China unveiled a sweeping overhaul of its US$100 billion education tech sector, banning companies that teach the school curriculum from earning profit, raising capital or going public.
Beijing on Saturday published an array of regulations that together threaten to overturn the sector and jeopardize billions of dollars in foreign investment.
Companies that teach school subjects can no longer accept overseas investment, which could include capital from the offshore registered entities of Chinese firms, according to a notice released by the Chinese State Council.
Those in violation of that rule must take steps to rectify the situation, the country’s most powerful administrative authority said, without elaborating.
Additionally, listed firms will no longer be allowed to raise capital via stock markets to invest in businesses that teach classroom subjects. Outright acquisitions are forbidden, and all vacation and weekend tutoring related to the school syllabus is now banned.
The regulations threaten to obliterate the outsized growth that made stock market darlings of TAL Education Group (好未來教育集團), New Oriental Education & Technology Group (新東方教育科技集團) and Gaotu Techedu Inc (高途在線). The new rules could also put the market largely out of reach of global investors.
Education technology had emerged as one of the hottest investment plays in China in recent years, attracting billions from the likes of Tiger Global Management, Temasek Holdings Pte and Softbank Group Corp.
In a series of statements over the weekend, all the major education companies said that they would comply with the rules and support the decisions of the Chinese Communist Party.
In a post on its official Sina Weibo (新浪微博) account, TAL said it would “fully implement the party’s education policy” and “strive to cultivate people’s talents with all-around development of morality, intelligence and physical health.”
The regulatory assault mirrors Beijing’s broader campaign against the growing heft of Chinese Internet companies from Didi Global Inc (滴滴) to Alibaba Group Holding Ltd (阿里巴巴). It stems from a deeper backlash against the industry, as excessive tutoring torments young students, burdens parents with expensive fees and exacerbates inequalities in society.
The out-of-school education industry has been “severely hijacked by capital,” according to a separate article posted on the site of the Ministry of Education. “That broke the nature of education as welfare.”
Once regarded as a surefire way for aspiring children to get ahead, after-school tutoring is now viewed as an impediment to one of Chinese President Xi Jinping’s (習近平) top priorities: halting a declining birth rate.
It is a stunning reversal of fortune for an industry that once boasted some of the fastest growth rates in the country. Alibaba, Tencent Holdings Ltd (騰訊) and ByteDance Ltd (字節跳動) were among the big names that have invested in a sector that had been expected to generate 491 billion yuan (US$76 billion) in revenue by 2024.
Those lofty expectations groomed a generation of giant start-ups like Yuanfudao (猿輔導) and Zuoyebang (作業幫). Online education platforms attracted about 103 billion yuan of capital last year alone, according to iResearch Consulting Group.
Devised and overseen by a dedicated branch set up last month to regulate the industry, the rules unveiled on Saturday were couched in general terms that could be applied broadly to common practices throughout the industry.
The new regulations are focused on compulsory subjects, meaning critical material such as math, science and history. Classes for art or music mostly would not fall under the new restrictions.
The regulations also ban teaching foreign curricula, tighten scrutiny over imported textbooks and forbid the hiring of foreign teachers outside of China — a curb that could have severe consequences for start-ups like VIPKid that specialize in overseas tutors. The government also ordered local authorities to tighten approvals for companies providing training on extra-curricular subjects.
It is ultimately unclear how the government clampdown will turn out. Many believe that Beijing will not seek to annihilate an industry that still plays an essential role in grooming its future workforce.
For now, many investors might choose to err on the side of caution. The government’s desire to assert control over the economy and one of its most valuable resources lies at the heart of recent regulatory clampdowns on online industries.
Companies that operate as Internet platforms have come increasingly under scrutiny because of the reams of data they collect, stirring government concern over issues of privacy and security.
Online tutoring agencies will also be forbidden from accepting pupils under the age of six. To make up for the shortfall, China will improve the quality of state-run online education services and make them free of charge, the Chinese State Council said.
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