The Chinese regime recently imposed strict regulations on after-school education institutions, in a bid to stop paid tutoring services offered by teachers for core school subjects. The news caused panic among investors, leading Hong Kong and U.S. education stocks to plummet.
After Chinese authorities imposed the new regulations, Hong Kong shares fell by 1,105 points on July 27, with education and technology shares being the hardest hit. Mike Sun, a U.S.-based senior investment adviser, told the Hong Kong Epoch Times that the sharp drop in Hong Kong stocks that day was a panic sell-off. He added that the two-day sell-off was mainly due to a policy shift by the Chinese Communist Party (CCP), which led investors, including Wall Street, to adjust their investment direction.
Beijing’s Regulatory Crackdown on Education Shares
On July 23, according to a document verified by Reuters, Beijing intends to force tutoring institutions to register as a non-profit and prohibit local governments from approving new tutoring institutions.
On July 24, China’s Ministry of Education officially released the document that outlined new rules on after-school tutoring institutions, titled “Opinions on Further Reducing the Burden of Students’ Homework and Off-Campus Training at the Compulsory Education Stage.”
The rules bar primary and middle school teachers from carrying out for-profit tutoring on core school subjects.
Beijing imposed other strict rules such as tutoring institutions are prohibited from raising capital through the stock market; listed companies are prohibited from investing in tutoring; foreign investors are prohibited from investing in tutoring businesses through mergers and acquisitions, and setting up franchises.
Hundreds of Billions of Dollars Lost
On July 23, the U.S. stock price of New Oriental Education & Technology Group Inc. (New Oriental) was slashed, down by 54 percent. Compared to its peak stock price on Feb. 26, New Oriental’s U.S. stock price fell by more than 85 percent, and its market value evaporated by $29.2 billion by July 23, according to Chinese media Sina.
On the same day, three Chinese tutoring company giants listed on the New York Stock Exchange (NYSE)—New Oriental, TAL Education Group, and Gaotu Techedu Inc.—saw their market value evaporate by nearly $17 billion in an instant, driving China Concepts Stocks down, according to Chinese media STCN.
Beijing’s heavy crackdown on education enterprises is the same as the previous crackdown on Didi and Alibaba, and also a seizure of wealth and resources from private firms, according to Liao Shiming, a China affairs commentator in Hong Kong.
The CCP will not give up its control over education out of concern for the stability of the regime, Liao said.
Investment Adviser: Wall Street Adjusts Investment Strategy for China Concepts Stocks
China’s new regulations ban tutoring companies from making profits, raising capital, or going public. The “worst-case became a reality,” wrote JPMorgan Chase & Co. analysts, in a note dated July 24, adding that “it’s unclear what level of restructuring the companies should undergo with a new regime and, in our view, this makes these stocks virtually un-investable.”
On July 23, JPMorgan Chase lowered its price target for New Oriental, a China Concepts Stock, in the education sector from $19 to $3.50, according to Sina.
CITIC Securities said the education training sector for kindergarten and junior high school will enter a prolonged “rectification period,” while Industrial Securities warned investors to avoid all education-related stocks, Chinese news portal Sohu reported.
On July 16, Yi Huimann, chairman of China Securities Regulatory Commission, said that the development of China’s capital markets has always had a “red bloodline,” Sina reported. “Red bloodline” refers to communist capital.
“This statement means the future of China’s capital market players can only be the CCP, the red capital,” senior investment adviser Mike Sun said, adding that “Wall Street investment banks have been well aware and adjusted their strategies for China Concepts Stocks. … Due to the uncertainty of the CCP’s policies, Wall Street has chosen to withdraw its capital to avoid the risks.”
Under the Biden administration, “U.S.-China relations have entered a phase of ‘strategic ambiguity’ and now the Chinese and Hong Kong markets are bound to experience some sort of shock,” Sun said.