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Online Education in China

Online education has been a profitable and growing business. China's government has slammed the brakes on that.
August 12, 2021

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China's state and families spend big on education. Governments spent about 4% of the nation's GDP on schools in 2019 (compared to 3.2% in the U.S. in 2017). Private classes and tutoring is a US$120 billion industry in China. As technology has improved and with the shift to online learning during the COVID-19 pandemic (which we covered in May 2020), the online education market grew to almost US$40 billion in 2020. That same year, investors poured US$8 billion of investment into online education companies in China. One startup, Yuanfudao, was valued at US$1.5 billion.

More than 75% of 6-18 year olds attended after school tutoring classes in 2016 and it isn't cheap. Parents spend an average of US$17,400 a year on tutoring for six hour a weekwith some parents spending US$43,500 a year. This disadvantages children in rural areas where the average annual income is just US$2,635.

In an effort to ease the pressures of increasingly competitive educations on children, Chinese regulators have banned for-profit tutoring in core subjects. They have also banned tutoring for children under six years old and on weekends, public holidays, and school vacations. In addition to spending less time in font of textbooks, this will also ease the financial pressures of children on families and encourage a higher birth ratewhich is necessary to support China's aging population.

The restrictions stopped the flow of money into these companies. The news triggered share prices of publicly traded tutoring firms to drop over 50%. New Oriental, an English-language and exam tutoring company, saw shares tumble from from a high of $19.68 in February to a low of $2.18 last Friday. While this is causing immediate changes in the education business, it may be a few years before we see the effects on test scores, student quality of life, and family finances. Together with measures toward tech companies, investors are being reminded that the party-state's priorities will come first.