The good, the bad, and the loss behind China's hardest crackdown on after-school...

The good, the bad, and the loss behind China's hardest crackdown on after-school tutoring- PingWest

The good, the bad, and the loss behind China's hardest crackdown on after-school tutoring

Rebbeca Ren

posted on July 27, 2021 10:08 amEditor : Wang Boyuan

Over $126 billion in market cap has been erased from Chinese edtech stocks traded in the US, China and Hong Kong this year.

China's Ministry of Education issued a press release on Saturday, revealing why the unprecedented crackdown came to the K-12 after-school tutoring field. Previously, shares of Chinese online education companies were hit hard on Friday due to media reporting that the government was considering new regulations that would kill the sector's development.

On Friday, an unverified document allegedly issued by the central government on the private tutoring industry was widely spread on social media, announcing that K-12 education platforms will no longer be allowed to raise funds or go public, listed companies may no longer be allowed to invest in or acquire education companies that teach school subjects. Foreign investment will also be prohibited from entering the industry.

It triggered a massive selloff in the secondary market, even though US-listed Chinese edtech firms, including Oriental Education Group and TAL Education Group, insisted that they have not yet received such documents from relevant authorities.

However, the statement from the Ministry of Education on Saturday confirmed the authenticity of the document. "(We) focus on building a high-quality education system, deepen the governance of off-campus training institutions. Behaviors that violate the interests of the people should be resolutely stopped, parents' anxiety should be effectively alleviated, and a superior education ecology should be established," said the Ministry.

The regulator believed that the overburden of homework and after-class tutoring has brought pressure to students and parents and aroused substantial social repercussions. 

The press release also detailed the problems posed by extracurricular education companies, including:

1. Excessive after-class learning institutions exist. If left unchecked, an education system outside the compulsory education system will be formed, which will raise the load on students and the financial burden on parents and disrupt teaching arrangements of compulsory education.
2. Violations of laws and regulations occur from time to time. Wrongdoings, including misleading consumers, false advertising, and price fraud, have seriously harmed the interests of the people.
3. The sector is seriously "hijacked by capital." In recent years, a large amount of capital has been poured into the training industry, sparking the fierce cash-burning war, violating the public welfare nature of education, and destroying the normal ecology of education.

China's education system is heavily competitive, and exam-focused, which leads to the prosperous expansion of extracurricular tuition classes as families have tried to give a head-start to their children. The landing of the document means that the after-school tutoring business, which contributes considerable revenue to online education firms, will be curbed.

In a statement, New Oriental said it would "follow the spirit of the Opinion and comply with relevant rules and regulations when providing educational services," with a similar statement from TAL and Gaotu Techedu.

Although many applauded the new policy, the sudden drop of the policy caught some people off guard. Parents shared their views on social media, saying that the regulation will make them turn to one-on-one tutoring services, which is way more costly than online courses. "After all, the college entrance examination system, where there is only one chance in one's life, has not changed," said a parent of a junior high school student.

This sudden, non-negotiable policy made them bankrupt or unemployed overnight for startups and employees in the after-school education industry. "Maybe it's fate. We can't do anything but accept it," a co-founder of a small education company wrote on Xiaohongshu, a Pinterest-like app. Dozens of people who underwent similar doom left comments encouraging each other.

An employee who has worked in Yuandao, the Tencent-backed e-learning platform, for four years told PingWest that the maximum value of the option he has been granted exceeded $1 million. However, the introduction of the new policy meant that the option would become a bounced check. "Options have injected me with the energy to withstand high-intensity work, but now it seems that going public is likely to be hopeless, suddenly I feel that all my previous efforts are in vain," said the employee.

Education giants New Oriental and TAL would likely have to spin off some businesses to meet the non-profit requirements, Jenny Tsai, senior equity analyst at Morningstar, wrote in a Monday research note. She added that both education providers would also likely invest in non-academic tutorings such as art, sports, and music so they could remain listed.

The news shook the Chinese market more broadly on Monday, as investors worried that similar raids would come to other tech firms. The Hang Seng Index (HSI) fell more than 4%, its worst day in more than a year, as it was dragged down by the sharp drop in major Chinese technology stocks. The Shanghai Composite Index (SHCOMP) fell more than 2%.

"It's another ratchet higher in the regulatory risk landscape in China," Jeffrey Halley, senior market analyst for the Asia Pacific at Oanda, said. "The crackdown on education threatens to wipe out billions of dollars by overseas investors."

According to Bloomberg, more than $126 billion in market capitalization has been erased from Chinese education stocks traded in the US, mainland China, and Hong Kong this year.

Cover image credit: Yuanfudao