New rules have China private education firms in a fix.
China’s private education companies had for years been the darlings of investors from New York to Shanghai, building a $100 billion industry on the promise of the world’s largest and arguably most-competitive schooling system. Then they got caught up in the Chinese government’s sweeping efforts to rein in the country’s technology giants, with a regulatory clampdown unveiled in July after months of rumbling that threatens to put an end to years of out-sized growth. The industry’s rise -- and future -- hinges on two of the most powerful and anxiety-inducing forces in China today: the pursuit of wealth and status, and the Communist Party’s enduring obsession with maintaining social order.
1. How did tutoring become so popular?
Blame it on the Gaokao: the national college admission test, administered in June, that decides which universities one can attend and thereby determining the fates of millions. It’s considered a playing-field leveler for those aspiring to move up the social ladder. Only 1.9% of nearly 11 million students who sat for the Gaokao in 2020 made it to a top-tier institution like Peking, Fudan or Tsinghua universities. Preparations begin many years before, in some cases as early as pre-school, as parents try to give their children every possible edge. Ironically, years of government entreaties to lessen the burden of homework may have driven anxious parents to private companies. After-school tutoring flourished, supplemented by online classes that in turn exploded during the Covid-19 pandemic. China’s market for private tutoring was expected to almost double to 1.17 trillion yuan ($183 billion) in 2023, from 619.1 billion yuan in 2019, according to Macquarie Research.
2. What do the regulators say?
That some tutoring firms exploited parental paranoia. A marketing free-for-all -- sometimes with false ads and misleading campaigns -- funneled millions of kids into mind-numbing virtual classes with uncertain benefits. As student numbers exploded, venture capital investors who didn’t want to miss out joined Alibaba Group Holding Ltd., Tencent Holdings Ltd. and SoftBank Group Corp. in doling out more than $10 billion of funding last year alone. That exuberance alarmed regulators, who feared tutoring firms empowered by big capital would only grow and exacerbate problems. President Xi Jinping lashed out at the industry’s “disorderly development” at a meeting in May, intensifying a clampdown from agencies including the powerful education ministry.
3. What’s the bigger picture?
Officials are also concerned about the destabilizing effects of hundreds of millions of parents plowing their life savings into online classes, while subjecting children to increasingly onerous workloads. As with past booms built on shaky ground -- say, in peer-to-peer lending, online shopping or improperly licensed wealth management products -- Beijing stepped in to defuse what it perceived to be a potential time bomb that threatened to disrupt order and thus the party’s grip on power. In addition, many cite the cost and competition for better education resources as a contributor to China’s declining birthrate. China offered tax breaks -- including tax write-offs for education fees --in 2019 to promote its new two-child policy, but that didn’t help. Now it wants people to consider having up to three. A reform of the education system may seem like a good way to start.
4. What has the government done?
Declaring that the industry has been “severely hijacked by capital,” regulators published new regulations on July 24 that, among other things:
- Require private companies that teach compulsory school subjects to go non-profit.
- Ban them from going public or raising foreign capital.
- Ban all tutoring related to the core school syllabus during vacations and weekends -- the prime hours for such companies.
- Forbid outright acquisitions.
- Banned foreign firms 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
- Forbid online tutoring and school-curriculum teaching for children under 6 years old.
- Ban teaching of foreign curriculums or hiring foreigners outside China to teach.
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-backed Yuanfudao. On the flip side, tutoring services that focus on cultivating interests, innovation and practical abilities -- say piano lessons -- are encouraged.
5. What’s the impact?
All the major education companies said they would comply with the new rules, including on foreign investment. Global investors such as Tiger Global Management and Temasek Holdings Pte that had poured billions into the industry are reeling. Plans for several mega-IPOs already had been halted, including VIPKid, backed by Tencent and Huohua Siwei. Shares of listed tutoring firms have gotten hammered, including industry bellwethers New Oriental Education & Technology Group Inc., TAL Education Group and GSX Techedu Inc. GSX already said in May it’s closing its pre-school education business for children ages 3 to 8 and cutting staff.
Source: The Washington Post