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Chinese edtech upended by sweeping regulations

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Beijing unveiled new rules on Saturday on the country’s private education sector, barring after-school tutoring companies, including edtech companies, from earning profits, raising capital, or going public and imposing new limits on extracurricular study.

Why it matters: The new rules will end IPO hopes for online education startups like Yuanfudao and Zuoyebang, and limit fundraising for the already listed. Companies that cannot comply with new rules could be forced out of business.

Details: Top-level party and government bodies released on Saturday a directive (in Chinese) to “reduce the burden of students enrolled in compulsory education.” The directive requires private tutoring companies to re-register as non-profit organizations, bars local authorities from approving any new companies, and orders local authorities to re-examine previously registered online education companies. 

  • The directive was jointly issued by the General Office of the Central Committee, the administrative branch for the party’s top leading groups, and the General Office of the State Council, the Chinese cabinet.
  • Shares of US-listed tutoring companies TAL Education, Gaotu Techedu, and New Oriental Education lost at least half of their value Friday as the document began to be widely shared.
  • The new rules forbids after-school tutoring companies teaching school subjects to pursue IPOs or accept foreign investment. Listed education companies will not be allowed to issue new equities and raise money in stock markets.
  • The new rule bans companies from teaching school subjects on weekends and holidays. 
  • The rules also forbid companies to provide online courses to children three to six years old. Chinese children typically start primary school at the age of seven.
  • Chinese authorities will also re-evaluate existing online education companies and cancel business licenses for companies that fail to meet the new requirements. 
  • China’s after-school education industry has been “severely hijacked by capital,” said a Monday op-ed (in Chinese) from the state-owned newspaper China Education Daily, republished by the Ministry of Education. 

‘Worst case’ for investors: Rumors of a crackdown on after-school education had been around for months, said Ted Mo Chen, a Shanghai-based edtech entrepreneur and TechNode contributor. But the new policy is “the worst-case scenario expected by the market,” he told TechNode.

  • Investors who haven’t cashed out from recently listed or would-be public edtech companies “will not get a fruitful exit,” Chen said.
  • Chen advised companies to take out classes focusing on school subjects. “If they can, switch to professional or skills training, or non-test subject education such as arts, sports, and character-building,” he added.

Relief for parents? Ding Zhe, a father of a five-year-old in Shanghai, said he expects the new rule to ease financial pressures for parents. Ding pays a combined RMB 40,000 ($6,175) per year after-school courses for his daughter, including English, math, and painting. Ding said he will continue to pay for some after-school courses, but he will worry less because other children won’t be studying extracurricular programs.

Context: Investors have rushed into the online education sector since 2016, and many doubled down last year as the sector boomed during the Covid-19 outbreak. 

  • In 2020, Chinese edtech companies raised a combined RMB 53.93 billion, equivalent to the total funding received over the past four years, a report from data intelligence service 100EC shows.
  • Tencent-backed Spark Education, which provides online education for K-12 students, filed for a Nasdaq IPO in June. Yuanfudao and Zuoyebang, two of the country’s most valuable edtech startups, were also rumored to be planning for IPO after receiving a combined $5.9 billion funding in 2020.
  • The new regulation comes two months after Beijing imposed the maximum penalty on Zuoyebang and Yuanfudao for unfair competition.

Check out TechNode’s Techlash Tracker for an overview of the crackdown.

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