China strikes at Edtech firms; says 'capital has hijacked education'

The Chinese government has destroyed the 'for profit' edutech market in one stroke, by ordering all to go 'non-profit'.

 China strikes at Edtech firms; says 'capital has hijacked education'

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• The story: Educational technology or "Edtech" became a big story in China in recent years. Firms attracted huge interest from large investors, and became listed on the stock markets, gaining in value. And then came the asteroid strike, at least for the Edtech firms engaged in school education.
• July order: The Chinese government ordered all such Edtech firms to change their business model to a non-profit mode, as such rampant commercialisation of education was putting huge pressure on parents across China. Stocks slumped on the mainland and in Hong Kong, with the benchmark CSI 300 Index and the Hang Seng Index both tumbling more than 3 per cent.

1. The selloff in Chinese private education companies sent shockwaves through the nation’s equity market and investors scrambled to price in the growing risks from an intensifying crackdown by Beijing on its industries.
2. The sweeping overhaul threatens to upend the $100 billion sector and jeopardize billions of dollars in foreign investment.

• Panic selling: There clearly was panic selling in the market as investors are pricing in a possibility that Beijing will tighten regulation on all sectors that have seen robust growth in recent years. There can be no bottom fishing at this point, as no one knows where the bottom is. A firm "New Oriental Education & Technology Group" plunged as much as 40 per cent in Hong Kong, extending a record 41 per cent fall.  
• Reforms: Chinese regulators had recently published reforms that will fundamentally alter the business model of private firms teaching the school curriculum, as the government aims to overhaul a sector it says has been “hijacked by capital.” The new regulations ban firms that teach school curriculum from making profits, raising capital or going public. This was the worst case possible, and listed firms will simply unlist now.
• Multiple sectors hit hard: Chinese education stocks have seen their market value fall more than $100 billion since the beginning of this year, with TAL Education Group and New Oriental losing a combined $65 billion. The latest reforms follow an unprecedented pace of regulatory tightening from Beijing, amid crackdowns on industries from tech to real estate.

1. The government’s moves to rein in the nation’s powerful tech firms such as Jack Ma’s Ant Group Co. and Didi Global have sent global investors fleeing.
2. A campaign to cut leverage in the property industry has also weighed on builder shares, with a Hong Kong gauge of related firms falling to its lowest since February '21.

• Bye bye profits in teaching: In the latest move, companies that teach school subjects can no longer accept overseas investment, which could include capital from the offshore registered entities of Chinese firms. Those now in violation of that rule must take steps to rectify the situation, the country’s most powerful administrative authority has said. Curriculum tutoring firms should remodel their businesses or even switch to a different industry as soon as possible.
• Summary: Clearly, the Communist Party is tightening the screws on every sector it feels has grown too big for its shoes, and where it feels such actions can earn it widespread sympathy from the ordinary Chinese.

 

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