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China bans foreign investment in education, two U.S.-listed Chinese stocks fall down the wall

By Yashasvini on Jul 23, 2021 | 03:33 AM IST

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Two U.S.-listed Chinese companies are the latest in line to face the wrath of Beijing after the Chinese government announced a ban on foreign investment in the education sector.  shares fell 58% and  shares dropped by 56% after China ordered all tutoring companies to go non-profit.

China’s top executive body, the State Council, and the Chinese Communist Party’s central committee issued a document on July 19 stating that after-school training institutions are banned from raising money through stock listings, while foreign capital cannot invest.

Reports of this notice have led to a mass sell-off in China’s $120 billion private tutoring industry resulting in the sharp plunge in shares of New Oriental Education and TAL Education.

All institutions offering tutoring on the school curriculum will be registered as non-profit organizations, and no new licenses will be granted, according to the document, which says it was distributed by China’s State Council, or cabinet, to local governments and is dated July 19.

Beijing has also banned the variable interest entities (VIE) process, used by Chinese companies to set up an offshore company that can be listed in overseas markets. The offshore company makes a deal with the local Chinese company’s owner, to obtain 100% economic interest in that business. This method has been utilized by mostly internet firms that set up bases outside China's legal jurisdiction, allowing them to raise capital offshore.  

CNBC reported the circulation of another policy document of the same name, referring to lowering costs for after-school tutoring. It banned after-school tutoring businesses from advertising and said they could not operate during public holidays, weekends, winter and summer vacations. It was among five approved at a May 21 meeting chaired by Chinese President Xi Jinping. 

However, TAL education issued a statement about the report on PRC regulators considering a new set of regulations for after-school tutoring services related to school subjects taught in China's compulsory education system. The company stated, “The regulations have not been published, and the Company has not received official notification of the regulations. It's the Company's policy not to comment on market speculations.’ 

U.S. capital markets have helped 34 Chinese companies raise a record $12.5 billion this year. They have continued to be an excellent source of funding for technology companies looking to tap into the liquidity pool but the geopolitical tensions between Beijing and Washington have majorly affected U.S.-listed China companies.

At 2:07 PM ET, TAL education was trading at $6.66, share apiece, down 67.52 % on the New York Stock Exchange (NYSE). At 2:13 PM ET, New Oriental Education & Tech Group was trading at $2.66, share apiece, down 58.52 % on the NYSE.

Online education stocks in Hong Kong also stocks also plunged collectively. As of the close of trading, New Oriental closed down 40%, and its stock price fell in midday, setting a record for the largest one-day decline in history; New Oriental Online closed down 28%. Sigle Education fell nearly 29% while Excellence Education Group fell 21%.

In its national five-year development plan adopted in March, Beijing stated that authorities aim to “fully implement” a registration for stock issuance and improve the “quality” of listed companies while strengthening efforts to ensure national security and crackdown on monopolistic behavior.

Beijing has since then intensified its crackdown on China’s huge internet sector, which has rattling investors. The Chinese government launched a cybersecurity investigation into ride-hailing firm Didi Global just two days after it raised $4.4 billion in a New York IPO. Since then the stock has been painted in red, on Wall Street.

Picture Credits: Getty Images 

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