China’s quest to bring its internet industries under total governmental control is seeing a shift to edtech. The crackdown, which started with the financial sector, targeting Alibaba, the Ant Group and the cryptocurrency market, is gradually escalating to every part of China’s tech industry.
Didi, a burgeoning ride-hailing company that gave Uber a run for its money in China, and recently got listed in New York Stock Exchange, became the latest victim. Now, companies offering online education in the south Asian country are facing new rules that will force their businesses into non-profit.
The decision was contained in a document circulated on Friday, and has been confirmed by Chinese news outlet, Xinhua. Foreign investment in the sector will be prohibited under the rules set out by the State Council, Xinhua said.
In details, Bloomberg reported Friday how China was considering asking companies that offer tutoring on the school curriculum to go non-profit, citing people familiar with the matter, as part of a sweeping set of constraints that could decimate the country’s $100 billion education tech industry. The news sank shares.
The new rules means the ed-platforms will no longer be allowed to raise capital or go public. Listed firms will also no longer be allowed to invest in or acquire education firms teaching school subjects while foreign capital will also be barred from the sector.
Local regulators will stop approving new after-school education firms seeking to offer tutoring on China’s compulsory syllabus and require extra scrutiny of existing online platforms, the people have revealed. Vacation and weekend tutoring on school subjects will also be banned, they said. Changes may still occur as the rules haven’t been published.
New Oriental Education & Technology Group sank a record 41% in Hong Kong Friday, while Koolearn Technology Holding Ltd. tumbled 28%, also its biggest-ever single day loss. TAL Education slumped 47% in U.S. pre-market trading and Gaotu Techedu dropped 53%.
The new set of regulations, devised and overseen by a dedicated branch set up just last month to regulate the industry, could wipe out the enormous growth that made stock market darlings of TAL Education Group and Gaotu Techedu Inc.
“Making the sector non-profit is just as good as eradicating the industry all together,” said Wu Yuefeng, a fund manager at Funding Capital Management (Beijing) Co. “The regulations on financing are a major surprise and show that to the authorities, this is a matter of no small importance. In the short term for the sector, any news will be bad news.”
Beijing is coming down hard on the sector as excessive tutoring anguishes young pupils and burdens parents with expensive tutoring fees. It’s also regarded as an impediment to one of the country’s top priorities, boosting a declining birth rate. Last month, China said it will allow a couple to have three children and released a slew of support measures to encourage births and lower child expenses.
Making the whole sector go non-profit “would make being a listed entity meaningless,” said Justin Tang, head of Asian research at United First Partners. “Investors are selling out first and asking questions later. It’s all being done to reduce the cost of education and motivate citizens to raise kids.”
Education technology has emerged as one of the hottest investment plays in China in recent years, with $10 billion of venture capital money pouring into the sector last year alone. Alibaba, Tencent Holdings Ltd. and ByteDance Ltd. all entered the arena, seeking to capitalize on Chinese parents’ desires to give their children every academic advantage. A spokesman from the education ministry said relevant policies are still being formulated and declined to provide more details.
Beijing is taking issue with for-profit companies for stressing out kids while enriching investors and startup founders. In May, President Xi Jinping chaired a meeting with top officials where they approved a new set of rules to ease the burden of homework and after-school training for primary and secondary school students.
Last month, China’s education ministry created a dedicated division to oversee all private education platforms for the first time. That followed a plethora of restrictions, including caps on fees firms can charge and time limits on after-school programs. Regulators have fined two of the biggest startups for false advertising: Alibaba-backed Zuoyebang and Tencent-investee Yuanfudao. A new law on minor protection, which went into effect June 1, also bans kindergarten and private institutions from teaching the primary-school curriculum to preschoolers — not uncommon previously.
Several high-profile startups in the sector — including Yuanfudao, which at $15.5 billion is the most valuable of the lot — are likely to have to put initial public offering plans on hold because of the crackdown.
Shares of China’s largest private education companies are among the world’s worst performers in recent months, with New Oriental Education, TAL Education and Gaotu Techedu together shedding nearly $100 billion of value from their highs reached earlier this year.
