China’s “Bloodletting” Reform to Release Tutorial Burden & Pain

Published September 2021

Guidelines restricting after-school tutoring released by the General Office of the State Council in China in July caused stock prices of Chinese education companies to plummet, with some losing 70% of their value overnight.

Under the new regulations, no business licenses will be granted to core curriculum training providers, and the ones already in business are required to be converted to not-for-profit. Listing and any other form of capital raising is banned, and employment of foreign tutors has also been prohibited.

The reasoning behind this unprecedented policy is complex:  currently many families invest a significant proportion of their income in after-school tuition and struggle to support even one child, despite the recent introduction of a three-child policy. The Chinese government is desperate to reverse its falling birth rate and minimise the effects of an ageing population. Additionally, although China has always tightly controlled curricula, this entirely non-state-owned training sector makes it harder for the government to regulate and monitor educational progress.

The Chinese media listed some facts and numbers to justify this harsh decision:

  • There are over 490,000 education and training businesses in China. Even with the onset of COVID, since early 2020 another 130,000 training entities have been established.  There are now twice  as many private tutoring businesses as schools in China.
  • According to the Hurun Global Rich List, among the top 19 education entrepreneurs, 12 are Chinese; out of the top 8 education enterprises, 7 are from China.
  • The Chinese education and training industry is more than twice as profitable as in the US. Its high growth potential and profitability have attracted significant capital.
  • The revenue of top curriculum training providers has exceeded the combined revenue of top Chinese universities: TAL exceeded Peking and Zhejiang Universities combined, New Oriental exceeded Fudan and Jiaotong Universities combined.
  • It is normal for the principal tutors in these training companies to receive million-dollar packages paid by families. Many tutors also hold teaching positions in public schools at the same time or quit their public school position to enjoy a much higher paid job.

Moving forward, investment in training and education will be subdued while both international and domestic investors anxiously look for the next arena to achieve their ROI goal. Goldman Sachs, already having downgraded Chinese education stocks in early June, forecasts that China’s educational training industry will shrink a further 76% (US$100billion).

The policy change has created a huge amount of tension between the children’s families and tuition company operators. Families that paid large lump sum fees for private tutoring, some only days before the new policy was announced, quickly found that the classes they had paid for had been cancelled and no one was willing to come forward to discuss a refund. Operators have had no choice but to overhaul their offerings, downsize and change the fundamentals of their businesses.

VIPKid, known for providing language training courses through its international tutor network, issued a statement saying it will stop sales of training packages involving international tutors from 7th August 2021. Other providers are exploring the use of AI to replace foreign tutors or are switching to teach non-core subjects in arts and sports.

Some provinces/municipal governments have further banned training companies from receiving direct payments. All payments must instead go through a trust account, allowing the state to take control of pricing and payment terms, thereby minimising insolvency risks. To fill out the surplus time after-school, the Ministry of Education issued a subsequent document requesting schools to provide an additional two hours of after-school activities, though there is no detail on how schools and teachers are to implement this in addition to their current responsibilities.

Nanjing Normal University
Prof. XIANG Xianming

Can this reform truly achieve the goal of “reducing the pain and pressure” for students, families and society as a whole? Professor XIANG Xianming of Nanjing Normal University described the education reform process as “a blind man feeling an elephant”. He is concerned that neither the policies nor their implementation has been able to identify the root of the “learning pain and financial burden” – is it social, political or educational? He believes that as long as the problem cannot be identified, all countermeasures will be futile.

40 years ago South Korea underwent a similar “training sector cleansing” with the same intention. Yet today South Korea remains a society committed to after-school training:  the reform was only seriously enforced for a few years before gradually loosening up. Will China go down the same track? A Chinese proverb might offer some insight: “To turn in the direction you want, you must first oversteer with the steering wheel, then let it reset to the perfect position”.

Over 75% of Chinese K-12 students living in urban areas participate in after-school curriculum training. The MoE criticized the current situation where “capital is hand-in-hand with education and training industry players”. Curriculum training has been “bombarding” society and destroying the relationship between education and the public.

This “bloodletting” policy is not a small wound that can be simply bandaged over by investors, business operators or individuals who have operated in the industry for decades. Hundreds of thousands of bankruptcies are expected and millions will lose their jobs. Time will tell whether this will return education to any sort of “normality”, or if it will only usher in a period of short-lived industry deceleration.

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