China has imposed wide-reaching restrictions on the country’s for-profit schools and after-school tuition providers, stirring concern among British independent schools with mainland offshoots.

New regulations, which take effect on 1 September, will prevent individuals and private organisations from acquiring schools providing compulsory education, which in China covers the first nine years of education.

Foreign-owned entities will also be barred from owning or controlling private schools providing K-9 education.

Meanwhile, the teaching of foreign curricula will be halted in K-9 grades – and providers of compulsory-aged schooling will be prevented from establishing private schools or converting themselves into for-profit institutions.

The changes could spook British independent school operators that have launched branch campuses in China via franchise deals with local partners, under which they receive management fees for lending their brand and educational expertise. These structures – which encompass K-9 grades at all-through schools – allow overseas operators to extract profits from China’s lucrative yet tightly regulated private school market.

One market observer with deep experience in the sector, who spoke to EducationInvestor Global on the condition of anonymity, said that the new laws will make it more difficult for overseas-based independent school brands to operate in China’s compulsory education sector.

“Personally, I think though it will almost be impossible for any independent school brand to operate successfully in the private K-9 space for local students. All management fees will be banned, particularly to foreign entities,” the person said.

Edward Slade, a corporate finance advisor to international education companies, who has experience in China’s K12 sector, said in a LinkedIn post: “If bilingual international schools with British brand names really cannot teach anything other than the CCP [Chinese Communist Party] curriculum in grades 1-9, then discerning parents will send their kids offshore to board at a younger age. This is great news for UK, US, Canadian and (eventually) Australian boarding schools, who will have to cope with a much more cosmopolitan mix of students.”

The new law is “stricter-than-expected for compulsory education schools (K-9 schools), especially in the complete ban of connected party transactions, and K9 private schools can’t be controlled by agreement,” US investment bank Citi stated in a research note sent to clients. Citi said it expected much of the K12 players’ revenues and profits to come “under challenge” due to the new law.

In response to news of the new law, publicly listed operators of schools in China saw their share prices slide, exacerbating a downward trend witnessed in recent months. Maple Leaf Educational Systems is down 20% year-to-date, Bright Scholar Education is down 30% over the same period, and Wisdom Education International Holdings is down 37%.

Just days before the new regulations were officially announced, Reuters reported that China is framing “tough new rules” designed to clamp down on the country’s booming tutoring industry in a bid to ease pressure on school children while boosting China’s birth rate by lowering family living costs.

The regulatory changes are being drafted by China’s Ministry of Education, according to the report, and will target before- and after-school K12 tutoring providers.

Reuters’ report states: “Under the planned rules, on-campus academic tutoring classes will be banned, as will both on and off-campus tutoring during weekends, two of the people said. Regulators will also clamp down on off-campus tutoring, in particular for English and math, they added, restricting class times on weekdays.”

Tencent-backed Yuanfudao has reportedly put on ice plans to raise around $1 billion in response to the impending regulatory changes.

Shares in New York-listed New Oriental and competitor TAL, both after-school tuition providers with large networks of centres, as well as online divisions, have fallen 23% and 26%, respectively, this year.

Date published: 19 May 2021

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