Originally appeared on Lone Conservative.
In sweeping new regulations, China has effectively ended a $100 billion tech industry.
China’s state media claims to address social equity concerns by releasing new restrictions on after-school tutoring. The restrictions involve a ban on for-profit private tutoring companies. Many of these companies are online programs that either employ a large percentage of American teachers or rely on American investors. According to a statement from China’s Ministry of Education, the after-school tutoring industry has been “severely hijacked by capital.” Listed Chinese private tutoring companies can no longer issue stocks or raise capital; they must register as nonprofits.
Private in-person and online tutoring is lucrative in China. The highly competitive education system incurs large investment by parents into children’s after-school lessons. China’s private tutoring industry saw a 30% annual increase from 2017-2019 alone. In 2018, 5 in 10 Chinese students received private tutoring compared to just 1 in 10 in the U.S.
Bejing claims the rationale for its latest administrative orders is to diffuse the competitive nature of private tuition. The restrictions specifically target lessons for children in the compulsory education system. Included are stipulations that tutoring may not occur on weekends or holidays, reducing the need for after-school lessons which “charge high fees” and pose risks to education with “excessive capital influx.”
Broadly speaking, Beijing’s newest regulations are nothing less than a crackdown on foreign investors who fail to align with the interests of the Chinese Communist Party (CCP.) Aside from apparently lifting the burden of high tuition costs, the restrictions are aimed at foreign investment in the Chinese education system and tech industry. The ban not only prohibits private agencies from teaching foreign curricula but also prohibits the employment of any foreign tutors outside China via online programs. Further, foreign investors cannot hold shares in any online tutoring company.
In recent months China has focused its fiat power on tech giants and competitors. Thanks to new regulations, over $1 trillion in the stock market has vanished from top Chinese tech companies since February. Chinese officials say they maintain an interest in global markets while at the same time nullifying multibillion-dollar industries that until now have had far-reaching benefits for Western educators, investors, and business. Keeping foreign investors happy is never a concern for China. In an overnight administrative decree, Beijing has devastated one of its most lucrative industries for foreign exchange.
The TAL Education Group, Gaotu Techedu Inc., and New Oriental & Technology Group are Chinese holding companies that are U.S.-listed. Three days after Bejing announced the restrictions on private tutoring, Gaotu’s stocks had dropped from roughly $149 to $3 per share. TAL Education and New Oriental Education have both canceled upcoming earnings releases.
The crackdowns from the Chinese Ministry of Education appear in light of an act signed by former President Trump in December 2020. The law, titled “Holding Foreign Companies Accountable Act,” requires any foreign company that has not been audited by the U.S. in three consecutive years to delist from U.S. exchanges. The act specifically names the Chinese Communist Party, calling foreign issuers to disclose company board members or controlling interests connected to the CCP.
The majority of Chinese-owned tech companies rely on Variable Interest Entities (VIEs) to evade American antitrust laws. VIEs are a legal strategy to maintain control in a company even if one does not have a majority of voting rights. Therefore, stocks that are mainly backed by VIE subsidiaries have a loophole to avoid creditors and foreign audits. TAL Education is one such example: it is dependent on VIEs and is behind many online tutoring companies that hire American teachers. Prior to the Holding Foreign Companies Accountable Act, TAL Education may have continued to escape U.S. audits.
Rather than comply with U.S. data breach notification laws, the Chinese Communist Party just eliminated an entire industry dependent on its last loophole. Despite what the CCP would have you believe, this overhaul disregards the real interests of both Chinese students and global markets.
China’s assault on the technology sector is only on the upswing. It bears collateral damage to both Chinese and American workers. VIPKid, one of the largest online tutoring companies which connect Chinese students to American tutors for English lessons, is announcing new layoffs. VIPKid alone employs over 70,000 North American teachers and works with over 500,000 Chinese students, just as of 2019. Now, businesses are scrambling to realign themselves with the CCP. American teachers financially dependent on their Chinese students are without jobs overnight.
China’s latest private education restrictions send one message to global investors. If you wish to do business with China, there is but one entity you must be in lockstep with: their government.
