Stocks crash as the new law restricts for-profit education in China. China’s recent law set-up for the private
education sector has shocked the entire industry. The industry is claimed to be worth $120 billion and is expected to undergo a massive loss due to the new set of reforms initiated by the country.
As per the official notice, the move will restrict private companies from making profits, raising capital and going public. Billions of dollars had been invested in the private education industry in China, which will be collapsing soon. The losses incurred will have an impact on stalks and the market. The existing firms in the business will have to equip their business models according to the reforms or they won’t be permitted to operate in the region. Besides this, no new firms or start-ups will be granted the licence for private tutoring. The reforms also ban the tutoring service providers from taking classes on weekends, public holidays and during vacations. The law states that foreign curriculum can’t be taught and tutors can’t be hired from any other nation except China. The firms will be under extra scrutiny and will face negative consequences if any of the aforementioned rules are not followed.
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The post-pandemic world relied heavily on online services and the education sector specifically witnessed a huge boom in their profits. The industry was expected to earn big profits in the coming years as well, which resulted in start-ups actively establishing themselves in the market. Major firms like the US-based TAL Education group stated that it expected the new rules to have “material adverse impact on its after-school tutoring services … which in turn may adversely affect” its operations and prospects. It did not elaborate upon it. The effects of the move can already be seen on an international level. China’s education industry dropped as much as 14%. The shares of these firms witnessed a massive fall in both Hong Kong and New York. The sell-off continued to happen with some of the shares dropping to 30%–40%.
Since the investors and firms will have to incur such losses, they might not consider investing more into Chinese economy for some time. The uncertainty of rules and regulations being consistent has resulted in this drastic change overnight. The strict control of the Chinese government in certain areas makes it difficult for foreign firms and investors to capitalize. This example will act like a precedence for others to think before investing and making such huge bets in the communist nation. The Chinese rules and regulations have always been amended to the likes of the ruling party, making it dicey for foreign companies to earn profits.
The Chinese officials claim that this move would be beneficial for both students and their parents. Students won’t be burdened with extra homework after school hours and their parents won’t have to worry about the costs anymore. This would also reflect positively on China’s birth rate, which has been going down in recent years.
The financial burden of education costs is seen as a major reason for the decreasing birth rate.
Recently, China also announced a new rule that allows couples to have three children. The nation which has the maximum population has been facing the negative consequences of their “One Child Policy,” which resulted in low birth rates and fewer young people! This law is one of the measures to reverse population growth.
The citizens are still figuring out whether this law will benefit them or not. Around 75% of the students were enrolled for private tutoring in 2016. The numbers have definitely gone up in recent years. Parents don’t want their children to miss out or lag behind their peers in any field, especially academics, and thus private tutoring became a social norm. Most of the students were also relying heavily on these services to cope with the foreign curriculum and concepts which will help them get into some best universities around the world. With this new education law in place, keeping up with the foreign curriculum seems like a distant reality. Primary school students will certainly benefit as the added pressure from the tutors will be relieved and allow them to have more time for their extracurricular interests. Consequences in terms of the social impact will be visible in the coming months as the citizens get more clarity regarding the new rules!
Dave Wang, portfolio manager at Nuvest Capital in Singapore, said “the Chinese government has always been more particular on sectors that have widespread social implications.” Thus, attacking the education sector seemed like a viable solution. It solves certain issues, which might have been the reason for reduced birth rate, and also eases the burden on students. The Chinese government also believes that this “for-profit” nature of private tutoring is defying the idea of education as welfare.
The decision will be changing quite a few trends while affecting the markets at the same time. One needs to wait for a few months before analysing the on-ground consequences of the same. Until then, we hope the market revives from its substantial losses and makes a successful comeback!
