Bloodbath for Chinese Stocks as Government Cracks Down on Private Tutoring
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- Asian indexes dipped amid increased concerns about China’s overly hostile regulatory actions.
- Private tutoring companies no longer permitted to raise capital or profit from their activities.
- Other industries including food delivery, real estate, and technology remain under pressure.
Asian stock indexes experienced a sharp downturn during today’s session as the Chinese government has ramped up its efforts to crack down on multiple sectors of the economy including education, real estate, and technology.
Worst single-day since May 2020
Hong Kong’s Hang Seng Index closed today’s session with a 4.1% drop – its worst single-day downtick since 21 May last year – while the Shanghai SE Composite Index dropped 2.3% as well after upcoming strict regulations toward the country’s private tutoring sector were confirmed by government officials during the weekend.
Some of the most prominent names that have dragged Asian indexes lower include Meituan, the country’s largest food delivery service, as the government is expected to push new legislation that will aim to protect riders hired by the company amid concerns about their working conditions and compensation.
A sad day for the private tutoring industry
Meanwhile, companies in China’s privileged private tutoring industry were under fire today as the government officials confirmed measures that will prevent them from making a profit and raising capital via the stock market.
Authorities have been warning for months that they had been scrutinizing the sector’s rising costs and the impact that it has had on the country’s birth rates as parents have felt tremendously pressured to keep up with the pace of private tutoring prices as a way to help heir kids in thriving in an increasingly competitive academic environment.
Shares of companies like New Oriental Education & Technology Group, Koolearn Technology Holding, and Scholar Education Group dropped precipitously in Hong Kong this morning, losing as much as 47%, 33%, and 45% respectively amid the news.
Capital investments and profits no longer on the table for tutoring companies
Among the restrictions introduced by the government to this once thriving sector, China has barred the inclusion of private tutoring as part of school’s core subjects while also restricting investments made by foreign investors into the sector.
Moving forward, only non-profit institutions will be allowed to offer tutoring services as part of the curriculum while existing online tutoring firms will be subject to increased scrutiny.
Even though the official documents that will fully describe these restrictions have not been released yet, sources and preliminary drafts have already been circulating and rumors have been confirmed by officials within the Chinese government.
The move is expected to send China’s $120 billion private tutoring market on a downward spiral, with estimates from Citigroup anticipating a drop of as much as 70% in the revenues brought in by top firms in the sector.
Real estate and technology are also facing increased regulatory pressures
The internet sector in China has also been subject to increased regulatory scrutiny going from e-commerce players like Alibaba (BABA) to ride-hailing companies like Didi Global (DIDI), whose shares plunged only two days after the company went public in the United States after the government announced that it launched an investigation about the company’s data management practices.
These efforts to reshape the country’s business landscape seem to have accelerated after officials from Xi Jinping’s administration halted the widely-expected initial public offering of Ant Group – the owner of Alipay and one of China’s largest financial companies – last year in a move that included the temporary disappearance of one of the country’s top business figures, the billionaire founder of Alibaba Jack Ma.
Other sectors that have suffered from China’s increasingly hostile stand toward private businesses include crypto mining companies, whose activities were banned amid concerns about their elevated energy consumption levels.
Moreover, companies within the real estate segment have also suffered lately as government authorities have been planning to step into a seemingly overheated housing market by proposing higher interest rates for mortgages while cracking down on alleged corruption and malpractices that they claim have been plaguing the sector for years.
Shares of Evergrande, one of China’s largest home builders, declined 7.6% this morning while they accumulate a 54% loss so far this year as they continue to be in what seems to be an unstoppable downtrend.
What to expect from Chinese stocks moving forward?
The iShares MSCI China ETF (MCHI) shows the extent of the downturn that Chinese stocks within the country have been experiencing as the fund has declined almost 12% since the year started while its stock is trading 27% below its 52-week high.
Meanwhile, even though these latest steps from the government to regulate multiple industries have been a concern among market participants, certain analysts with close knowledge of the region’s dynamics have stated that these sectors were largely unregulated and they have been in regulator’s crosshairs for years.
In this regard, Qi Wang, the Chief Executive of Hong Kong-based investment fund MegaTrust Investment, told CNBC:
However, others have emphasized that even though increased regulation was expected, the extent of the crackdown has a political scent that is hard to ignore.
“While there’s absolutely a regulatory case for why Beijing is bringing more scrutiny on these companies, it’s inseparable from the political case”, said Jude Blanchette, an expert in Chinese matters for the Center for Strategic and International Studies.
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