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Education

China education crackdown teaches online tutors a harsh lesson

Tougher oversight in store for edtech sector that boomed during pandemic

SHANGHAI -- China is tightening the screws on after-school education operators blamed for intensifying already cutthroat competition among students and adding to parents' financial burdens.

If implemented, stricter regulations, including requirements for Chinese Communist Party involvement, may affect an array of investors who have poured money into the sector, including Alibaba Group Holding and Japan's SoftBank Group.

The Education Ministry said this month that an agency would be created to rein in nearly half a million tutoring services that provide extracurricular lessons to children from kindergarten to 12th grade.

The agency's tasks will include drawing up regulations to oversee course structures, pricing and teacher recruitment. It will also guide operators on setting up a Communist Party chapter within their organizations -- a common practice in China to ensure the ruling party's grip on every facet of society.

"For some time, the mushrooming of tutoring services that serve the compulsory primary and middle secondary school education [market] has turned unruly to the point of becoming a stubborn malady," China's People's Daily wrote in an editorial on June 16. "The bottom line is, no one should turn a conscience sector into a profit-making industry."

Last month, Beijing's antitrust regulator fined two prominent online education outfits -- Tencent-backed Yuanfudao and Alibaba-backed Zuoyebang -- 2.5 million yuan ($390,000) each for offenses such as falsifying teachers' credentials and misleading advertisements. Operators have drawn criticism for exploiting parents and students' fixation on better exam results.

The crackdown is weighing on technology-driven education stocks, which attracted 106 billion yuan of investment last year, according to Beijing's iResearch Global Group. The edtech sector was a big beneficiary of the shift into online learning during the coronavirus pandemic.

New York-listed Gautu Techedu (formerly known as GSX Techedu) closed at $13.36 on Tuesday, down 30% from its monthly high of $19.05. The shares of the Beijing-based company have plunged from $142.70 in January as the government weighed tighter regulations on the industry.

In a March report, iResearch Global estimated the size of the online education industry by confirmed revenue alone at 257.3 billion yuan in 2020, up from 78.7 billion yuan in 2016. Banking on the COVID-19-driven lockdown and social distancing measures, some 84,000 new operators entered the market last year, an 8% increase over 2019, according to company search portal Qcc.com.

The frenzied growth has buoyed companies such as Zuoyebang, which raised $1.6 billion in December from investors, including SoftBank's Vision Fund 1.

The new oversight agency will bring clarity and regulation to what has been a "renegade" sector, David Bicknell, an analyst at GlobalData in the U.K., told Nikkei Asia. "But there will be collateral damage for the financial plans of China's big edtech players, whose listing plans will now be on hold, probably for the rest of 2021," Bicknell said.

He added that Yuanfudao, Zuoyebang and VIPKid, whose investors include Tencent and Sequoia Capital, are some of the companies that may have to wait until 2022 to go public, after greater clarity emerges.

That is an added headache for some of China's biggest tech groups, which are already facing an array of curbs on other core businesses. Fines were recently imposed on financial technology operators, including Ant Group, Alibaba's financial arm, and Tencent, as the government worried that they had become too powerful and created systemic risks.

The crackdown appears to have direct backing from President Xi Jinping. He told lawmakers in March to build a balanced public education system that satisfied people's needs.

Xi's government has been struggling to arrest the falling birthrate even after scrapping the one-child policy in 2016. Beijing said last month it will support couples who want to have a third child, but many parents say the high cost of living and an intensely competitive society are the main deterrents to having more kids.

Before the announcement of the new rules on private tutoring, Beijing last month published regulations aimed at preventing profit-making in compulsory education and curbing what it deems excessive tutoring.

Stricter rules will impact operators' revenue and investors appetite, and may lead to faster consolidation in the industry, FitchRatings said in a June 17 report.

Some parents think it is unfair to blame operators, instead condemning China's high-pressure education system, which generates demand for extra classes. "I want my daughter to take classes in summer as preparation before she begins her secondary education in autumn," said Gong Ru, mother of a 12-year-old in Shanghai. "It will not be easy for her."

Others are grateful for the wide range of affordable online and offline education options. Ni Tao and his wife enrolled their 5-year-old son in online math lessons "for fun" to ride out the pandemic last year. "Since the enrollment is massive, whether it is online or in-person, edtech players effectively bring the price per tutor down by leveraging on the economies of scale," said Ni.

A recent China Education Daily's report revealed that 92% of around 4,000 parents surveyed have enrolled their children in extracurricular lessons, with more than half of them spending at least 10,000 yuan annually.

Parents like Ni said that if the crackdown is enforced strictly, it may lead operators to raise prices to comply with stricter governance rules, forcing private tutors to go underground because of the overwhelming demand.

Not all operators will be hurt by the new rules. Operators that provide diversified products focusing on higher education and vocational training may gain. Citi Research retained its "buy" rating on New Oriental Education & Tech Group in a Jun 11 note, citing a strong brand portfolio that includes English and other foreign language training, as well as overseas test preparation.

But for most of the companies in the sector, the curbs are providing an unwanted and potentially expensive lesson in Beijing's new priorities for tech. "For fintech, read edtech, except that edtech is perhaps even more critical to China's future," said GlobalData's Bicknell. "China wants its edtech firms to flourish, but it also wants them to toe the party line."

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