China’s edtech companies are facing an existential crisis after the Chinese government issued new rules on Friday. All edtech companies and after-school tutoring services must operate on a not-for-profit basis and be registered as nonprofit entities. The new regulation sent share prices plunging.
The policy was issued by the General Office of the CPC Central Committee and the General Office of the State Council. It indicates that no license will be granted to for-profit education providers. No companies that provide education services are allowed to float shares on public markets. Those that are currently listed are prohibited from raising capital to invest in businesses that offer classes in academic subjects in China’s public curriculum. Foreign capital is banned from the sector from this point forward.
The consequences will be felt most severely by Chinese edtech companies that are listed in the United States. These include New Oriental Education & Technology, Gaotu Techedu (formerly GSX Techedu), and TAL Education Group. The share prices of all three companies dropped by more than 50% on Friday after the new restrictions were announced.
New Oriental Education & Technology said on Sunday that it will abide by the relevant rules and regulations, but compliance will lead to an “adverse impact on its after-school tutoring services.” TAL Education Group also made a similar statement, warning shareholders and potential investors of the negative effect on its operations and prospects.
After-school tutoring is seen as an important component in the education of Chinese students, particularly because public exams are highly competitive. A report published by the Chinese Society of Education shows that more than 70% of students from primary school to high school take part in after-school tutoring classes. As of 2020, there are 200,000 private education firms in China, and the market size has exceeded RMB 1 trillion (USD 154 billion) according to IPS consulting.
Regulators have been tightening their grip on the after-school education industry this year. Alibaba-backed Zuoyebang and Yuanfudao, China’s two largest online education companies, were each fined RMB 2.5 million (USD 385,000) for false advertising and deceptive pricing in early May. Throughout the year, edtech companies have been downsizing. VIPKid, Huohua Siwei, Yuanfudao, and Zuoyebang halted their IPO plans.
“The excessive capital influx is a great risk. After-school tutoring services usually charge high fees, which bring excessive financial burdens to the students and their families,” said a spokesperson of the Ministry of Education in the press release.
Industry insiders told Radar Finance that many K–12 education companies will shift to providing adult education, focusing on training for qualification examinations for professions like teachers and legal professionals.