Chinese authorities have ramped up their crackdown on after-school tutoring companies by unveiling a new set of sweeping regulations that bans the firms from making profits and raising capital from overseas markets.
Released on Saturday by China’s State Council, the new rules confirm previous reports of regulations that had sent shares of U.S.-listed Chinese education companies into a nosedive. Tutoring companies that teach school subjects are now required to register as non-profits. They are also banned from raising capital from overseas investors or through public listings.
What’s more, authorities will stop approving new tutoring companies seeking to teach China’s school syllabus, and require existing ones to undergo regulatory reviews and apply for licenses. The companies found to be in violation will be rectified or eradicated, according to the rules, without further elaboration.
“The after-school tutoring industry has been severely hijacked by capital,” and in recent years this has led to money-burning wars and excessive advertising, the Ministry of Education wrote on its website. “[This] runs against the nature of education as welfare, and harms the normal education ecosystem.”
Rumors of regulatory crackdown already sent shockwaves through China’s education sector. Shares of three U.S.-listed Chinese education firms—Gaotu Techedu (formerly GSX Techedu), New Oriental Education & Technology, and TAL Education Group–all plunged more than 50% on Friday after reports of the planned restrictions began to circulate.
Gaotu’s founder Larry Chen had a net worth of $10.2 billion in April when the World’s Billionaires List was published, but today he wouldn’t even qualify for the ranking because his wealth has dropped to about $390 million. Industry rivals Michael Yu of New Oriental and Zhang Bangxin from TAL Education appear to be on the verge of dropping out of the three-comma club as well. Yu’s wealth has plunged 70% since April to $1.3 billion, while Zhang’s is down almost 90% to $1.4 billion in the same period.
All three companies pledged to proactively seek government guidance, and comply with the new rules. They also warned of the “material adverse impact” that the regulations would have on their after-school tutoring services, and said they were still carefully evaluating the effect they would have.
Shares of Chinese tutoring companies had previously been bolstered by the pandemic, which shut down many schools and drove students to go online for their studies. Online education companies raised a combined 103.4 billion yuan ($16 billion) last year from investors, such as SoftBank, Temasek and DST Global, to compete in an industry that was valued at 257.3 billion yuan in 2020, according to Beijing-based consultancy iResearch.
But going into this year, complaints of false and misleading advertising began to emerge, leading regulators to levy millions of dollars in fines. Authorities also worry that excessive tutoring services have been straining the finances of Chinese parents at a time when the government is seeking to boost birthrates by allowing married couples to have three children.
“Such harsh rules are probably related to the recent population census,” says Guo Jingwen, a Shenzhen-based analyst at research firm Blue Lotus Capital Advisors. “By looking at Japan or South Korea, losing the demographic bonus is a really bad prospect for China.”