Chinese education stocks in US recover after sharp sell-off

(Bloomberg) — Trading in US-listed Chinese education stocks began showing signs of slowing down Tuesday after a sharp two-day sell-off wiped out billions in the companies’ market value.

Shares of TAL Education Group and New Oriental Education & Technology Group – down nearly $20 billion in value in the past two trading sessions – each gained a whopping 12% in premarket. Other companies including Meten EdtechX Education Group Ltd., Gaotu Techedu Inc. and China Online Education Group, were higher at 8:15 a.m. in New York.

The recovery follows the worst two-day sell-off in US-listed companies in more than a decade, as regulators in Beijing unleashed sweeping policy changes on the technology, online education and property management sectors. Markets across China collapsed on Tuesday as rumors circulated that US funds were dumping Chinese and Hong Kong assets, with analysts warning that gains could be short-lived.

To add to that wall of concerns, companies with a floating rate entity (VIE) structure, which turns a Chinese company into a foreign company with shares that foreign investors can buy, have never been formally approved by Beijing, giving investors eternal getting nervous about their bets being settled overnight.

As part of the latest crackdown, regulators have banned foreign companies from acquiring or holding stock in school curriculum educational institutions, or from using a VIE to do so. They added that anyone currently violating the new policy must correct the situation.

“Under the new rules, the legitimacy of the listing status of certain players currently using the VIE structure, particularly New Oriental and TAL Education, may be called into question,” said Anita Chu, CCB International Securities analyst.

Despite today’s rebound, not everyone is convinced that the sale has abated.

“I expect the sell-off in mainland listed companies in Hong Kong and the US to continue for some time until we reach a level where international investors feel that the now greatly increased regulatory risk in China is offset by attractive enough valuations” , said Jeffrey Halley, senior market analyst at Oanda.

(Adds details about the VIE structure, analyst comments in the last paragraph, and updates prices throughout.)

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