China’s education industry cracks down on foreign investors

China’s comprehensive reform of its US$100 billion private education industry will exclude foreign investors from most areas of the industry, and may erase BlackRock, Baillie Gifford, Tencent, Sequoia and SoftBank Vision Fund, etc. The group’s multi-billion dollar investment.

Regulations Will ban the company Teaching school curriculum subjects to earn profits, raise funds or list on global stock exchanges, and will prevent them from accepting foreign investment.

This move may fundamentally damage the booming industry in recent years, leading to the overvaluation of the three major U.S. listed companies—Good Future Education, New Oriental Education, and Gaotu Technology.

These changes are the Chinese Communist Party’s efforts to make child-raising and education more affordable. Imminent population decline This threatens the country’s economic future.

The suppression also shows that China is more and more willing Restrict foreign investment In its company.Chinese regulators Amendment rules A few days after it went public in New York for $4.4 billion last month, it ordered a security review of the ride-hailing app Didi Chuxing and sought an initial public offering in the United States.

Chinese authorities announced measures against education companies over the weekend, sending shares of listed groups Plummet Regulatory uncertainty on Monday and the end of months.

New Oriental Education’s share price has fallen 60% in New York since last Friday, when a leaked memo suggested that Beijing plans to crack down on the industry and fell 14% in early trading on Monday. The market value of Good Future Education, which is listed in New York, has plummeted from US$59 billion in February to less than US$4 billion. Its stock price was flat on Monday. Gaotu Techedu, formerly known as GSX, has seen its market value shrunk from USD 38 billion in January to USD 780 million after falling again by 13% on Monday.

Analysts at Goldman Sachs predict that the size of the Chinese tutoring market will shrink by 76% to $24 billion.

The sell-off has spread beyond the educational technology sector.Take a stake in China’s distribution platform Meituan As Beijing announced new regulations for the food delivery industry, the stock price fell 13.8%, the worst one-day performance on record.

JPMorgan Chase said: “It is not yet clear to what extent these companies should be reorganized under the new system. In our view, this makes these stocks almost impossible to invest.”

Regulatory measures will also have a broader impact on the economy. The for-profit counseling department employs hundreds of thousands of teachers and staff. During the coronavirus pandemic, investment in online learning has increased, and the industry is an important advertiser for large Internet companies such as Baidu and Tencent.

In recent months, education companies such as Yuanfudao, VIPKID and Gaotu supported by Tencent have begun small-scale layoffs. Employees said on Monday that they expect more.

The latest move may further increase investor risk Variable interest entity, Allowing foreign investors to own offshore vehicles for Chinese companies listed overseas. The new regulations prohibit for-profit education companies from using this structure.

“The situation is very bad,” said the chief executive of a large Hong Kong private equity firm that does business with Chinese educational technology companies. “The industry needs three to six months to adjust, but then we will have to evaluate whether to write down the investment or completely write off some of the investment. Every private equity company must conduct this necessary reassessment.”

Children leave school in Shenzhen, China

The Chinese authorities are seeking to reduce the cost of raising children, while relaxing the family planning policy to reverse the slowdown in population growth © Reuters

As of November last year, foreign investors such as BlackRock held 5% of the shares when New Oriental was listed in Hong Kong, but they found that they were prohibited from investing in Chinese education companies covering school teaching subjects.

However, if companies move to other areas of education, they can still retain shares. This rule is for after-school tutoring, but does not include adult education or professional technical training.

BlackRock is also the third largest shareholder of a good future listed in the United States, second only to Bailey Gifford, The British-based investor made a big bet on China’s technology industry. Bailie Gifford owns nearly 9% of US stocks in the future after increasing his shareholding in March.

At the same time, investors include SoftBank Vision FundTiger Global and Sequoia China have invested a lot of money in private learning applications such as Doyebang and Yuanfudao. They may not be able to cash in on their investments by listing their companies.

BlackRock, SoftBank, Tiger Global, Baillie Gifford and Sequoia did not immediately respond to requests for comment. Tencent declined to comment.

Good Future, New Oriental, and Gaotu responded swiftly to these regulations over the weekend, promising to abide by the Communist Party.

New Oriental stated that it would “fulfil its social responsibilities and serve the country’s development,” but added that its extracurricular tutoring business would be “significantly adversely affected.”

An educational technology executive said: “What should we do? We can’t beat the Communist Party.”

The Ministry of Education of China said in issuing the detailed rules: “In recent years, a lot of funds have poured into the field of education and training… Advertising is everywhere, bombarding the whole society…. It destroys the normal education environment.”

By prohibiting tutoring companies from using the extensive VIE structure, this gives international capital Enter the restricted area For the Chinese economy, this rule sets an important precedent for investors. VIE operates in a legal gray area and has not been formally recognized by Chinese regulators. Analysts predict that VIEs in all industries will face stricter supervision.

Gaotu, New Oriental, Good Future Education and many private start-ups use the VIE structure to operate some of their businesses. The new rule warned: “Current violations will be cleaned up and corrected.” But there was no detailed explanation. The Chinese authorities have not set a clear timetable or procedure for foreign investors to withdraw from their holdings.

This prepares private equity and venture capital funds for their ability to raise funds to invest in Chinese technology companies.

“In terms of global investment in U.S. dollars, the sentiment in the technology industry is clearly negative in the short term,” said the head of private equity in Hong Kong.

However, “in the long run, sentiment may reverse within a few days,” the person added, noting that even after Ant Group cancelled its $37 billion initial public offering last year, people’s attitudes towards technology groups have also changed. .

Additional reporting by Hudson Lockett in Hong Kong

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