The 2021 Education Reform in China

image source : salinger / Pixabay

 

The 2021 Education Reform in China

 

From investment perspective is it all sell now or are there still opportunities in this sector?

It looks like the reform reached its final stage and it’s a strict one. First and most important thing to understand is that the force from profit oriented to non-profit orientation change refers to tutoring services and not private schools. Tutoring services offer education in different subjects after school, weekends and/or in holidays. These mostly referred to as K-12 schools. 

Basically the biggest concern was that children have overloaded and exhausted and parents have had huge financial burden on their shoulders because of the expenses on these services. In China, parents’ first priority is their children education, almost at all cost which basically means many years of hard working in the schools to finally reach and do the hard ‘gaokao’ exam. This exam have a very strong impact on the childern’s career and future.

Of course, there are other articles that regulate this industry but the aforementioned is probably the most important one.

Others regulations ie. :

- only Chinese nationals can run companies like these including private schools (K-9)

- companies have to be Chinese (so probably the companies which have registered off-shore address like Cayman, might have to move to Chinese territory but it's another question if their share registry office is in the Cayman but the actual Head Office etc. are in Chinese Territory...it's still something to clarify)

- only Chinese educational books can be used in the elementary education

 

Why was this regulation or as Western media likes to call it "crackdown" happened?

- Due to the one-child policy, which has already been stopped, China is facing a demographic issue.

- Raising kids have become very expensive, mostly because of the extra educational costs, so people don’t want more then one child and young people are hesitating much more before having a child/childern due to these high costs.

- Children are exhausted, that can result burned generation in the society, meaning that basically those flames that should burn strong will be weak and faded. In other words undermotivated young generation is a big problem.

The other side say that it’s just another act to control everything and ruin private companies. If you you look into this statement objectively you might see that it makes no sense really. 1. The CCP already controls everything and it’s not a secret or something, that's the system in China that's how things work. 2. What would they really benefit from ruining private companies in an industry that they already control anyway. 

China's policy is to let people/companies make money but if an industry grows too quick and/or too big it can cause distortions in the society and also in the economy. So keeping the healthy balance is important. 

This educational regulation is basically puts...

1. solving issues in the society
2. not letting people going into large debt
3. take off a heavy burden from the young's shoulder and also their families

...ahead of companies and shareholder profit. Altough in the short term it might be painful for stocks but in the mid/long term it looks like a very wise decision and definetely benevolent for the future. Altough this industry is over $100 billion (100⁹) which is a huge amount of money but the damage it can cause without regulations would be tremendously higher with insanely indebted parents and undermotivated young people and deep demographic problems. In my opinion this is a good decision and just in time.

Also it has been planned since 2019, but now everyone suddenly got surprised and there was a strong sell-off (not educational stocks only) in the Hong Kong stock market.

Just as always, emotions dictate in the short-term. I’m not saying that tutoring stocks will rise or even go back up where they were before...indeed...but the overall sell-off was an overreaction and I think it basically created opportunities for investors. It might not be over just yet as more regulations can come in other sectors and also the Western media does its job to make these decisions look much worse and in  a negative aspect but the long-term prospects are shining.

In this sell-off I bought shares in Wisdom Education 6068.HK (yes, education), JD Health 6618.HK and Aoyuan Healthy Life 3662.HK.

I guess there is more to the downside so planning to invest more later.

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