China's Education Crackdown: Impact and Casualties
The Rapid Shift in China’s Edtech Landscape
Companies that were once highly favored by investors, including those on Wall Street and within venture capital circles, are now facing significant financial challenges. Chinese edtech firms are questioning their ability to remain financially stable in the long term.
A series of comprehensive new regulations enacted by the central government have dramatically altered the multi-billion dollar education and test preparation sector. These changes impact the financial planning and educational pathways of urban, middle-class families throughout the country.
Key Regulatory Changes
The most substantial policies were implemented in July. These include a prohibition on for-profit tutoring services that concentrate on the core curriculum of China’s public school system. This specifically targets tutoring related to crucial high school and university entrance examinations.
Furthermore, restrictions have been placed on student class times. Class schedules are now limited to 9pm on weekdays, with extracurricular courses permitted only on weekends.
Devastating Impact on Edtech Companies
These regulations have had a severely negative impact on leading Chinese edtech companies. New Oriental Education and Technology Group (NYSE: EDU) has experienced an 86% decrease in stock value this year.
TAL Education Group (NYSE: TAL) has seen over 93% of its value erased since reaching its peak in February. A substantial portion – between 50% and 80% – of these companies’ revenue originated from tutoring services, which are now prohibited.
Executives are now tasked with the difficult challenge of restructuring their large organizations to avoid financial collapse.
Broader Educational Restructuring
While the July ban on for-profit tutoring has garnered significant attention, a continuous stream of policies aimed at reshaping education in the world’s most populous nation has been unfolding.
English language education, previously a high priority, is now receiving less emphasis within the state curriculum. A ban on employing foreign online teachers has also created uncertainty for several popular edtech firms.
To prevent circumvention of the rules, regulators have also outlawed private tutoring conducted online or in unregistered locations, such as hotels, cafes, and private residences.
Widespread Adaptation and Uncertainty
A widespread effort to adapt is currently underway. Parents are revising their children’s educational plans, educators are seeking alternative avenues, and edtech entrepreneurs are urgently attempting to revise their business models.
The fundamental economic principles of supply and demand in education remain unchanged. The central question now revolves around how regulation is reshaping these forces.
A Traditional Chinese Perspective
A common Chinese idiom, “上有政策，下有对策 (shàng yǒu zhèng cè , xià yǒu duì cè),” which translates to “the rulers make the rules, while their subjects find loopholes,” is frequently applied to discussions of political economy.
As these new regulations disrupt the education industry, many are now focused on identifying potential loopholes and alternative strategies.
China's Demographic Challenges and Educational Reform
Recent policy shifts and increased regulation within China’s educational landscape are significantly influenced by the nation’s unfolding demographic situation. The publication of the 2020 census data in May highlighted a more drastic decline in the birth rate than previously projected.
This revelation has seemingly spurred officials to prioritize alleviating the financial and emotional pressures on families, with the goal of stimulating a rise in births. The current educational system is characterized by intense competition.
Success isn't guaranteed for all students, yet there's a strong cultural expectation that children will provide for their parents and potentially multiple sets of grandparents in their later years. This creates a cycle of escalating investment in education.
Many families feel compelled to dedicate increasing amounts of time and resources to ensure their children remain competitive. A mother in Beijing, identified as Yi, articulated this sentiment, stating her hope that supplemental education would help her child excel.
However, she acknowledged that widespread participation in such training diminishes its effectiveness, adding to financial strain and increasing stress for children. Consequently, Yi expressed support for the government’s decision to regulate these supplementary schools.
Implications for the Workforce
China’s demographic shift also raises concerns about a potential deficit in skilled vocational and technical workers. This poses a threat to the country’s position as a leading global manufacturing hub.
Educational reforms are therefore aimed at reducing the pressure on families striving for university placement. Simultaneously, efforts are being made to enhance the attractiveness of vocational training and careers.
This involves increased attention and modernization of the vocational education system, which has historically been undervalued. Vocational training is now seen as a crucial component of a balanced educational approach.
- The goal is to provide alternative pathways to success.
- This will help address the evolving needs of the Chinese economy.
- It will also alleviate the intense pressure on the traditional academic route.
By reforming the education system, China seeks to address both its demographic challenges and its long-term economic goals. The focus is shifting towards a more sustainable and equitable approach to education.
The Aftermath of Edtech Industry Downturn
The recent significant decline in value experienced by U.S.-listed education technology companies has understandably prompted financial media to analyze the industry’s prospects. However, the situation for these larger firms and their personnel appears comparatively favorable to that of smaller businesses.
For companies lacking access to sufficient capital to maintain operations, bankruptcy has become the unavoidable outcome. This is exemplified by the Chinese subsidiary of Wall Street English, formerly prominent language-training centers in major cities like Beijing and Shanghai. Consecutive disruptions from the COVID-19 pandemic and associated travel restrictions, impacting both teacher recruitment and retention, combined with new regulatory challenges, have deterred both customers and potential investors.
