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Beijing regulations see Chinese edtech stocks plummet

New regulations from Beijing directed at the private education sector released on July 24 saw stocks in private tutoring companies plunge, with New Oriental stock value dropping 34%, TAL 27% and Youdao 34% two days later.

ChinaOnline companies will be prohibited from teaching young children. Photo: Unsplash

New Oriental dropped 34%, TAL 27% and Youdao 34% on Monday

The new regulations, which have been anticipated for several months and will be trialled in several cities before rolling out nationally, broadly address two different aspects of business operations: course content and delivery, and the financial set up of companies.

Extracurricular programs will be limited, schools will be prevented from teaching school subjects during weekends and public holidays, and tutoring for children aged six and under will be prohibited.

After-school tutoring businesses will also be stopped from earning profits for certain types of programs, raising capital and going public abroad.

While regulations already exist in China preventing investment by foreign investors, many companies get around this by structuring themselves as a Variable Interest Entity and registering themselves in places like the Cayman Islands, meaning they can sell stocks on foreign exchanges.

China has taken a greater interest in companies operating this way over the past year. As well as edtech giants, it has also clamped down on other large companies with this sort of structure, including Alibaba and ride-hailing service app Didi Chuxing.

While the tutoring sector boomed in China during the pandemic, it has also come under criticism for the high cost of services. Tencent-backed Yuanfudao and Alibaba-backed Zuoyebang, both of which were rumoured to be mulling an IPO before the new regulations were announced, were also fined for false advertising in May.

There has also been growing worry in China both about the academic pressure on school children and the cost of living for families, particularly when it comes to paying for expensive additional tutoring.

As the government seeks – so far unsuccessfully – to encourage families to have more than one child after decades of the one-child policy, fingers have pointed at the culture of after-school tutoring as making the possibility of having multiple children too much of a financial burden.

One town in Sichuan, Panzhihua, even announced this week it would pay couples 500RMB per child per month for second and third children, a relatively large amount in a region where the average urban income is 3,500RMB per person and the rural 1,500RMB.

“We expect the guidelines to impact our K-12 course business, financial condition and corporate structure”

In response to the regulations, edtech companies, including New Oriental, Zhangmen and TAL, released almost identical statements saying they would comply with the rules and seek guidance on how to follow them.

“The company is carefully considering the provisions of the opinion and assessing their implications for the company’s business,” said New Oriental.

“The company expects the opinion, related rules and regulations, and the compliance measures to be taken by the company will have material adverse impact on its after-school tutoring services related to academic subjects in China’s compulsory education system, which in turn may adversely affect the company’s results of operations and prospect.”

Youdao added in a statement that “although the interpretation and implementation of the guidelines remain uncertain, we expect the guidelines to have material impacts on our K-12 course business, financial condition and corporate structure”.

“As we are currently exploring measures to comply with the requirements in the guidelines for our K-12 course business, we will continue to seek guidance from regulatory authorities to improve our operations in strict compliance with all laws and regulations, fulfil our social responsibilities, provide our users with high-quality, innovative products and services, and promote the long-term development of China’s education industry.”

Beijing-based Rise, which noted that the directives would have an adverse impact on their English language teaching, said that it would however “continue to grow its two aptitude training products announced in May, namely WhySTEAM and Hiyeah, in compliance with the applicable laws, rules and regulations”.

It is not yet clear when the effects of what one thinktank called a “bloodbath” will start to be felt, as companies are still in the stage of trying to understand the new regulations and how they will be applied.

In the past, companies have been adept at circumventing new regulations when it comes to teaching. For example, during a previous crackdown against tutoring companies giving out homework, some simply started offering ‘enrichment activities’ for students to do at home instead.

Online English teachers that The PIE News spoke with said that they have not yet seen any changes to their schedules and are continuing to teach evenings and weekends Beijing time, while information from their companies has been vague.

“The bottom line is that we do not know if, how, or when these regulations will impact the VIPKid platform”

“We know that teachers are concerned and interested in learning more about the new regulations. Despite what you may have read in the press, the bottom line is that we do not know if, how, or when these regulations will impact the VIPKid platform,” VIPKid recently told teachers by email.

“Our government relations team is working to understand timelines and exactly how these regulations may impact VIPKid, and we will share more information with you as soon as possible.”

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