Why China’s Cracking Down Now on Education-Tech Firms: QuickTake

China’s private education companies have for years been the darlings of investors from New York to Shanghai, building a $100 billion industry on the promise of the world’s largest and arguably most-competitive schooling system. Then suddenly they got caught up in the Chinese government’s sweeping efforts to rein in the country’s technology giants. The regulatory clampdown, ostensibly in the name of consumer protection, has walloped listed companies and forced startups with big-name backers like Tencent Holdings Ltd. to mothball plans for multibillion-dollar initial public offerings. The industry’s rise, and potential fall, hinges on two of the most powerful — and anxiety-inducing — forces in China today: the pursuit of wealth and status, and the Communist Party’s enduring obsession with maintaining social order.

Blame it on the Gaokao: the national college admission test, administered in June, that decides which universities one can attend, thereby determining the fates of millions. It’s considered a playing-field leveler for those aspiring to move up the social ladder. Only 1.9% of nearly 11 million students who sat for the Gaokao in 2020 made it to a top-tier institution like Peking, Fudan or Tsinghua universities. Preparations begin many years before, in some cases as early as pre-school, as parents try to give their children every possible edge. Ironically, years of government entreaties to lessen the burden of homework may have driven anxious parents to private companies. After-school tutoring flourished, supplemented by online classes that in turn exploded during the Covid-19 pandemic. China’s market for private tutoring is expected to almost double to 1.17 trillion yuan ($183 billion) in 2023, from 619.1 billion yuan in 2019, according to Macquarie Research.

China’s Education Boom

Venture capital funding for education technology startups surged last year

Data: Preqin

2. What do the regulators say?

That some tutoring firms exploited parental paranoia. A marketing free-for-all — sometimes with false ads and misleading campaigns — funneled millions of kids into mind-numbing virtual classes with uncertain benefits. As student numbers exploded, venture capital investors who didn’t want to miss out joined Alibaba Group Holding Ltd., Tencent and SoftBank Group Corp. in doling out more than $10 billion of funding last year alone. That exuberance alarmed regulators, who feared tutoring firms empowered by big capital would only grow and exacerbate problems. President Xi Jinping lashed out at the industry’s “disorderly development” at a meeting in May, intensifying a clampdown from agencies including the powerful education ministry.

3. What’s the bigger picture?

Yung A. Elizabeth

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