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Parents and businesses are scrambling because of China's harsh education policy

Parents and businesses are scrambling because of China's harsh education policy

The Chinese government's move to crack down on after-school education companies is raising costs for many parents and throwing millions of jobs into uncertainty. In a country where parents prize a good education, and good grades play an outsized role in determining career opportunities, tens of millions of students across China drown in after-school tutoring courses. This summer will be the last time educational institutions can legally sell tutoring programs.

Since the central government officially released the double reduction policy last month, local authorities in several provinces have ordered private businesses to suspend online and offline tutoring classes for children from kindergarten to 9th grade One of the main goals of the policy is to make it easier for Chinese parents to give their children a good education. The nine years of compulsory education before high school and the call for academic tutoring businesses to restructure as non-profits are included in the guidelines. The policy also prohibits those businesses from offering classes on weekends, holidays, summer and winter breaks, effectively allowing tutoring only on weekdays with a limited number of hours.

Alan Wang, an analyst covering education at Beijing-based asset manager Harvest Fund, said the policy is far beyond expectations. The industry was preparing for some regulations, but it didn't expect an order for restructuring that included a ban on public listings, making the sector not investable according to a CNBC translation. He said that some parents will still pay for tutoring courses they can find.

CNBC interviews across the education industry show that the new regulations shocked parents and left businesses struggling, as millions of employees braced for job losses. That means hourly rates will go up and parents will pay less up-front deposits than if they had gone through an institution, said Zhang, who declined to share her first name with privacy concerns. She said she will not spare any effort to help her children compete for high quality education in China.

The family lives in Beijing's top public school district of Haidian, and the older child, who is set to begin middle school in the fall, spends about three hours a day at online group classes and one or two hours of one-on-one tutoring a week. She studies less than her peers in the district, who study all day or at least half a day during the summer break. A child who just finished the first year of elementary school is spending about half an hour a day on online group classes.

Zhang wanted to enroll her daughter in more offline tutoring classes because she is damaging her eyesight by staring at the screen. It will be nearly impossible because of the latest crackdown. "I feel this approach is kind of one size fits all, and many parents feel compelled to sign their children up so they stand a chance in the highly competitive college entrance exam system."

Luna Cheng is raising her daughter in downtown Shanghai. She paid about 700 dollars for a two-week summer course with about 20 other students and three hours a day on mathematics. It's a lot of money for most households, who also have high housing costs.

According to official data for this year, a 5,000 yuan course is more than 70% of the average monthly disposable income for city dwellers. The data showed that the course would far exceed the average monthly disposable income of rural residents working in the city. The hourly rate of a private one-on-one class in Beijing can be as high as 2000 yuan.

Cheng said she wanted to enroll her daughter in more courses this summer, but she did not want to. Cheng said he was a bit anxious. Cheng estimates that most of her classmates will be studying for physics during the summer when her daughter begins class in the fall.

Cheng is afraid that her daughter will not be able to excel in the new subject without extra studying time after school. Parents in China spend a lot on after-school tutoring because of fear. The market size for China's after-school tutoring for kindergarten to 12th grade students reached over 120 billion dollars in 2019.

The market is predicted to break 1 trillion by the end of the century. The growth was accelerated by the Covid-19 epidemic. The new policy may have adverse effects in the short term, especially since poorer families tend to send their children to tutoring schools only because of peer pressure, according to the lead of the firm's Asia education practice, who spoke to CNBC on Monday.

The future of millions of workers also hangs in the balance, as the consequences reach far beyond business owners and parents. Many businesses will likely be forced to close due to the new policies. According to a report in January by Beijing Normal University and TAL Education, the education service industry in China provides about 10 million jobs.

Citic Securities, a major Chinese investment bank, said in a note to its clients on July 23 that tutoring centers should move to another industry as soon as possible. The "double reduction" is just the beginning, and more policies will come to regulate nine-year compulsory education. A senior employee of 17 Education & Technology Group, a U.S.-listed after-school tutoring company in China, told CNBC the company plans to halve the number of employees.

When the central government released a harsh policy on the sector, the source asked to resign but decided to stay longer to help the company pivot its business. "No one really knows how," he said in Chinese, according to a CNBC translation. Depending on how local authorities implement the central government's regulation and how much the firm depends on income from tutoring students who are kindergarten to 9th grade, other education industry giants are preparing for a 30% to 70% cut in their labor force.

The source said that the ban on tutoring on weekends and summer breaks hurts the businesses since those classes account for more than half of class hours for most privately run after-school tutoring companies. The majority of employees will no longer need to take those courses. According to a report by Chinese financial media, Chen said in a letter to employees that he was very sorry that they had to make a tough decision.

However, Wang, the analyst from Harvest Fund Management, said he did not expect much backlash from potential job losses because the government would likely have already considered employment issues before making the policy decision. Chinese education stocks listed in the U.S. plunged after news of the government crackdown, and lost The earnings report plans of New Oriental and TAL have been delayed. New Oriental, TAL, Gaotu and 17EdTech did not respond to CNBC's request for comment on the story.

Major players like Huohua Siwei, Zuoyebang and Yuanfudao were able to raise billions of dollars during the Pandemic. The "mega unicorns" are reported to have planned to list in the US just before the policy announcement. The companies that went public ahead of the raid are suffering.

17 EdTech was listed on the stock exchange in December with an offering price. Its share price is $1 now.

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