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Billions wiped from Chinese education companies as Beijing suggests banning profits

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About $16bn was wiped from the value of three major Chinese education companies listed in New York in pre-market trading on Friday after a leaked memo suggested that Beijing might ban academic tutors from making a profit.

The document, dated July 19 and seen by the Financial Times, requires home-schooling or off-campus education companies to register for non-profit status and bars local authorities from approving any new agencies.

If the measures are enacted, it would be a heavy blow for one of China’s fastest-growing industries: tutoring children outside of school and preparing teenagers for university entrance exams.

Share prices in some of China’s largest education companies plunged on the news. TAL Education, Gaotu Techedu and New Oriental Education, all listed in New York and which previously had a combined market value of more than $26bn, all fell about 60 per cent in pre-market trading.

TAL, the largest company by market value, has about 45,000 employees and runs 990 teaching centres in 102 cities.

The crackdown could also dash hopes by Yuanfudao and Zuoyebang, two leading online education groups known for test preparation, to float in the US or Hong Kong.

“There is zero chance they could still do an IPO,” said a Beijing-based private equity firm partner with connections to the securities regulator. “They are too insensitive to policy shifts.”

China’s after-school tutoring industry has taken off in recent years as it provided an effective method for students to excel in academic tests that determine admission into top-ranked middle schools and universities.

In Beijing’s Haidian District, known for its vibrant tutoring schools, 57 students made the list of top 80 scores in the city’s college entrance examination last year. By contrast, the district’s test-takers accounted for less than a quarter of the city’s total.

“A good education provides the best way to move up the social ladder,” said David Yang, a Haidian-based office worker who has enrolled his 12-year-old daughter into three after-school courses a week. “I won’t have a second thought investing in my child’s future.”

The tutoring boom, however, has worried Beijing as it has put heavy workload on students and financial burden on parents. The authority was also concerned that the spending spree on after-school academic training may widen education disparity and stoke social turmoil.

“The government decided to kill the sector because it had created too many problems ranging from education inequality to low birth rates,” said Li Chengdong, founder of Dolphin Think Tank in Beijing.

“If the best way to get into good schools is by taking private tutoring courses, then rich kids will have an unfair advantage over poor ones,” he added.

Beijing’s latest industry overhaul aims to address the problem. The document said China would “effectively” reduce students’ academic burden and households’ education spending in one year and make “significant progress” in three years.

To meet the goal, according to the document, China will ban academic training agencies from raising capital through IPOs. The circular also prohibits listed companies from raising capital to invest in academic training agencies.

“That is going to create a credit crunch for the industry,” said a Beijing-based education investor.

To ease households’ education expenses, according to the circular, the authority will set guidance prices for off-campus training courses. “We must uphold the non-profit nature of after-school tutoring,” said the document.

These combined measures are likely to see the sector shrink dramatically. “There is going to be massive lay-offs,” said Li. “But the government thinks the benefits outweigh the costs.”

He added that the document also outlined how Beijing will “strictly” ban foreigners from tutoring Chinese children. “That could drive education technology companies like VIPKID out of business,” he said, referring to online education platforms featuring US-based teachers.

A former official at the Central Propaganda Department said Beijing made the move after it found ideological problems in private tutoring courses involving foreigners. “We must regain control in this area,” said the person.

It remains a question, however, how much the new rule will benefit average students. Yang, the Beijing parent, said he would find his daughter a new tutor if the current one goes under.

“While the government is shutting down private tutoring schools out of goodwill, they have done little to make good universities easier to get into,” said Yang. “We cannot afford to lose the race.”


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