Chinese education companies have been one of the driving forces behind the evolution of edtech, which has accelerated due to the pandemic.

Yuanfudao, VIPKid, and Zuoyebang have become familiar examples of the growing role of private companies in China’s education system. That has been good for their funding and valuations, which have been rising relentlessly. Yuanfudao, a homework tutoring app founded in 2012, is now worth $15.5bn and vies with India’s Byju’s (currently worth $16.5bn) for the title of the world’s most valuable edtech company.

In the US, three US-listed Chinese education companies had seen their market valuations rise until a couple of weeks ago when it became clear that Beijing’s edtech market regulator had sharper teeth than anyone expected. The regulatory crackdown on after-school tuition (AST) companies in China has changed the edtech landscape.

Profits ban shifts investment balance in China

China’s new regulations will ban companies that teach school curriculum subjects from making profits, raising capital, or listing on stock exchanges worldwide, thus preventing them from accepting foreign investment.

That will potentially shift the future investment balance towards US and Indian edtech companies whose growth has been equally swift, particularly in the case of Byju’s.

China’s sweeping overhaul of its $100bn private education industry will eliminate foreign investors from much of the sector. It may lead to billions of dollars of investment from groups such as Tencent, Alibaba, Sequoia, SoftBank’s Vision Fund, and other private equity firms being written down or written off. The outcome will be a shrinking sector.

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The expected pathway for China’s education companies has been acquiring significant venture capital funding before filing for an initial public offering (IPO), ideally in New York, or alternatively Hong Kong. That has been the route for the three largest US-listed groups, TAL Education, New Oriental Education, and Gaotu Techedu.

But Gaotu’s shares have crashed from $149 in January 2021 to $3.19 on 30 July, losing founder Larry Chen his billionaire status.

Chinese after-school tutoring company Zhangmen filed for an IPO on the New York Stock Exchange (NYSE). Its shares rose on the first day of trading from $11.50 to nearly $17, creating a market capitalization of $1.8bn. After news of China’s crackdown emerged, Zhangmen’s market capitalization tumbled at one point on 27 July to $4.29, giving a market capitalization of just $628m.

The regulatory crackdown reflects a backlash against the edtech industry, as excessive tutoring adds hours to children’s study time and burdens parents with expensive fees.

First fintech, now edtech

There is perhaps another reason behind the crackdown. One of Chinese president Xi Jinping’s top priorities is boosting a declining birth rate. Chinese parents spend an average of 120,000 yuan ($17,400) a year on extra-curricular tutoring for their children, believing that a good education will help them climb the social ladder. Some will pay up to 300,000 yuan ($43,500), according to the Chinese Education Society. But the Chinese government is concerned that the financial burden on parents has become excessive.

China’s current regulatory crusade on edtech follows similar crackdowns that began with fintech and then hit ride-hailing, with Didi Chuxing suffering the regulator’s ire.

China’s clampdown doesn’t seem to concern its public: the new non-profit rules have gained popular support. But it has brought China’s once high-flying edtech start-ups down to earth, creating huge potential losses for those that invested in them and uncertainty over the industry’s long-term future.