Global Source Partners
China’s Education Crackdown – How Far Will This Go?
Andrew Collier | Jul 27, 2021
Executive Summary
The new regulatory crackdown on the educational sector in China was a surprising move by China. New Oriental Education’s shares plunged 17.5% on the news. What really is a shock is how small the companies are in this sector – EDU has a market cap of just $6.6 billion. What is going on and how far will this go? Is China reverting to a 100 percent state-owned economy?
China’s “mini-decoupling”
There are a couple of micro reasons for the latest regulatory crackdown.
First, the education companies, as with many of the smaller tech companies, are listed in the U.S. China is intent on reducing the ability of Chinese companies to access capital in the west. This is to further the goals of financial decoupling. Eliminating the VIE structure and NASDAQ listings would reduce the power base of private entrepreneurs in China. In addition, education is focused on getting students into international schools and teaching them foreign languages, particularly English. According to the Chinese Society of Education, about seven in 10 students in kindergarten through 12th grade receive after-school tutoring in major cities like Beijing, Shanghai, Guangzhou and Shenzhen, the Wall Street Journal reported. This does include studying for the internal college tests but much of it is internationally focused.
This teaching of international studies is not something that Beijing wants to encourage. The party doesn’t want private domestic or foreign capital or foreigners controlling China’s educational system. The education ministry must pay attention to the propaganda department; every educational establishment has a party secretary, which controls the educational system. This has been going on the ground for some time but is now being formally instituted through the regulators.
Second, education in general is part of the data/information world. Xi Jinping would like to reduce the ability of any non-state actors to control anything to do with this sector. Education, loosely, falls within this camp. So between foreign listings and information control, Beijing gets to kill two birds with one stone. This follows the clear examples of state control over Ant Financial, Wepay and other financial and data-oriented firms.
U.S. IPOs are a problem for China. U.S. capital that is given to Chinese entrepreneurs provides a foreign capital base. This is now being discouraged. That’s not to say there wouldn’t be disruption to China’s financial system and to global investments if there is a continued cancellation of U.S. IPOs – what I would call a “mini-decoupling.” According to the U.S.-China Economic and Security Review Commission, in October 2020, there were 217 Chinese companies listed on NASDAQ, the New York Stock Exchange (NYSE) and NYSE American, with a combined market capitalization of $2.2 trillion. In 2020, Chinese- based companies raised approximately $11.7 billion in the United States through 30 initial public offerings.
The interesting question is whether private capital in China’s growth story really matters. If the state controls the regulators, does ownership of capital truly mean ownership of power?
The large pools of capital (trusts, local government companies, private funds, and even private companies) creates an incentive structure separate from the state. The PBOC, the CBIRC, and the State Council can reach into this network, but they have limits to their control. Such features as the huge pool of local debt cannot be eliminated without disastrous consequences for the economy. And this debt has many private strings to it. Thus, the death knell for the private economy in China should not yet be written.