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China’s Crackdown on Ed Tech May Have Little Effect on U.S.

China’s new restrictions to keep educational technology companies out of capital markets threaten to curtail tutoring and other industries, but experts say the changes may have little effect on the U.S. market.

Share prices in China’s for-profit education market plunged last week after officials in Beijing announced broad restrictions to its booming private tutoring sector, sending shockwaves through an industry that had been riding a wave of demand for digital learning services during the pandemic.

According to the new regulations, companies and institutions that teach school curriculums can no longer be for-profit, accept foreign investments or offer tutoring services for core subjects outside of school hours, and foreign entities can’t hold shares in such institutions.

Officials in Beijing have indicated the sweeping regulations are meant to relieve pressure on students and help reverse the nation’s declining birthrate by reducing the financial burden of tutoring costs on parents, and by extension the costs of having children.

The news threatens China’s $120 billion for-profit education industry, prompting selloffs in Koolearn Technology Holding Ltd. and New Oriental Education & Technology Group, as well as U.S.-listed stocks such as Gaotu Techedu and TAL Education Group, according to the Wall Street Journal. China’s education industry sub-index dropped as much as 14 percent last week, with stocks falling between 30 and 40 percent, according to Reuters.

In a statement last week, TAL said it would comply with the government’s “Opinions on Further Alleviating the Burden of Homework and After-School Tutoring for Students in Compulsory Education,” or “Opinion” outlining the restrictions last month.

“The company expects the opinion, related rules and regulations, and the compliance measures to be taken by the company will have material adverse impact on its after-school tutoring services related to academic subjects in China's compulsory education system, which in turn may adversely affect the company's results of operations and prospect,” the statement read.

Though the announcement sent Chinese share prices into a tailspin, Beijing’s new edict could have little effect on business related to ed tech in the U.S., according to John Bailey, a visiting fellow at the American Enterprise Institute policy think tank.

Bailey told Government Technology that the American-based ed-tech industry and investors in for-profit educational businesses have put most of their focus on competing with one another, leaving little room for Chinese and American markets to intermingle during the COVID-19 digital surge.

Bailey said American ed-tech giants like Instructure, creator of the Canvas learning management system used by millions of U.S. K-12 students, have seen consistent growth and continue to profit from billions in federal relief funds awarded to schools for digital upgrades such as virtual learning products.

In this context, Bailey believes Beijing’s regulations will have a “minimal” effect on American online learning investments and company profits.

“They’re two different markets, so in some ways, it won’t really impact what’s going on here in the United States right now,” Bailey said.

“You don’t have too many purely international companies,” he continued. “Most of the U.S. companies I know of are focused purely on capturing and conserving as many kids as they can in the U.S. market.”

According to Steven Gedeon, associate professor of entrepreneurship at Ryerson University’s Ted Rogers School of Management, venture capitalists tend to view China as a wealth of investment opportunities, partly due to its population size and emerging markets.

While U.S.-based ed-tech investors had once viewed China as a place to look for growth, he said those hopes have now been dashed.

“It is certainly true that any U.S. companies or Canadian companies that are offering online tutoring to the Chinese marketplace — that business opportunity is dead to them,” Gedeon said.

Gedeon said foreign investors might begin to think twice about future investments in China as ed-tech companies look to other markets for expansion in the years to come.

“With the stroke of a pen, they can erase an entire industry,” he said. “Anytime you’re doing anything in China, that’s the risk you take.

“You’re looking for growth, and this is the thing with the stock market — it’s not about profitability nearly as much as it is about growth rates,” he added. “China has again demonstrated itself to be a very dangerous, risky place to invest in, either as an investor or as a company trying to grow their revenues. So, you look to other locations.”

Bailey and Gedeon both said regulations in China will likely shift global digital learning investors elsewhere. They may look instead to India’s growing ed-tech market due to its regulations and size, according to Gedeon.

China’s regulations could perhaps encourage foreign ed-tech companies to expand in the U.S. instead of China, where Bailey said there’s still “demand, funding and an easier regulatory environment” for online tutoring and ed-tech services.

“You have companies in India and some companies in China that don’t necessarily serve a lot of kids here in the U.S. Maybe that changes — maybe some of those companies now see the U.S. as the better market to pursue because of all these dollars, because of the demand and because we have, as of now, a better regulatory environment than China,” Bailey noted.

Though such sweeping regulations in other industries could have more drastic implications for U.S. markets, Bailey said the education industry is an entirely different story.

“It’s mostly more of a China story than it is a U.S. story,” he said. “I don’t think it’s going to totally disrupt the U.S. markets.”
Brandon Paykamian is a staff writer for Government Technology. He has a bachelor's degree in journalism from East Tennessee State University and years of experience as a multimedia reporter, mainly focusing on public education and higher ed.