China's central government issued sweeping rules aimed at reining the country's thriving private tutoring and ed tech sector over the weekend.
On Saturday, the Central Committee of the Chinese Communist Party and the State Council issued "Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education." New regulations mandate that existing private tutoring companies register as nonprofit organizations. Tutoring companies will be banned from financing through public listings. Online tutoring agencies will be subject to regulatory approval.
Versions of the drafted official rules had already made the rounds on the Chinese internet a day earlier, causing stocks of leading Chinese private tutoring companies to tumble. New York Stock Exchange-listed TAL Education and Gaotu Techedu have plunged 80% and 70% since Friday, respectively, according to Bloomberg. Shares of New Oriental Education & Technology, which is listed on the Hong Kong Stock Exchange, have fallen almost 70%.
China's private tutoring market was huge and lucrative; anxiety-driven parents were willing to spend an average of 11% of family income for their children to succeed in an ultra-competitive environment. The demand has spurred China's ed tech industry to explosive growth over the past few years — especially during the pandemic. In 2020, about two-thirds of the world's total venture capital investments in this sector, nearly $11 billion, went to Chinese companies, according to HolonIQ, a market intelligence firm.
But China's thriving online education sector has come under heavy regulatory scrutiny this year along with other sectors in the tech industry as Beijing's crackdown on Big Tech continued to widen. Protocol reported in January that the Chinese Communist Party's powerful anti-corruption body had paid particular attention to the online education sector. On Jan. 18, the Central Commission for Discipline Inspection published a scathing criticism of the online-tutoring market for investing relentlessly in marketing. The anti-corruption authority called for heightened regulatory oversight to ensure "the online education sector's healthy development, prevent a messy capital bloodbath, and encourage the sector to refocus on education itself."
In the months that followed, local and state market regulators fined major private tutoring institutions, online and offline, over misleading advertising and pricing fraud. Beijing's municipal market regulator in April fined four leading online education companies $77,100 each for false advertising and a breach of China's pricing law. And in May, the state market regulator imposed a $389,000 fine on two of the country's most valuable ed tech startups, Baidu-backed Zuoyebang and Tencent-backed Yuanfudao. In June, the state market regulator found 15 after-school tutoring companies had used misleading advertising, 13 of which included price fraud violations. The market regulator fined each of the 15 offenders $5.63 million.
Investors have taken note of the uncertain regulatory regime in China. According to HolonIQ, global investments into China's ed tech sector were down significantly in the first six months of 2021; during that period, China made up only less than 25% of the $10 billion investments in the global ed tech industry.