School’s Out

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What's going on?

China cracked down on the country’s for-profit education industry over the weekend, and this is one lesson investors won’t soon forget.

What does this mean?

The $100 billion for-profit education industry peddles the kind of extracurricular tuition that’s seen as a surefire way for China’s kids to get ahead of their classmates. It’s also one of the fastest-growing markets in the country, which is why it’s been attracting billions from tech heavyweights like Alibaba, Tencent, and ByteDance, as well as from investment firms like Tiger Global Management and SoftBank.

Or rather, it was one of the fastest-growing markets in China: that might not be the case now the government’s issued new rules banning education companies from making profits, raising capital, going public, and much more. It’s all part of a deeper backlash against an industry that the government accuses of overloading kids with work, burdening parents with expensive fees, and widening inequalities across Chinese society.

Why should I care?

For markets: Education stocks learn the hard way.
Former stock market darlings TAL Education Group, Gaotu Techedu, and New Oriental Education & Technology Group all saw their share prices fall on Monday, with the latter’s collapsing almost 50%. That helped drag down a wider index of Chinese education stocks by 10%. But spare a thought for the backers of unlisted companies too: the huge stakes they own aren’t exactly worth much now that these companies aren’t able to debut on the stock market.

The bigger picture: A pattern is emerging.
The stock market carnage went beyond just education companies, mind you: this controversy has got investors worried that more clampdowns on the country’s fastest-growing sectors are inevitable – especially since it’s come hot on the heels of a broader assault on Chinese tech firms. That’s not an encouraging sign, and growth-hungry investors duly sent the Chinese stock market more than 3% lower on Monday.

Originally posted as part of the Finimize daily email.

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