China to Overhaul Education Sector ‘Hijacked by Capital’

China announced a broad set of reforms for private education companies, seeking to decrease workloads for students.

China to Overhaul Education Sector ‘Hijacked by Capital’
Students sit the Hong Kong Diploma Secondary Education in Hong Kong, China. (Photographer: Anthony Kwan/Getty Images/Bloomberg)

China announced a broad set of reforms for private education companies, seeking to decrease workloads for students and overhaul a sector it says has been “hijacked by capital.”

The new regulations, released over the weekend, ban companies that teach school curriculums from making profits, raising capital or going public. They can no longer offer tutoring related to the school syllabus on weekends or during vacations. They also can’t give online or academic classes to children under the age of six, a segment of the population that had increasingly been pushed to start studying early.

China’s education technology sector had grown to $100 billion as companies catered to parents seeking to give their children every advantage. Beijing’s reforms will fundamentally alter the business model, forcing firms and their investors into extensive changes. In one dramatic shift, overseas investment is prohibited in companies that teach school subjects and any company in violation must rectify the situation, according to a notice released by the State Council, the country’s most powerful administrative authority.

The regulations will undercut prospects for wide swaths of the industry. One-time stock market darlings TAL Education Group, New Oriental Education & Technology Group and Gaotu Techedu Inc. all plummeted after early reports about the reforms. A generation of younger startups had hoped to go public.

In a series of statements over the weekend, all the major education companies said they would comply with the new rules and support the decisions of the Communist Party. New Oriental, which warned the regulations would have material impact, slid 47% Monday while Koolearn Technology Holding Ltd. dropped 33%, extending Friday’s losses.

Investors, spooked by the severity of the crackdown on one of China’s fastest-growing and best-funded online sectors, fled internet stocks from Bilibili Inc. to Alibaba Group Holding Ltd. on Monday. Tencent Holdings Ltd. -- a prominent investor in the sector -- slid more than 7% while Meituan closed down 14%, its biggest fall on record.

“If you look at the breadth of what’s come out over the weekend, some of it is very specific to the education space,” Mixo Das, Asia equity strategist at JPMorgan Chase & Co., told Bloomberg Television. “But other topics that investors are worried about -- such as references to the VIE sector or asking these education companies to go non-profit -- these are some things that investors worry could extend to spaces beyond Chinese education.”

In a post on its official Weibo account, TAL said it would “fully implement the party’s education policy” and “strive to cultivate people’s talents with all-around development of morality, intelligence and physical health.”

The regulatory assault mirrors Beijing’s broader campaign against the growing power of Chinese internet companies from Didi Global Inc. to Alibaba. It stems from a deeper backlash against the industry, as excessive tutoring torments youths, burdens parents with expensive fees and exacerbates inequalities in society.

The out-of-school education industry has been “severely hijacked by capital,” according to a separate article posted on the site of the Ministry of Education. “That broke the nature of education as welfare.”

Once regarded as a sure-fire way for aspiring children to get ahead, after-school tutoring is now viewed as an impediment to one of Xi Jinping’s top priorities: boosting a declining birth rate.

It’s a stunning reversal of fortune for an industry that had emerged as one of the hottest investment plays in China in recent years. Alibaba, Tencent and ByteDance Ltd. were among the big name backers, along with the overseas players like Tiger Global Management, Temasek Holdings Pte and SoftBank Group Corp.

The sector had attracted billions of dollars because it had been expected to generate 491 billion yuan ($76 billion) in revenue by 2024. Those lofty expectations groomed a generation of promising startups like Yuanfudao and Zuoyebang.

Devised and overseen by a dedicated branch set up just last month to regulate the industry, the rules unveiled Saturday were couched in general terms that could be applied broadly to common practices throughout the industry. The new regulations are focused on compulsory subjects, meaning critical material like math, science and history. Classes for art or music mostly would not fall under the new restrictions.

Among other things, they also ban the teaching of foreign curriculums, tighten scrutiny over the import of textbooks and forbid the hiring of foreign teachers outside of China -- a curb that could have severe consequences for startups like VIPKid that specialize in overseas tutors. The government also ordered local authorities to tighten approvals for companies providing training on extra-curriculum subjects.

New Regulations for China’s Education Sector:

  • Companies and institutions that teach the school curriculum must go non-profit
  • Such institutions cannot pursue IPOs, or take foreign capital
  • Listed companies will be prohibited from issuing stock or raising money in capital markets to invest in school-subject tutoring institutions, or acquiring their assets via stock or cash
  • Foreign firms are banned from acquiring or holding shares in school curriculum tutoring institutions, or using VIEs (variable interest entities) to do so. Those already in violation need to rectify the situation
  • All vacation and holiday curriculum tutoring is off-limits
  • Online tutoring and school-curriculum teaching for kids below six years of age is forbidden
  • Agencies cannot teach foreign curriculums or hire foreigners outside of China to teach
China to Overhaul Education Sector ‘Hijacked by Capital’

It’s ultimately unclear how the government clampdown will turn out -- many believe Beijing won’t seek to annihilate an industry that still plays an essential role in grooming its future workforce.

For now, many investors may choose to err on the side of caution. The government’s desire to assert control over the economy and one of its most valuable resources lies at the heart of recent regulatory clampdowns on online industries. Companies that operate as internet platforms have come increasingly under scrutiny because of the reams of data they collect, stirring government concern over issues of privacy and security.

China will improve the quality of state-run online education services and make them free of charge, the State Council said.

“All regions can no longer approve new subject-based off-campus training institutions for students in the compulsory education stage, and existing subject-based training institutions are uniformly registered as non-profit institutions,” according to the State Council notice.

©2021 Bloomberg L.P.

With assistance from Bloomberg