China’s crackdown on education providers sends stocks tumbling. JPMorgan says the new rules could make the sector ‘un-investable’.

Hong kong hang seng futures trader
A trader rises above the crowd to get his order in July 4, 1997 during a dramatic morning session at the Hong Kong Futures Exchange. REUTERS
  • Chinese education stocks tumbled on Monday after officials announced new rules for the sector.
  • The regulations effectively ban private tutoring, a major sector in China’s competitive education system.
  • JPMorgan analysts have said this could make Chinese education stocks ‘un-investable’.
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Chinese education stocks tumbled on Monday after officials confirmed that new regulations would be put in place that ban after-school tutoring businesses from making a profit.

The competitive nature of China’s education system has driven demand for private learning and tutoring for students, spurring immense growth in the sector. After news of the new rules emerged, education stocks dropped steeply on Monday, dragging down Asian equity markets.

On the Hong Kong stock exchange, New Oriental Education and Technology Group shares closed 47% lower at HK$16.00 ($US2.06 ($AU3)), having lost 40.61% on Friday, while Koolearn Technology Holding finished down 33% at HK$3.94.

In early-session trading on Monday, New York Stock Exchange-listed shares of New Oriental and Tech were down about 22% at $US2.27 ($AU3) each, having closed the session Friday at $US2.93 ($AU4), a decline of ab ot 54% on Thursday’s close. On the same index, TAL Education Group’s stock fell about 15% to $US5.08 ($AU7), after plummeting 71% on Friday to $US6 ($AU8) a share.

The education sector’s slide pulled on equity markets in China and Hong Kong on Monday. The Shanghai Composite closed 2.3% lower, while Hong Kong’s Hang Seng Index ended the trading session with a 3.9% decline.

On Friday, leaked information emerged on new rules that would effectively ban for-profit tutoring in China’s core school subjects. The rule changes mean no new licenses will be granted to after-school learning businesses, and existing ones must convert to nonprofit organizations, officials confirmed on Saturday. They also impose new limitations on initial public offerings, advertising and content offered by tutoring companies.

JPMorgan analysts said the rules as put forward would be detrimental to China’s after-school education industry.

“While details of measures remain debatable, the document, if true, will effectively make the sector un-investable in our view,” they wrote in a note published Saturday. “We think it’s best to avoid the sector until clarity emerges.”

But the analysts pointed out there could be loopholes in the rules, and that further clarification is needed in terms as to where the policies will apply and to which specific age groups and teaching formats. Stocks could therefore rally, they said.

Even so, the JP Morgan analysts still view the tightening of regulations as a push by the government to reduce the size of the tutoring market in the long term

“As such, we’d probably use the rebound – even if it happens – to cut (remaining) positions.” they said.