China bars for-profit tutoring in core school subjects -document (updated)

Scholar Education

23/07/2021 16:37

(Repeats to more subscribers)
    * Rules in policy document are tougher than expected
    * Shares in education firms plunge
    * Policy intended to ease burden on students, families
    * Tutoring also prohibited on weekends, holidays

    SHANGHAI, July 23 (Reuters) - China is barring tutoring for
profit in core school subjects to ease financial pressures on
families that have contributed to low birth rates, news that
sent shockwaves through its vast private education sector and
share prices plunging.
    The policy change, which also restricts foreign investment
in a sector that had become essential to success in Chinese
school exams, was contained in a government document widely
circulated on Friday and verified by sources.
    The move threatens to decimate China's $120 billion private
tutoring industry and triggered a heavy selloff in shares of
tutoring firms traded in Hong Kong and New York including New
Oriental Education & Technology Group and Koolearn Technology
Holding Ltd.
    All institutions offering tutoring on the school curriculum
will be registered as non-profit organisations, and no new
licences will be granted, according to the document, which says
it was distributed by China's State Council, or cabinet, to
local governments and is dated July 19.
    More than 75% of students aged from around 6 to 18 in China
attended after-school tutoring classes in 2016, according to the
most recent figures from the Chinese Society of Education, and
anecdotal evidence suggests that percentage has risen.
    China International Capital Corp said the rules are "tougher
than market expectations, and we expect material impact on
future business and capital market activities."
    The pressure for children to succeed in an increasingly
competitive society has given rise to the term Jiwa, or "chicken
baby", which refers to children pumped with extracurricular
classes and energy-boosting "chicken blood" by anxious parents.
    Existing online tutoring firms will be subject to extra
scrutiny and after-school tutoring prohibited during weekends,
public holidays and school vacations, the document said. China's
State Council did not immediately respond to a request for
comment.
    Curriculum-based tutoring institutions would be barred from
raising money through listings or other capital-related
activities, while listed companies would be banned from
investing in such institutions, according to the document.
    China's for-profit education sector has been under scrutiny
as part of Beijing's push to ease pressure on school children
and reduce a cost burden on parents that has contributed to a
drop in birth rates. In May, China said it would allow couples
to have up to three children, from two previously.
    The policy aims to reduce burdens on students and family
finances "effectively" within one year and "significantly"
within three, the document said.
    Three sources told Reuters last month that the crackdown is
being driven from the top. In June the official Xinhua news
agency quoted President Xi Jinping as saying schools, rather
than tutoring firms, should be responsible for student learning.
 urn:newsml:reuters.com:*:nL3N2NY4RP
    
    FOREIGN INVESTMENT RESTRICTIONS
    The new policy would also bar foreign investors from
investing in China's curriculum-based tutoring businesses
through mergers and acquisitions, franchises, or variable
interest entity (VIEs) arrangements, according to the document.
VIEs are a commonly used structure to circumvent rules
restricting foreign investment in certain industries.
    Those which have already violated the rules must make
corrective measures, it added.
    "The worst case in our scenario analysis could imply 70%+
K12 revenue plunge for leaders," Citi wrote, referring to
kindergarten to grade 12.
    New Oriental's  9901.HK  Hong Kong-traded shares slumped as
much as 50.4% to their lowest since its listing late last year.
Scholar Education Group  1769.HK  and Koolearn Technology
Holding Ltd  1797.HK  both tumbled nearly 30% in Hong Kong.
    "The regulations have not been published, and the Company
has not received official notification of the regulations," New
Oriental, whose U.S.-listed shares slumped about 60%, said in a
statement late on Friday.
    TAL Education  TAL.N  and Gaotu Techedu  GOTU.N , whose U.S.
listed shares also tumbled roughly 60% in response to the news,
made similar statements about waiting for details.
    Shares of other U.S.-listed Chinese education companies,
including China Online Education Group  COE.N , Zhangmen
Education Inc  ZME.N  and 17 Education & Technology Group Inc
 YQ.O  also plunged. 
    Education stocks also saw a sell-off in mainland China, with
an index tracking the sector  .CSI930717  dropping nearly 5%. 
    The rules threaten the listing ambitions of numerous venture
capital-backed education firms, including Alibaba-backed
Zuoyebang, and online education platforms Yuanfudao and Classin,
both backed by Tencent.
    A broad crackdown on China's massive internet sector has
already rattled investors and saw Beijing launch a data-related
cybersecurity investigation into ride-hailing giant Didi Global
Inc  DIDI.N  just two days after it raised $4.4 billion in a New
York initial public offering.   

 (Reporting by Samuel Shen in Shanghai, Tony Munroe in Beijing,
Julie Zhu in Hong Kong and Tom Westbrook in Singapore
Editing by William Maclean, Andrea Ricci and Philippa Fletcher)
 ((samuel.shen@thomsonreuters.com;  +86 21 20830018; Reuters
Messaging: samuel.shen.thomsonreuters.com@reuters.net))