China Business and Finance Update

After a leaked memo suggested that Beijing might ban academic tutors from making profits, the market value of the three major Chinese education companies listed in New York on Friday evaporated by about $16 billion.

The document, dated July 19, seen by the Financial Times, requires homeschooling or off-campus education companies to register as non-profit organizations and prohibits local authorities from approving any new institutions.

If implemented, these measures will deal a heavy blow to one of China’s fastest-growing industries-tutoring children outside schools and preparing teenagers for university entrance exams.

After the news, the share prices of some of China’s largest education companies plummeted. Good Future Education, Gaotu Technology and New Oriental Education, which were listed in New York and had a total market value of more than $26 billion before, all fell nearly 60% within the first hour of the transaction.

Future is the largest company by market capitalization, with approximately 45,000 employees and 990 teaching centers operating in 102 cities.

The crackdown may also dash the hopes of Yuanfudao and Zuoyebang, two leading online education groups that are known for exam preparation, to be listed in the United States or Hong Kong.

“The probability that they will still conduct an initial public offering is zero,” said a partner in a Beijing private equity firm with ties to securities regulators. “They are too insensitive to policy changes.”

China’s private tutoring industry has flourished in recent years because it provides an effective way for students to achieve excellent results in academic exams deciding to enter first-class secondary schools and universities.

In Beijing’s Haidian District, known for its vibrant cram schools, 57 students entered the top 80 in the city’s college entrance examination last year. In contrast, the district’s test takers accounted for less than a quarter of the city’s total.

“A good education is the best way to improve social status,” said David Yang, an office worker in Haidian, who enrolls his 12-year-old daughter for three extracurricular courses every week. “I will no longer consider investing in my child’s future.”

However, the upsurge of tutoring worries Beijing because it brings a heavy workload to students and financial burdens to parents. The authorities are also worried that large expenditures on extracurricular academic training may widen the education gap and trigger social unrest.

“The government decided to kill this industry because it created too many problems, from inequality in education to low birth rates,” said Li Chengdong, founder of the Beijing Dolphin Think Tank.

He added: “If the best way to enter a good school is to take private tutoring courses, then the rich kids will have an unfair advantage over the poor.”

Beijing’s latest industry reform aims to solve this problem. The document stated that China will “effectively” reduce students’ academic burdens and family education expenditures within one year, and make “significant progress” within three years.

To achieve this goal, according to the document, China will prohibit academic training institutions from raising funds through IPOs. The notice also prohibits listed companies from raising funds to invest in academic training institutions.

“This will cause a credit crunch for the industry,” said an education investor in Beijing.

In order to reduce the cost of family education, according to the notice, the competent authority will set guidance prices for off-campus training courses. The document said: “We must adhere to the non-profit nature of tutoring.”

These comprehensive measures may cause the industry to shrink significantly. “There will be mass layoffs,” Li said. “But the government believes that the benefits outweigh the costs.”

He added that the document also outlines how Beijing will “strictly” prohibit foreigners from tutoring Chinese children. “This could lead to the closure of educational technology companies like VIPKID,” he said, referring to an online education platform featuring American teachers.

A former official of the Central Propaganda Department stated that Beijing took this action after discovering ideological problems in extracurricular tutoring courses involving foreigners. “We must regain control of this area,” the person said.

However, it is still a question of how good the new rules will benefit ordinary students. Beijing’s parents Yang said that if the current mentor fails, he will find a new mentor for his daughter.

“Although the government closed cram schools out of goodwill, they have done little to make good universities easier to enter,” Yang said. “We can’t lose the game.”

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