Why China cracked down on its tutoring programs

Two U.S.-listed Chinese education stocks plunged Friday after reports of a government crackdown on the sector that included bans on foreign investment.

TAL Education shares tumbled 70.8%. New Oriental Education and Technology shares dropped by 54.2%.

The reports come as Chinese authorities stepped up restrictions in recent months on the private education industry, and increased scrutiny on domestic companies listing overseas in the U.S.

Caixin, a major Chinese financial news site, reported Friday that new Chinese government restrictions on the education sector were starting to be implemented in Beijing and other cities nationwide.

Copies of the policy document were circulating online Friday afternoon.

Educational training institutions are banned from raising money through stock listings, while foreign capital cannot invest, according to a copy of the Chinese-language document seen and translated by CNBC. It was dated July 19 as issued from the top executive body — the State Council — and the Chinese Communist Party’s central committee.

One of the bans on foreign investment included variable interest entities, a common structure by which Chinese companies use to list in the U.S. Existing violations of the capital bans must be addressed, the document said.

CNBC has not independently verified the document. The Ministry of Education did not immediately respond to a faxed request for comment outside of Beijing business hours.

A policy document of the same name — referring to lowering costs for after-school tutoring — was among five approved at a May 21 meeting chaired by Chinese President Xi Jinping. The version circulating Friday banned after-school tutoring businesses from advertising, and said they could not operate during public holidays, weekends and winter and summer vacations.

New Oriental Education declined to comment to CNBC, and TAL did not immediately respond to a request for comment.

The stock plunges followed sharp declines for education stocks traded in Hong Kong, which began to drop in the afternoon.

Shares of New Oriental’s Hong Kong-listed subsidiary Koolearn fell 28% on Friday.

UBS analyst Felix Liu said in a note Friday the firm was putting its ratings on TAL, New Oriental and Koolearn under review “given the potential substantial impacts to fundamentals and the reported regulation pending official confirmation.”

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[xiao-rongpeng]

FYI, private education in long term affects public education and thus affect kids born in poor family. The government’s intention is to maintain equality of education between rich and poor. Teachers migrate to slight higher pay, for example.

[frankluo]

Imagine you go to watch a movie but the audiences in the first row stand and refuse to sit down. The second row audiences have to stand up. Then the third row... and the entire theatre. Nobody is the winner. The tutoring companies are people who incite the first row audience to stand up. What the government doing is to let everyone sit down.

[zack]

This guy is well-informed about the reason why the government went with this policy. Well done

[wk]

The interviewer keeps trying to do a negative spin. How unethical.

[SummerHailstones]

Another reason why the Chinese government cracked down on tutoring companies is that Chinese kids have spent days and nights doing additional tutoring homework and the workload is tedious for kids and parents. Parents had to send kids for tutoring because of the competitive educational landscape in China. The public has been complaining for years that tutoring companies crazily promoting its products with exaggerated tone and it's so tiring for kids and parents. Apart from the birth rate and capital concerns, the public also called for a change.

[TheMjoDoj]

The American dream is to buy a house, have a big fancy wedding, 2.5 children, Healthcare for the family, 2 cars in the driveway. That's all expensive. If you want that, you'll need one of those good paying job. If you want that job you'll need an college degree. College degree cost nearly $100K for a standard undergrad with books and living expenses. Most Americans end up in debt the rest of their lives and school debt is what kicks it all off. Bc of student loans, you can't pay off those 2 cars you need to get to work. That wedding sets you back more. Kids aren't cheap. That mortgage? 30 years of your life if you're lucky. Wouldn't it be nice if US politicians had the foresight to find the first break in the prosperity chain and actually try to fix it? Then do it while prioritizing the needs of the students' futures even if it means hurting the profits of these precious private schools?

[rdg]

Sounds what a normal country would do.
Who cares about stocks if you can help families and students.

[abroadinchina_]

It has nothing to do with educational equality between the rich and the poor. China simply doesn't want foreign companies, foreign investors dominating their educational system. They want full control. The rich will find a way to either pay their children into school, or pay a higher price for private tutors. The working class will be greatly impacted.

[neverletmego]

I bet 100% this guy won't be invited to ever interview on the media again since he's actually bringing some fair analysis instead of doing ideological smears

[nicolass]

Education and medical should be not Capitalize

[dylangao]

we thought the private sector can help balance the education inequity between rural and urban area, education investment shortage, etc. it turns out private money don't act that way, on the contrary, it exacerbated the situation. i don't think the ban will have any effect though, after all, thr demand is there. only if the upward movement is stalled, like some countries, the middle class will at ease and stop worrying their place be taken. sad but true🙄

[LordAshura]

As long as children have to compete and be number 1 at all cost to succeed in China, Parents will continue to find other ways of tutoring and making their children spend their entire life behind a book.

[helioseclipse]

in short make education opportunity as equal as possible for children regardless rich or poor

[penhdog]

Isn't it due to the Chinese government not wanting money going out of the country paying online (foreign) teachers based in other countries? A lot of the online teachers are based overseas and not spending it in China.

[keep]

25% of family income goes to tutoring !!! scary

[---zgex]

The real cause of low birth is high living cost, intensified competition and value belief of making more money is the best, industrialized concentrated economy...etc, extra education class is just one of the puzzle. Parents will look for other ways to upgrade their children's education, this won't help on 3-child policy.

[brotherbig]

Those people who think China’s action is good should learn some history and economics. The demand for going to good college is always there in China. The education institutions are just supplies to meet the demand. When these companies are banned, private tutoring does not go away. The rich can still hire private tutors easily using their network and wealth. While the regular people and the poor will have to pay a much higher cost and risk to hire a qualified tutor. It will make it much harder for the poor kids to compete with the rich kids. The truth is, after the policy was announced recently, many parents in China were struggling to keep in touch with the private tutors they know. And the price of private tutoring hiked dramatically.

South Korea did the same thing in the 80s in the name of equality. Ten years later the rich dominated in all the top colleges. The regular people started protesting against the policy.

[weichengcn]

Well said by the guest.finally someone know a thing or two about why Chinese government does what it does another than distorting and slander in most mainstream media.

[uchihazero]

One done research in this field, they basically don't want people to spend all their money on tutors. The CCP would rather see families use that money to raise another child because everything is expensive

[jonh.]

Chinese parents and kids are under a lot of pressure to score well in their school/university entrance exams. There is incredible competition there. Parents spend the money for extra classes to give their kids an opportunity to do better. For many parents, the success of their kids is directly tied to their own future as well. Their kids are often their retirement plans. I need to do as much as I can to help my kids get into the best school, so they can then get the best jobs, and then they can take care of me when I'm old. Cracking down on afterschool tutoring doesn't do anything to reduce the competition to score well on the Gaokao. It only makes it more likely all will be less prepared. You want a higher score on your IELTS/TOEFL so you can go to university overseas? Sorry, you're not allowed to take extra classes anymore. Sadly rich Chinese will still find a way to pay for private classes for their kids. But options will be reduced for the low-middle class who can't afford private classes. They depend more on Online classes with native English speakers rather than tutoring at brick and mortar centers. Sadly the online companies are taking a huge hit by this. The latest is possibly no foreign teachers allowed online??? Sad for the kids. They're being left with the option of either no additional tutoring, or tutoring with non-native (less qualified) local Chinese teachers. While parents may want relief from the additional costs of additional tutoring, they may not see the whole/bigger picture (kids being less prepared for their entrance exams).