Destabilizing speculation

Why China is Now Cracking Down on Education Technology Companies: QuickTake

Chinese private education companies have been the darlings of investors from New York to Shanghai for years, building a $ 100 billion industry on the promise of the world’s largest and arguably most competitive school system. Then suddenly they have taken in the considerable efforts of the Chinese government to master the country’s technological giants. Regulatory crackdown, ostensibly in the name of consumer protection, has upset listed companies and forced startups with reputable backers like Tencent Holdings Ltd. at mothballs plans for multibillion-dollar initial public offerings. The rise of the industry and its potential downfall depend on two of the most powerful – and most anxiety-provoking – forces in China today: the pursuit of wealth and status, and the Communist Party’s lingering obsession with it. maintenance of social order.

The Gaokao’s fault: the national university admission test, administered in June, which decides which universities one can attend, thus determining the fate of millions of people. It is considered a playground leveler for those who aspire to move up the social ladder. Only 1.9% of the nearly 11 million students who participated in Gaokao in 2020 managed to join a leading institution like the universities of Beijing, Fudan or Tsinghua. Preparations begin many years ago, in some cases as early as kindergarten, as parents try to give their children all the possible benefits. Ironically, years of begging the government to ease the homework burden may have pushed anxious parents into private business. After-school tutoring flourished, supplemented by online courses which in turn exploded during the Covid-19 pandemic. China’s private tutoring market is expected to nearly double to 1.17 trillion yuan ($ 183 billion) in 2023, from 619.1 billion yuan in 2019, according to Macquarie Research.

The education boom in China

Venture capital funding for educational tech startups surged last year

Data: Preqin

2. What are regulators saying?

That some tutoring companies were exploiting parental paranoia. Free marketing for everyone – sometimes with bogus advertisements and deceptive campaigns – have led millions of children into mind-numbing virtual classrooms of uncertain benefits. As student numbers exploded, venture capitalists who didn’t want to miss out joined in Alibaba Group Holding Ltd., Tencent and SoftBank Group Corp. distributing more than $ 10 billion in funding last year alone. This exuberance alarmed regulators, who feared that big-capital-empowered tutoring firms would only grow and exacerbate the problems. President Xi Jinping lambasted the “disorderly development” of the industry during a Meet in May, stepping up the crackdown on agencies, including the powerful education ministry.

3. What is the big picture?

Officials are also concerned about the destabilizing effects of hundreds of millions of parents who spend their savings on online courses, while subjecting children to increasingly heavy workloads. As with dams built in the past on unstable ground – say, peer-to-peer loan, online shopping or incorrect license wealth management products – Beijing moved swiftly to defuse what it saw as a potential time bomb that threatened to disrupt order and therefore the party’s grip on power. In addition, many cite the cost and competition for better educational resources as contributing to China’s decline. birth-rate. China offered tax breaks – including tax deductions for tuition fees – in 2019 to promote its new two-child policy, but that hasn’t helped. Now he wants people to consider having until Three. A reform of the education system may seem like a good way to start.

4. What did regulators actually do?

Announced a plethora of restrictions, including caps on fees businesses can charge and time limits for after-school programs. Regulators have fined two of the biggest startups for false advertising: backed by Alibaba Zuoyebang and Tencent-investor Yuanfudao. The law on the protection of minors, which entered into force on 1 June, also banned tutoring establishments (and kindergartens) from offering primary-level classes to preschoolers – which was not uncommon before. The Ministry of Education is now reportedly considering creating for the first time a division dedicated to overseeing all private education platforms.

5. What’s in store?

There has been speculation that a law or regulation specifically for tutoring could come up to date. guidelines published in 2018, according to Vivien Chan, analyst at Zhongtai International. The worst-case scenario for the industry: After-school tutors could be banned from working on weekends and holidays, their peak hours. Existing guidelines already prohibit tutoring activities related to taking tests and admission to registration. On the other hand, tutoring services that focus on cultivating interests, innovation and practical skills – say piano lessons – are encouraged. Such extracurricular programs are supposed to end no later than 8:30 p.m. and assign no homework, and institutions should not charge more than three months in fees. However, the application has been spotty at best.

6. What was the impact of the crackdown?

Plans for several mega-IPOs have been stopped, with Tencent supported VIPKid and Huohua Siwei is pushing back US registrations, and Zuoyebang is set to miss his goal to debut as early as this year. Shares of publicly traded tutoring companies hammered, including industry metrics New Oriental Education & Technology Group Inc., NLP Education Group and GSX Techedu Inc. GSX also declared in late May that it closure of its preschool education activity for children aged 3 to 8 and removal of staff.

Beijing crackdown wipes out billions in market value

7. So, is it a good time to go bottom fishing?

Maybe not, given the prospect of tighter controls on the road. The actions of education companies have not been fully integrated in the worst-case scenario, Zhongtai’s Chan said. While industry leaders including GSX and TAL have seen double-digit or more revenue growth in recent years, their marketing spend has grown again amid fierce competition. The sharp drop in cash flow coupled with more cautious investors could plunge the industry into a vicious cycle if Beijing tightens the screws further.

The reference shelf

  • QuickTakes on the Chinese governance model, its efforts to encourage more babies, and the crackdown on Great technology.
  • Chinese tech giants are embarking on a spending spree for growth nonetheless.
  • A Gaokao scandal last year sparked national outrage.
  • Bloomberg Opinion’s David Fickling explains why China’s new three-child policy won’t help bring down the birth rate, and Clara Ferreira Marques asks for more help for moms.
  • Macquarie report in the Chinese private education market.

– With the help of Allen K Wan, Amanda Wang and Daniela Wei

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