Consequently, the company was forced to cease operations abruptly. Company closures can present significant hardship for employees, particularly when bankruptcy proceedings are initiated. In China, white-collar workers facing layoffs may receive a financial benefit due to prevailing labor regulations.
Typically, employees are entitled to a severance payment equivalent to one month’s salary, plus an additional month’s salary for each year of service. More generous packages are often offered by companies aiming for swift and amicable staff reductions. However, in instances of rapid company failure, both employees and customers frequently experience financial losses.
A sales representative with over ten years of service at Wall Street English noted that, “when a company’s decline is gradual, options for assistance are available. But a sudden collapse leaves little time for recourse.” She anticipates a modest payout based on her length of employment during the bankruptcy process, and would consider receiving owed back pay a positive outcome, given reports of another U.S.-listed edtech company offering severance packages of only 2,000RMB (approximately $300).
Confusion characterized the experience for Western educators providing virtual instruction. A British teacher, referred to as “Ed,” who worked for Beijing-based online education startup Whales English, faced a period of approximately three weeks marked by uncertainty. The company, which employed freelance overseas teachers for remote English classes, found itself non-compliant with new regulations implemented in July.
According to Ed, the company continued expansion and recruitment until July 28th, when a halt to new teacher hiring was announced. By August 7th, teachers were informed that new courses would be cancelled, while existing, paid-for courses would be completed. Teachers were encouraged to maximize availability as parents sought to utilize pre-paid lessons.
Around this time, rumors surfaced regarding layoffs affecting two-thirds of the workforce at the Beijing headquarters, and both parents and teachers began developing strategies to bypass the company’s online platform. On August 18th, Ed and his colleagues were notified of the immediate suspension of all classes, likely in response to updated directives from authorities.
Despite frustrations with the company’s communication, Ed considers himself fortunate. He received full and timely payment for his work and has since secured a teaching position in Japan.
Stories similar to Ed’s are prevalent within the 14,000-plus member Facebook group for teachers of VIPKid, a prominent Chinese edtech company. However, the flexibility and consistent income provided by these platforms are not easily replicated.
The pandemic’s increased childcare demands have led many parents, particularly those with education or teaching backgrounds, to utilize these platforms to earn income while remaining home with their children. Finding comparable employment may prove challenging.
Despite these challenges, a grey market for tutoring and related services is emerging, characterized by loopholes and inconsistent enforcement. This situation mirrors that of other informal economies. Demand for these services remains, but regulations have compelled large corporations to avoid direct participation, driving the trade underground and leaving teachers without legal protections.
Parents, the State, and the Pursuit of the Chinese Dream
The recent crackdown on private education in China has elicited varied responses from parents, largely dictated by their socioeconomic standing. Instances are emerging of families employing highly qualified tutors as in-home “nannies,” with monthly salaries reaching 30,000 RMB (approximately $4,600), effectively circumventing the new regulations while maintaining access to supplemental learning.
For China’s most affluent and influential families, the impact of these regulations is minimal. Many have long prioritized strategies to navigate the domestic education system, often through enrollment in international schools. These institutions offer the International Baccalaureate (IB) curriculum, preparing students for overseas university admission and bypassing China’s competitive national exams.
Alternatively, financial resources enable some families to send their children to study abroad, sometimes accompanied by relocation of the family and their assets. A retired executive, Gao, currently residing in the U.S. with her daughter, remarked that overseas study increasingly appears to be the optimal, or even sole, viable path.
A common thread unites both the wealthiest and middle-class parents: those who experienced China’s economic boom anticipate social and economic progress for their children, viewing it as essential to remain competitive. To not advance is perceived as a failure, and regression is considered unacceptable.
With economic growth decelerating, President Xi Jinping’s emphasis on “common prosperity” and prioritizing vocational training over traditional higher education clashes with some parental aspirations. A mother in Shanghai, Li, expressed her concerns directly: “Even with the state’s overarching goals, would it be acceptable if my daughter were denied access to higher education? I believe the answer is no.”
Beyond financial considerations, many parents are concerned about their children missing out on the development of “suzhi (素质),” a concept encompassing ethics, ambition, education, and social standing. A Beijing teacher, Guo, voiced his anxieties regarding his daughter’s future. He acknowledged the necessity of skilled vocational workers, but prioritized the social benefits of a university education.
Guo believes the social connections forged during university are invaluable. He stated, “While vocational school students may have a certain reputation for negative behaviors, the friendships formed in university often last a lifetime. I want my daughter to associate with high-caliber individuals.”
As Chinese regulators undertake sweeping reforms across key institutions to address significant challenges, established expectations are being challenged. However, the inherent drive for self-improvement, familial advancement, and the pursuit of ambition is likely to endure. Regulations will be established by the authorities, but resourceful individuals will invariably discover ways to adapt and overcome.
