- The rules in the policy document are stricter than expected
- Shares of education companies plunge
- Policy to alleviate the burden on students, families
- School support also prohibited on weekends, holidays
SHANGHAI, July 23 (Reuters) – China is banning for-profit private lessons in basic school subjects to ease financial pressures on families that have contributed to low birth rates, news that has sparked a wave of shock in its vast private education sector and falling stock prices.
The policy change, which also restricts foreign investment in a sector that has become critical to passing Chinese school exams, was contained in a government document that was released widely on Friday and verified by sources.
The move threatens to decimate China’s $ 120 billion private tutoring industry and has triggered a sharp drop in shares of tutoring companies traded in Hong Kong and New York, including New Oriental Education & Technology Group and Koolearn Technology Holding Ltd. .
All institutions offering private lessons on the school curriculum will be registered as non-profit organizations, and no new licenses will be granted, according to the document, which says it was distributed by the Chinese State Council. , or cabinet, to local governments and is dated July. 19.
More than 75% of students aged 6 to 18 in China took after-school tutoring classes in 2016, according to the most recent figures from the China Education Society, and anecdotal evidence suggests that this percentage has increases.
China International Capital Corp said the rules are “stricter than market expectations, and we expect a big impact on future business activities and on capital markets.”
The pressure for children to succeed in an increasingly competitive society has given rise to the term Jiwa, or “chicken,” which refers to children bloated by extracurricular classes and the energizing “chicken blood” of anxious parents.
Existing online tutoring businesses will come under scrutiny and out-of-school tutoring will be banned during weekends, holidays and school vacations, according to the document. The Chinese State Council did not immediately respond to a request for comment.
According to the document, mentoring institutions based on the programs would not be allowed to raise funds through lists or other capital-related activities, while listed companies would be prohibited from investing in such institutions.
China’s for-profit education sector has come under scrutiny as part of Beijing’s efforts to ease the strain on schoolchildren and reduce the financial burden on parents that has contributed to a drop in school fees. birth-rate. In May, China announced it would allow couples to have up to three children, up from two previously.
The policy aims to reduce financial burdens on students and families “effectively” within one year and “significantly” within three years, according to the document.
Three sources told Reuters last month the crackdown was being carried out from above. In June, the state-run Xinhua News Agency quoted President Xi Jinping as saying that schools, rather than tutoring companies, should be responsible for student learning. Read more
FOREIGN INVESTMENT RESTRICTIONS
The new policy would also prohibit foreign investors from investing in Chinese curriculum-based tutoring companies through mergers and acquisitions, franchises or variable interest entity (VIE) agreements, according to the report. document. VIEs are a structure commonly used to circumvent rules restricting foreign investment in certain industries.
Those who have already broken the rules must take corrective action, he added.
“The worst-case scenario in our scenario analysis could involve a 70% + K12 drop in earnings for executives,” Citi wrote, referring to Kindergarten to Grade 12.
New Oriental’s Hong Kong-traded shares (9901.HK) fell 50.4% to their lowest level since listing late last year. Scholar Education Group (1769.HK) and Koolearn Technology Holding Ltd (1797.HK) both fell almost 30% in Hong Kong.
The policy shift hit Chinese Internet stocks listed in the United States, with Alibaba, and Baidu, each down about 4%, with investors worried about increased regulation by the Chinese government. Read more
“The settlement has not been published and the company has not received formal notification of the settlement,” said New Oriental, whose US-listed shares fell about 60%, in a statement Friday evening. .
TAL Education (TAL.N) and Gaotu Techedu (GOTU.N), whose U.S.-listed shares also fell about 60% in response to the news, made similar statements regarding the wait for details.
Shares of other Chinese education companies listed in the United States, including China Online Education Group, Zhangmen Education Inc (ZME.N) and 17 Education & Technology Group Inc (YQ.O) also plunged.
Education stocks also saw a massive selloff in mainland China, with an index following the sector (.CSI930717) down nearly 5%.
The rules threaten the listing ambitions of many venture-backed education companies, including Zuoyebang, backed by Alibaba, and online education platforms Yuanfudao and Classin, both backed by Tencent.
A sweeping crackdown on China’s huge internet industry has already rocked investors and saw Beijing launch a data-related cybersecurity investigation into ride-hailing giant Didi Global Inc (DIDI.N) just two days after raising 4 , $ 4 billion in an initial public offering in New York. .
Reporting by Samuel Shen in Shanghai, Tony Munroe in Beijing, Julie Zhu in Hong Kong and Tom Westbrook in Singapore; Additional reporting by Noel Randewich in Oakland, California; Editing by William Maclean, Philippa Fletcher and Andrea Ricci
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