Chinese Education Stocks on NYSE Collapse Amid New Crackdown

Shares of Chinese education companies collapsed Friday in New York after the Chinese government issued sweeping new regulations to restrict after-school tutoring services and force a restructuring of the industry, including bans on initial public offerings and foreign investments.

Foreign capital will be barred from the sector through mergers and acquisitions, franchising or variable interest entity arrangements, according to a document issued Tuesday by the State Council and the Chinese Communist Party’s central committee.

The document stressed that after-school training companies are also banned from providing overseas educational classes or classes that go beyond standard school curriculum. The ban on overseas classes might target preparatory courses offered to students seeking studying abroad, said Ma Xuelei, vice president of the research branch of the China Association for Non-Government Education.

Shares of industry giant TAL Education Group led the pack, plunging over 70% to a six-year low. New Oriental Education & Technology Group Inc. sank 54%, also to a six-year low. Shares of Gaotu Techedu Inc., which went public two years ago, dropped 63% to about a third of its initial public offering price.

Together, the three New York Stock Exchange-traded companies have shed nearly $100 billion of value from highs reached earlier this year.

Educational training institutions providing tutoring classes were banned from raising money through the sale of shares, while already-traded companies were barred from investing in such companies’ stocks, according to the document.

The implementation of the new policies involves millions of employees in the industry and parents who have prepaid large sums of tuition to training institutions. So a full rollout will require a transition time of six months to a year, a person close to the Ministry of Education told Caixin.

Education department staff in Beijing and several other cities confirmed that they received the document and are conducting regulatory actions in accordance with it.

In a statement on its website, New Oriental said Friday that its policy is not to comment on market speculation, saying the regulations have not been published and the company has not received official notification of the regulations. TAL Education and Gaotu Techedu Inc. made similar responses in statements.

The government’s policy on reducing students’ academic burden has been around for years, but in recent months authorities stepped up restrictions on the private tutoring industry and increased scrutiny of domestic companies traded in the U.S.

The Communist Party’s Central Commission for Comprehensively Deepening Reform in May issued an opinion on further reducing homework and after-school training burdens for primary and secondary school students. The document, including implementation measures and trial programs, was distributed nationwide to local authorities July 20.

Local authorities were told to stop approving new after-school education businesses offering tutoring on primary and secondary school subjects. Existing approved enterprises were ordered to become nonprofit organizations. Online platforms are required to get approval from regulators instead of following a registration-based system.

Publicly traded education companies will need to spin off their school-subject tutoring businesses and reregister as nonprofit originations with local bureaus of the Ministry of Civil Affairs, and earnings from such activities can no longer be distributed to shareholders as dividends, Ma said.

Otherwise, listed education companies will have to exit school-subject tutoring services and explore other sectors, Ma said.

The new document also sets strict limits on the time period when after-school training enterprises can provide classes. The institutions are banned from providing school-subject programs during public holidays, weekends and winter and summer breaks. All classes have to end before 9 p.m.

The time restriction could cause a 70%–90% business reduction for the industry, executives at several leading education institutions told Caixin.

The crackdown mainly targets training programs for students in primary and secondary schools, known as nine-year compulsory education, which is funded by the government. Subject training programs for high school students will be administrated in accordance with relevant regulations, the document said.

Some industry participants interpreted that as a warning to the sector. It means that even though high school tutoring classes are not included in this round of restrictions, the education authorities retain the right to address the sector in the future, they said.

Before new the document was issued, a senior executive at an after-school tutoring company told Caixin that many companies, expecting their high school business not to be impacted by recent tightening policy, were planning to expand into smaller cities for new growth.

The work on reducing students’ burden will initially roll out in Beijing, Shanghai, Shenyang, Guangzhou, Chengdu, Zhengzhou, Changzhi, Weihai and Nantong, and other provinces should select at least one city to conduct pilot programs. The measures being tried include reducing after-school subject training, promoting nonsubject after-school programs and government-guided pricing of after-school programs.

Caixin learned that dozens of cities and counties in Shanxi, Shaanxi, Yunnan and Henan provinces took actions to ban after-school subject training and withdraw permits for such classes.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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