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  1. Home
  2. / Investing
  3. / Global Equity

China Puts Curbs on Private Tutoring, Mandates Higher Food Delivery Pay

Chinese regulators do not care how much stock market destruction they cause in the process of imposing these rules.
By ALEX FREW MCMILLAN
Jul 26, 2021 | 08:09 AM EDT
Stocks quotes in this article: BABA, TAL, EDU, BEDU, TME

Beijing administrators are finding new ways to scare investors daily, it seems, with curbs on private tutoring causing Chinese shares to surrender all gains they had made this year.

Separately, Chinese food-delivery apps were told they must ensure that the pay for their delivery people is above the minimum level. That drove Big Tech stocks with food-delivery operations, including Meituan HK:3690 and Alibaba Group Holding (BABA) , sharply lower in Hong Kong trading.

The central government over the weekend banned tutoring schools from offering for-profit courses in core classes during the academic year. Chinese tutoring companies in the US$120 billion industry have been hammered as a result.

Hong Kong-listed tutoring companies plummeted on Monday. The heavy selling that started for U.S.-listed rivals on Friday is likely to follow through this week.

Scholar Education Group HK:1769 plunged at the open in Asian trading with no reprieve in sight to end the day down 45.5%. China Beststudy Education Group HK:3978 finished down 42%.

Word spread in May that such changes might be on the way, but many stock watchers thought the regulators would avoid taking such drastic action. Nomura, for instance, called this wrong, saying this extreme case of banning classes on weekends and limiting fees "will NOT happen." Nomura noted that in such an extreme bear scenario, as first reported in Reuters, "the industry would be devastated."

As with many top-down highly proscriptive mandates from autocratic governments, it's likely that policies put in place to benefit citizens will have unintended consequences. The rules essentially outlaw for-profit tutoring, but rather than going away, it's likely such tutoring will go underground. Unlicensed tutoring of variable quality by instructors who may or may not be qualified will likely result.

With reports late last week in the Chinese press that the changes were imminent, TAL Education (TAL) plunged nearly 71% in New York trading last Friday.

New Oriental Education & Technology Group (EDU) dropped 54% last Friday in U.S. trading. New Oriental also has a Hong Kong listing HK:9901, which fell 47% on Monday, the worst performance among all Hong Kong company stocks.

Bright Scholar Education Holdings (BEDU) , which operates full bilingual and international schools within and outside China, held up better than most. It finished down "only" 10.8% in New York trading.

Educational arms race

The move is designed to "ease the burden of excessive homework" on school kids, official newswire Xinhua states. Chinese "tiger parents" look to augment their children's already-heavy homework load with numerous after-school classes intended to give them a leg up on national exams, in particular the gaokao, the National College Entrance Examination.

It has become an educational nuclear arms race. Parents pay for tutoring, afraid that other parents are paying even more for tutoring for their offspring.

Under the new rules, local authorities are not permitted to approve any new companies that offer academic courses for the first nine years of a child's schooling. Existing tutoring centers teaching classes from the regular academic curriculum will need to register as a non-profit.

Those companies are now not allowed to go public and/or raise financing by issuing securities to the public. Both overseas capital and other listed companies are barred from investing in those institutions.

Tutoring centers are not allowed to offer classes on weekends, national holidays or during the summer and winter vacations, the guidelines say.

There's some social engineering in the policies, too. To protect the eyesight of students, online tutoring sessions will be restricted to at most 30 minutes in length. The gap between classes should be at least 10 minutes and online tutoring must end at 9 p.m.

Students who can't finish their written homework "after hard work shall go to bed on time," the guidelines dictate, according to Xinhua.

The new rules will be rolled out in nine pilot cities: Beijing, Shanghai, Guangzhou, Chengdu, Shenyang, Zhengzhou, Changzhi, Weihai and Nantong. After that, they're likely to be rolled out nationwide.

Once tutoring centers are registered as non-profits, the Ministry of Education said local governments should set a standard for how much they can charge for course fees. That action is sure to further hamper the profitability of what had been a highly lucrative industry, with few barriers to entry except for renting space and hiring a couple teachers.

Other losers on Monday in Hong Kong include Koolearn Technology Holding HK:1797, down 33.5%, and Tianli Education HK:1773, ending off 29%.

The new guidelines for tutoring come from the very top: China's cabinet, the State Council, as well as the central committee of the Chinese Communist Party. The Chinese government hopes to curb the runaway cost of raising children, with Chinese citizens still reticent to have more than one child despite the lifting in 2016 of the draconian one-child policy imposed in 1979.

Married Chinese couples can now have three children, the Communist Party announced at the end of May. China's latest figures for population growth, at 5.4% over the last decade, are the slowest on record. It is likely China's 1.4 billion population will soon start to shrink. Women are having on average 1.3 children apiece, a fertility rate lower than the 1.38 rate in Japan.

In Hong Kong, it costs just under US$1 million, or US$937,000 to be precise, to raise a child through university, if you include a moderate amount of external tutoring and education at a mid-price international school. That's according to this calculator from the nonprofit Bauhinia Foundation.

Pay rules ding food delivery outfits

With the food-delivery operators, the new pay guidelines were issued by the stock watchdog, the State Administration for Market Regulation, with the backing of six other agencies.

Meituan shares dropped almost 14% by the Hong Kong close. Its backer, Tencent Holdings TCEHY, fell 7.7% and is also contending with an order issued Saturday barring it from signing exclusive music copyright deals. The WeChat operator's New York-listed spinoff Tencent Music Entertainment (TME) fell 6.9% on Friday and will be one to watch for further selling this week.

The Hong Kong listing of Alibaba HK:9988 fell 6.4% on Monday. Its Ele.me app is the second-most popular food-delivery app in China, with it and Meituan snaffling almost all the business there is.

Tencent, Meituan and Alibaba saw the heaviest trading in Hong Kong on Monday, topped by Tencent, with US$5.3 billion of shares changing hands.

The CSI 300 index of the largest companies in China sank to its lowest level of the year. Chinese stocks fell all morning to leave the index down 3.2% at the close and off 5.5% in 2021.

In Hong Kong, the Hang Seng Index fell 4.1%, with Chinese large-cap selling leading the way. That takes the benchmark to levels last seen in November 2020.

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At the time of publication, McMillan had no positions in the stocks mentioned.

TAGS: Regulation | Investing | Consumer | Food & Drink | Technology | E-Commerce | China | Real Money | Global Equity

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