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Caixin

China education companies had advance notice of rule changes

Shares of listed players hammered after government lays out new policies

About 120 education companies have already publicly pledged to comply with the new reguations.   © AP

Chinese officials held multiple rounds of talks with top private education companies to discuss the industry's future before announcing sweeping new regulations last week that are set to transform the sector, Caixin has learned.

The meetings indicate that the companies were bracing for impact weeks before Friday's announcement, which roiled a sector that employs millions of people and torched the share prices of major players, including New York-listed TAL Education, New Oriental Education & Technology and Gaotu Techedu.

More than $100 billion has fallen off the three above companies' combined market value compared with highs recorded earlier this year. TAL fared worst of all with a 70% plunge in its equity price, while Gaotu fell 63% and New Oriental sank 54%.

New Oriental also lists in Hong Kong and saw its shares there dive about 40% on Monday.

The rules announced by the State Council -- China's cabinet -- and the Communist Party's Central Committee bar local authorities from approving new private education companies that teach primary and secondary school subjects, require existing schools to register as nonprofits, and restrict flows of foreign capital into the sector.

Some 120 companies have publicly pledged to comply with the new policies, according to a statement published on Friday by the China Association for Non-Government Education, an industry group under government supervision.

However, some senior executives at the companies were aware of the looming policy change since at least the start of July, when they met informally with an education ministry body in charge of out-of-school learning to discuss the state of the industry, corporate plans and regulatory compliance, according to two people with knowledge of the matter.

Several major companies subsequently made changes to their product offerings before the rules became public, including launching new products that may lie outside the scope of the regulations. In mid-July, some New Oriental outlets sent questionnaires to parents asking for feedback on proposed tweaks to after-school services for kindergartners and primary school students.

On July 8, TAL announced a new adult education brand focusing on postgraduate entrance exams, language training and overseas study. The disclosure came less than a week after the company launched a separate science program and two weeks after it announced changes to a flagship English-learning service.

Similarly, on July 19 Gaotu trumpeted a new professional education app specializing in language training, college-level exams, overseas study, civil service exams and other areas.

However, these new initiatives are unlikely to be able to offset the loss of profit from the companies' core school curriculum tutoring business. New Oriental raked in over $1.1 billion in the three months through February from educational services, a 30.5% year-on-year rise that was primarily due to demand for K-12 tutoring, according to its most recent earnings report.

"Every market segment is up for grabs, but each of them is probably only worth 10 billion yuan ($1.52 billion) or 20 billion yuan," said Wang Jingjing, an education partner at consultancy Oliver Wyman, adding that companies would struggle to detach themselves from solid demand for test preparation but may pivot in the long term toward supplementing the work of schools.

The new regulations are Beijing's latest effort to curb booming demand for out-of-school tuition services that saddle students with heavy workloads and impose high costs on families. The move follows a series of policies in recent years that have sought to reduce the burden on children in China's notoriously competitive education system.

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Read also the original story.

Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.

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