China Considers Converting Tutoring Companies To Nonprofits

(Bloomberg) — China is considering asking school curriculum tutoring companies to go nonprofit, according to people familiar with the case, as part of a sweeping series of restrictions that will cut the $100 billion education technology industry from the could decimate the country.

Under the rules currently under consideration, the platforms will likely no longer be allowed to raise capital or go public, the people said, asking not to be identified as the information is not public. Listed companies are also likely to be banned from investing in or acquiring education companies that teach school subjects, while foreign capital is also banned from the sector, one of the people said.

Local regulators will stop approving new after-school education companies looking to offer tutoring on China’s mandatory syllabus and require additional scrutiny of existing online platforms, the people said. Holiday and weekend tutoring on school subjects will also be banned, they said. Changes may still occur because the rules have not yet been published. The 21st Century Business Herald previously reported on the ban on IPOs and investments by listed companies.

The new set of regulations, conceived and overseen by a special branch created last month to regulate the sector, could wipe out the massive growth that has plagued the stock market darlings of TAL Education Group and Gaotu Techedu Inc. made. The regulatory attack reflects a broader campaign against Didi Global Inc.’s growing number of Chinese internet companies. to Alibaba Group Holding Ltd.

“Making the sector non-profit is as good as wiping out the entire industry,” said Wu Yuefeng, fund manager at Funding Capital Management (Beijing) Co. “Financing regulations are a big surprise and show the authorities that this is no small matter. In the short term, any news is bad news for the industry.”

New Oriental Education & Technology Group plunged a whopping 50% in Hong Kong on Friday, while Koolearn Technology Holding Ltd. 31% dropped.

Beijing is hitting the sector hard as excessive tutoring harass young students and burdens parents with expensive tutoring. It is also considered a hindrance to one of the country’s top priorities, fueling a declining birth rate. Last month, China said it will allow a couple to have three children and released a slew of aid measures to encourage births and lower child costs.

If the entire industry went nonprofit, “it would be pointless to be a publicly traded entity,” said Justin Tang, head of Asian research at United First Partners. “Investors sell out first and ask questions later. It is all being done to lower the cost of education and motivate citizens to raise children.”

Education technology had emerged as one of the hottest investment projects in China in recent years, with $10 billion of venture capital invested in the sector last year alone. Alibaba, Tencent Holdings Ltd. and ByteDance Ltd. all entered the arena and tried to capitalize on the desires of Chinese parents to give their children every academic advantage. A spokesman for the Ministry of Education said the relevant policy is still in the works and declined to provide more details.

Beijing is arguing with for-profit companies because they stress children out while enriching investors and startup founders. In May, President Xi Jinping chaired a meeting with top officials where they approved a new set of rules to ease the burden of homework and after-school training for primary and secondary school students.

Last month, China’s Ministry of Education established a special department for the first time to oversee all private education platforms. That followed a plethora of restrictions, including limits on fees companies can charge and time limits on after-school programs. Regulators have fined two of the largest startups for false advertising: Alibaba-backed Zuoyebang and Tencent-investee Yuanfudao. A new law on the protection of minors, which came into effect on June 1, also bans kindergartens and private institutions from teaching preschoolers the elementary school curriculum — not unusually sooner.

Read more: Why China is now cracking up on after-school teachers: QuickTake

Several high-profile industry startups — including Yuanfudao, which is the most valuable of the lot at $15.5 billion — will likely have to halt plans for IPOs due to the crackdown.

Shares of China’s largest private education companies are among the worst-performing in recent months, with New Oriental Education, TAL Education and Gaotu Techedu collectively losing nearly $100 billion in value from their highs earlier this year.

Gaotu, New Oriental, Zuoyebang, Yuanfudao and TAL did not immediately respond to requests for comment.

(Updates with analyst comments in fifth paragraph.)

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