Capitalists Are No Longer Welcome in China's Classrooms

(Bloomberg Opinion) -- There were plenty of signs that an assault on China’s for-profit tutoring was coming. But few predicted that Beijing would lob a hand grenade into the industry, and in so doing let the entire world know that it sees childhood education as a policy priority and not just a hot capitalist income stream.

Over the weekend, the government decreed that offering after-hours education to students could no longer be done for profit, nor funded by capital raising or allowed to go public on equities markets. The move could destroy a 1 trillion yuan ($154 billion) industry built on convincing parents of the need to keep schooling kids late into the night and during the weekend. The move against the commercial education business is of an entirely different scale than the crackdowns in recent months that reined in other powerful, prominent sectors. 

Whereas Ant Group Co. (fintech), Didi Global Global Inc. (logistics), Alibaba Group Holding Ltd. (e-commerce) and Tencent Holdings Ltd. (social) found themselves in regulatory crosshairs over issues ranging from data privacy to anti-competitive behavior, big education providers are under fire for their core operations: charging money and profiting from teaching schoolchildren. Big Tech had the option to adjust course and pay a fine. The giants in tutoring — TAL Education Group, New Oriental Education & Technology Group and Gaotu Techedu Inc. — may be left with no business model at all.

President Xi Jinping has taken an interest in the topic. As far back as March, he noted the industry’s tendency to exploit parental anxiety, comparing it to a chronic disease: “On the one hand, parents want their children to be healthy and have a happy childhood; on the other hand, they are afraid their children will lose right from the starting line in the competition for marks.”

Such concern over the welfare of parents and children extends further than their emotional well-being. It cuts to the heart of the government’s focus on disparities between rich and poor, and revised policies on population control after China last year recorded a fourth consecutive decline in birth rate.

Each year, millions of students (including kindergarteners) find themselves in after-school programs aimed at getting them ahead of their peers. Only, the peers go, too. As more classmates join, parents feel the pressure to pay to keep up. One survey found that 92% of parents sent their children for extra classes, and more than half were spending over 10,000 yuan per year ($1,500), equal to almost 40% of median income. Some found themselves on the hook for $16,000 annually.

Even for rich couples in big cities like Beijing and Shanghai, these costs can stretch the budget. But for middle and low-income families — especially in rural areas where incomes are 60% lower than in the cities  — it ends up being prohibitive. Inequality has always been a concern to China’s modern leaders in varying degrees, but under Xi, who has vowed to tackle corruption and noted that the gap between rich and poor is a threat to the nation, allowing the private education sector to grow unabated became untenable.

The school move is tied to China’s decision to end its 35-year-old one-child doctrine. Couples can now have three children. Yet most can’t afford to. As is the case for many countries where birth rates are low, the pressure and economic burden of raising children remains a bigger obstacle to larger families than government mandates. 

The after-school tutoring sector had become part of the problem. Fines meted out in April for deceptive marketing confirmed the prevalence of heavy-handed sales tactics, among them displaying a high but never-used tuition price as a way to convince parents to sign up for purported discounts. (The companies, including New Oriental, TAL and Gaotu, paid the fines “sincerely” and promised to change their practices, according to an online report.)

Such cut-throat competition drove years of double-digit revenue growth. That in turn got investors excited, with the market value of the two largest companies — New Oriental and TAL — climbing more than five-fold in five years.

Beijing’s thoroughness is impressive. The reining in of the tutors includes tighter controls over teacher hours, the use of foreign curricula and textbooks. Weekend and vacation-period classes have also been banned. This should curb the amount of hours children spend in classes, though there may still be room for providers to offer private tuition to students who need the extra attention to keep up in a school environment that’s heavy on rote learning and large classrooms.

For the government, this revamp would mean that private tutoring works in the service of China and its students, not executives and their investors. Outfits like TAL and New Oriental may have to pivot to adult learning to have any hope of continued growth. There’s a nascent market for corporate training and upskilling, with companies and employees in need of ongoing professional development.

The transition from tutoring high-school math and physics to teaching accounting and coding won’t be easy. The survivors will be those who can get with a new program, and fast.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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