PlayerUnknown's Battlegrounds...

Also known simply as "PUBG," the game reportedly brought in almost $1 billion in player spending worldwide last year. It's a "battle royale" game... The goal is to outlast everyone else.

The play area shrinks as the game progresses, pushing the remaining players closer and closer together. In total, one round takes about 30 minutes to play.

It's an adrenaline-filled shooting match. And it's just about everything the Chinese government hates...

It's mindlessly violent. And it's bloody.

That didn't stop Tencent from testing the game in China. The company offered a free version for months. It attracted roughly 70 million daily active users.

But Tencent abruptly pulled PUBG from the Chinese market earlier this month, announcing on social media that the testing period had ended. Players and the media went into a frenzy.

However, the company didn't completely abandon ship in China. Instead, it's just playing by the rules.

Tencent unveiled a new, government-approved way for the Chinese to kill their friends...

In other words, it chose the reprogramming path. It remade the game into a model citizen.

It's now called Game for Peace. No kidding.

To be clear, the game still plays a lot like PUBG... The mechanics are the same. The action is the same. And the maps the players fight on are still the same.

But the elements the Chinese government find distasteful have been cleansed from it...

Dead bodies have been removed. And there's no blood. (Remember, this is a game where players shoot each other.) Now, when an enemy is killed, they happily wave goodbye.

And the story has taken an unusually patriotic return... It focuses on China's air force. According to a press release, the game "pays tribute to the blue sky warriors that guard our country's airspace."

In the U.S., watering down a video game and catering to what the government wants would be the kiss of death. But in China, players will take what they can get.

So if the government says your friends should wave goodbye after they die, that's what they'll do.

More important, with these changes in place, Tencent can flip on the money switch...

That means it can start charging for certain aspects of the game – like it does with PUBG in other countries. Now, players in China can spend their money on all sorts of in-game goodies called "loot crates." That might seem a little strange at first...

Many folks think of video games as tangible items – disks or cartridges – that you buy. Then, you put the disk or cartridge in a gaming system to play the content you purchased.

That's how video games worked dating back to the late 1970s.

But over the past decade, the industry has taken a dramatic turn...

Now, you can get basic versions of many games for free or at a low cost. Through this new way of doing things, the games are provided as a service – similar to a piece of software. And players pay extra to make that service more enjoyable.

Simply put, video games were once a static, one-time purchase. Now, they're a recurring revenue stream for publishers. And it looks like Tencent has hit the jackpot in China...

According to reports, Game for Peace brought in $14 million in its first 72 hours. That's huge! We won't know the full results until next quarter, but it's an incredible start.

It's just the latest example of how Tencent is willing to adapt to maintain its spot as one of the world's greatest technology companies. By making moves like this to maximize its profit potential, the company can position itself to dominate the industry for years to come.

But Tencent isn't the only Chinese company Steve believes you should be investing in today...

As anyone who has followed Steve's work knows, he is extremely bullish on China.

He believes it's a once-in-a-lifetime opportunity for investors. He has written countless essays about how to put your money to work in the country. He even launched True Wealth Opportunities: China in 2016 specifically to help investors find the best opportunities there.

And a couple of years ago, Steve started personally taking subscribers over to China to see the country's incredible transformation firsthand. Everyone who has gone on these trips with Steve – including myself – has been amazed after seeing what's taking place with their own eyes.

In fact, Steve just got back from his latest weeklong trip to China with important news to share...

You see, while the ongoing trade war was stealing all the headlines here in the U.S., Steve was blown away by what was actually happening on the ground on the other side of the globe. And he has arranged an emergency briefing to go over it all with you...

Next Thursday, May 30, at 8 p.m. Eastern time, Steve will answer your top questions about the trade war, including how it could impact your portfolio. Plus, he'll explain the $2 trillion story everyone is overlooking right now... and go over a surprising prediction some of the world's top finance minds shared with him.

And as an added bonus, he will even share the name and ticker symbol of an investment he believes will soar following the trade war. Reserve your spot for this free event right here.

New 52-week highs (as of 5/23/19): Axis Capital (AXS) and General Mills (GIS).

In today's mailbag: A note from a China skeptic... kudos for Ten Stock Trader... and two longtime subscribers respond to reader Arun D. As always, send your questions and comments to feedback@stansberryresearch.com.

"Hi, I recognize the investment opportunity in China but my brother in law has taken many Chinese investors on tour in Wisconsin and it is quite apparent that all they want to do is steal our technology. Your failure to recognize their militaristic intent is appalling." – Paid-up subscriber Gary B.

"Greetings, I just have to tell you, if you haven't noticed, that lately Greg Diamond has been nailing it. I've made money, or I am up, on many of his recommendations. I may not play it exactly like he recommends, but it doesn't matter. He made some great calls (and better puts)!" – Paid-up subscriber Bob G.

"LOVE the comment from Brill to paid-up subscriber Arun D. A criticism without content is useless. If you can't say why you don't like something, it probably means you can't understand it. It's better to remain silent and be thought a fool, than to open your mouth and remove all doubt. Keep up the great work." – Paid-up subscriber Scott N.

"Who doesn't like Stansberry Research?? The Digest is my favorite half hour of the day!!!!!!!!!!!!!!!!!!!!!!!!!!!!" – Paid-up subscriber Craig R.

Regards,

Vic Lederman
Jacksonville, Florida
May 24, 2019