China’s Central Committee and State Council jointly launched, on 24 July, a sweeping overhaul of its USD100 billion private education industry with the release of new Guidelines for Further Easing the Burden of Excessive Homework and Off-campus Tutoring for Students at the Stage of Compulsory Education.
The regulations, which are part of the Chinese Communist party’s drive to make raising children and education more affordable and combat a looming population decline, bans companies that teach school curriculum subjects from making profits, raising capital or listing on stock exchanges worldwide, and prevents them from accepting foreign investment.
The document, which was leaked a day early, sent shares in the three largest US-listed education companies – TAL Education, New Oriental Education and Gaotu Techedum – crashing, losing 76%, 76% and 75% of their market value in a week. Analysts at Goldman Sachs forecast that the size of China’s tutoring market would collapse 76%, to USD24 billion.
After-school tutoring had been booming in China, accelerated by the growing demand for virtual teaching during the Covid pandemic and intense competition for entrance into China’s top universities. For the 12 months to March 2021, TAL and New Oriental’s shares rose 38% and 39% respectively, while Gaotu’s shares rose 155% to a market cap of almost USD30 billion.
The guidelines include 30 measures on education sector reforms designed to promote the healthy development of students, improve education quality, alleviate financial burdens on parents, and institute law-based governance of the education sector, as well as restrict private investment – both domestic and foreign. These include:
Regulating off-campus for-profit tutoring and training centres
- Regional governments no longer permitted to approve new off-campus tutoring centres providing core/compulsory education. Existing ones must become registered as non-profit institutions.
- Local governments must distinguish between training centres in sports, culture and art, and science and technology, and consult relevant departments to set standards for each category.
- Tutoring at weekends, public holidays, and winter and summer vacations prohibited.
- Tutoring centres in core education prohibited from going public or being listed for financing. The guidelines call for the ‘excessive’ capital in training centres to be controlled, and to ensure that financing is primarily used for operational costs.
- Specific ban on foreign investment in such firms via mergers and acquisitions, franchise development, or the use of variable interest entities (VIEs). Those currently in violation must take steps to rectify.
- Hiring foreign teachers and other staff must follow relevant regulations and firms may not hire staff based outside China to carry out tutoring activities.
- Online lessons should be no more than 30 minutes, with intervals of at least 10 minutes between lessons, and should end by 9pm.
- Regional governments must review online tutoring centres for approval under the new guidelines. If they do not meet the updated standards, their registration and Internet Information Service Business Licence will be revoked.
- Content management – the guidelines call for greater supervision and management of tutoring centres and to issue domestic teaching materials. Foreign teaching materials are banned.
Reducing the homework and study burden on students
- Schools to set up management structures to coordinate homework assignments, ensure compliance with national standards and create evidence-based homework strategies according to age and learning goals.
- Schools should not assign any homework to students in grades one and two, aim for an average maximum of 60 minutes of homework for grades 3 to 6, and an average maximum of 90 minutes for junior high school students.
Promoting physical and mental health
- The guidelines encourage schools and parents to ensure students use their spare time responsibly. They recommend students complete homework they were unable to finish at school, get physical activity, read, moderate their use of electronics and go to bed on time.
- Parents encouraged to communicate with children and pay attention to their mental health; boarding schools to take responsibility for students’ after-school spare time.
Improving after-school services
- Schools should guarantee after-school services, encourage students to participate in them voluntarily, and create plans to improve quality.
- After-school services should be run by teachers, retired teachers, social workers or volunteers.
- Schools to offer and improve free online learning services. Local education departments should develop free-to-use online learning platforms and encourage students to use them.
- Directives to improve and standardise the quality of education across regions, develop better evaluation techniques and increase the quality of teaching.
- Decrease tutoring centres over time, particularly those with low operational standards.
- Tutoring centres cannot hold offline or online training for preschool students, including foreign language education.
- Restrict tutoring centres from advertising, including banning media, new media, public spaces and billboards from displaying advertisements.
- Off-campus tutoring centres should strengthen their party-building work and welcome the participation of party committees.
- Greater inspection and supervision of schools and education departments.
In announcing the rules, China’s education ministry said: “In recent years, a large amount of capital has poured into educational training … adverts are everywhere, bombarding the whole of society … It has destroyed the normal environment for education.”
Taken together, we expect these measures to have a significant negative impact on edtech companies and their ability to maintain previous levels of profitability. Investors should be ready for further volatility because China looks set to continue to implement reforms on its tech sector.