Stocks in Chinese tutoring firms tumbled Monday after Beijing imposed new rules requiring companies to register as non-profit organizations, effectively wiping out business models in the multibillion-dollar sector, with analysts saying the groups were essentially “uninvestable.”
Officials said Saturday they will stop approving new after-school education institutions, while all existing ones must now register as non-profits, as they warned that the industry had been “hijacked by capital.”
The private education sector was worth $260 billion in 2018 according to consultancy and research firm LEK Consulting, driven by China’s hyper-competitive kindergarten-to-university education system in oversubscribed cities.
While the move -– which also bans teaching on weekends and during holidays – is aimed at reducing pressure on children, parents and teachers, it is a gut punch to the tutoring industry, which was reflected in Monday trading.
Shares in New Oriental Education & Technology Group Inc plunged as much as 40 percent in Hong Kong, mirroring Friday’s record 41 percent fall that came as speculation about a crackdown spread on social media.
Its US-traded shares shed 54 percent.
The company said in a statement on Sunday that it expected the new measures “to have a material adverse impact on its after-school tutoring services related to academic subjects in China’s compulsory education system.”
Another firm, Koolearn Technology Holding Ltd dropped as much as 35 percent, while China Maple Leaf Educational Systems fell 16 percent.
New-York listed TAL Education Group fell 71 percent on Friday.
Analysts say the fallout from the new rules could jeopardize listings.
“It’s unclear what level of restructuring the companies should undergo with a new regime and, in our view, this makes these stocks virtually uninvestable,” said JPMorgan Chase & Co analysts in a note dated Saturday.
The crackdown resembles authorities’ moves to rein in China’s tech giants, taking aim at monopolistic behavior and imposing huge fines against firms.
On Saturday, the market regulator said market heavyweight Tencent had violated antitrust laws, compelling it to relinquish its exclusive music label rights and prompting the company’s shares to fall more than seven percent Monday.
China’s for-profit tutoring sector has faced heightened scrutiny in recent years, with excessive workloads and prohibitive costs of a “good” education coming under the spotlight.
The cost of education has also been cited by many young Chinese as a reason they are unwilling to have more children, even after China formally allowed all couples to have three children this year in an effort to stave off population decline. Bloomberg News contributed to this story.