The education technology sector in China is estimated to have grown above $100 million (Representative image: Shutterstock)
The Chinese Ministry of Education has unveiled new rules aimed at regulating the online tutoring sector. The regulations, which have a far-reaching impact on the market, are aimed at overhauling the out-of-school education sector that has been "severely hijacked by capital", the ministry said.
The norms effectively bar tutoring institutes teaching the school curriculum to raise money through the market in form of initial public offerings. Furthermore, the private tutoring firms are also required to operate as not-for-profit entities.
As the market opened this week, some of the big names in China's private tutoring sector, including TAL Education Group, New Oriental Education & Technology Group and Gaotu Techedu Inc, suffered significant losses.
The losses translated into one of the worst days of the year for the market on July 26, Hang Seng Index (HSI) fell more than four percent. The Shanghai Composite (SHCOMP) dropped by over two percent.
Also Read | Private equity firms to scramble for exit after China's new tutoring rules
Why the crackdown was launched?
The education technology sector in China, according to Bloomberg, has grown to $100 million and is considered to generate a revenue of 491 billion yuan ($76 billion) by 2024. Despite drawing global investors, the Communist Party apparently fears that an unregulated online tutoring sector may lead to the capitalisation of the entire education sector.
The Education Ministry noted in its statement that if online tutoring is left unregulated, it may lead to "inequality" in the society and adversely impact the "quality of education" imparted.
The ministry also noted, in a statement issued on July 26, that the regulations are aimed at reducing the burden on children.
A large number of Chinese families are pushing their children into private tutoring institutions at a young age to provide them a head-start in intensively preparing for competitive exams.
This, according to the Chinese government, has adversely impacted the quality of "after-school services" of children. Fresh norms were needed to lower the workload and learning hours of students, it added.
"Driven by utilitarianism and bound by capital, a large number of out-of-school training institutions in primary and secondary schools, especially those with a wide range of unqualified training institutions, have deviated from the purpose of non-profit education, catered to some unreasonable social needs, and ignored the laws of education," Dong Shengzu, director and researcher at Shanghai Academy of Educational Sciences, was quoted as saying in the ministry's statement.
Adopting methods such as early learning, super teaching and repeated training "has increased the burden of students' schoolwork and aggravated the education anxiety of the whole society", Shengzu added.
What are the new rules?
Companies that operate as online tutoring institutions must declare themselves as non-profit.
The Chinese government has categorically stated that such companies cannot float capital through IPOs, or accept foreign funding.
The rules further clarify that no listed company would be allowed to invest in entities providing online tutoring of school curriculum.
Those companies which have foreign firms as investing partners would need to rectify their position in order to continue as online tutoring services provider.
The rules also bar the tutoring companies from providing coaching during the vacation period and other holiday periods.
The firms are barred from providing online tuition to children aged below six. They are also prohibited from hiring foreigners, who are based outside of China, as teachers.
How the new rules will impact the Chinese market?
Analysts at Nomura said in a research note that the latest developments have "the potential to further dent foreign investors' confidence in China stocks."
"Bruised and shaken investors are now likely to ponder which other areas could potentially become the next target of expanded state control," they wrote.
New York-listed stocks for Chinese education companies also crashed due to the crackdown launched by Beijing on tutoring firms. The shares of TAL (TAL Education) plummeted by around 70 percent in the United States on July 23, losing around $9 billion.
Koolearn Technology lost around $250 million, after its stocks plunged by over 30 percent in Hong Kong.
New Oriental Education & Technology, amongst the leading education technology firms, witnessed a drop of 50 percent in Hong Kong on July 26, and has since the past week lost an estimated market value of $7.7 billion.
A number of private equity firms, which had backed startups as well as established online tutoring firms considering the sector's potential in China, are expected to find an exit.
Some PE investors expect their portfolio companies to explore the option of switching to vocational and extracurricular courses from the current curriculum-based tutoring in order to avoid the brunt of the new regulations.
Experts also feel that China may not completely annihilate an industry that may play a role in grooming their future workforce.
"There is always a time gap between the issuing of China's policies and the implementation of them. And there is always room for interpretation," Reuters quoted an investor in Zuoyebang, one of the leading Chinese start-up educational platform, as saying.