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When Chinese president Xi Jinping told a group of educators in March that the country’s school tutoring sector was “a chronic disease”, it seemed like just another warning about inequality and other social ills in the run-up to celebrations to mark the centennial of the Chinese Communist party.
But unbeknown to the $100bn-a-year industry, the cure that China’s president had in mind would go far beyond existing efforts to rein in the country’s largest technology companies and amount to what some analysts have called a “death penalty”.
The education sector had previously boomed on the back of demand from increasingly well-off Chinese parents who wanted to improve the chances that their often only child would prevail in the intense competition for admission to a top-ranked university.
However, former government officials, industry executives and analysts say Xi’s sudden crackdown is entirely consistent with his ideological determination that “government, military, society and schools — the party is leader of all”.
“At the heart of the crackdown is an effort to strengthen ideological control,” said one former government official who now works for a large technology company and asked not to be named. They added that the immediate triggers for Xi’s move were related to growing concerns about longstanding social pressures, such as mounting education expenses for parents and falling birth rates.
Since news of drastic new restrictions on tutoring companies leaked on Friday — and were confirmed at the weekend — the share prices of US-listed industry leaders TAL Education, New Oriental Education and Gaotu Techedu have collapsed by about 60 per cent on average. Goldman Sachs has estimated that the restrictions could reduce the industry’s annual earnings from $100bn to less than $25bn.
Under the new rules, issued by the general offices of both the party and the State Council, or Chinese cabinet, core parts of tutoring companies’ businesses can only be conducted on a “non-profit” basis. They also say that companies in the sector will no longer be allowed to use a corporate structure called a variable interest entity, or VIE, which is employed by many Chinese companies in sensitive sectors to sell shares to foreign investors.
These measures are far more draconian than anything Xi’s administration has unleashed against China’s largest tech groups, which also embraced VIEs but have been targeted principally on anti-monopoly and data security grounds. Chen Long, a partner at Plenum, a Beijing-based consultancy, calls them “tantamount to a death penalty for firms making money from after-school tutoring”.
The wider ranging “rectification” of the tech sector, which has ensnared Jack Ma’s Ant and Alibaba groups as well as ride-hailing company Didi Chuxing, began in earnest in December after the party’s politburo said it was determined to “prevent the disorderly expansion of capital”.
Ernan Cui, an analyst at Gavekal Dragonomics, said the education sector crackdown demonstrated that the government was “not afraid to simply shut down a large and profitable industry in order to achieve its social and political goals”.
“Xi’s emerging agenda of social goals, grouped under the heading of ‘common prosperity’, is more directly opposed to markets’ tendency to exacerbate inequalities,” she added. “The series of crackdowns on high-profile companies like Ant, Alibaba, Didi and now education are an attempt to teach the market a lesson about who is ultimately in charge.”
“For the past 20 years the government was focused on growth and efficiency,” added Ming Liao at Prospect Avenue Capital, a Beijing-based investment company. “But now they are rebalancing towards economic equality. They want to make sure the pie is distributed more equally.”
The crackdown on the tutoring sector also dovetails with the party’s larger interest in policing education. China’s education ministry issued guidelines in April to primary and middle schools, warning them not to stock their libraries with any books that “violate the party’s line, principles and policies” or “propagate erroneous views such as individualism, neoliberalism . . . and worship foreign ideologies”.
But while the party has sought to firmly bring technology and education companies to heel, Beijing also has to calibrate the potentially negative economic effects of its campaigns against the private sector.
Larry Hu, chief China economist at Macquarie, the Australian bank, noted that Xi took advantage of the country’s economic recovery from the Covid-19 pandemic to unleash his “regulatory storm” late last year. After a worrying dip in quarter-on-quarter growth over the first three months of 2021, the economy began to accelerate in the second quarter, giving regulators more confidence to take on private sector companies previously valued for their enormous contributions to economic growth, employment and tax revenues.
“The intrinsic tension between bolstering growth and curbing risks means that [the government] has to grab this short window to do as much as possible,” Hu said. “The duration and intensity of the regulatory storm depend on the economic situation.”
Additional reporting by Xinning Liu in Beijing
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