Why Did China Crack Down On Its Ed-Tech Industry?

Authored by Lizzi Lee via TheDiplomat.com,

Beijing’s latest move is a response to long-held public grievances about educational inequality and the resulting pressure to keep up…

The Chinese regulatory authorities have been keeping investors on the edge of their seats this year. Domestic fintech firms were among the first targeted by Beijing. Next came ride-hailing and food delivery. Now ed-tech giants have rounded out the lineup.

To understand the latest development, it is crucial to unpack the chronic love-hate relationship between Chinese parents and China’s private tutoring industry, says Zak Dychtwald, founder of the advisory firm Young China Group. “There’s enormous pressure on parents and children to give their kids a head start and to get them into the best school possible.”

It all starts with the idea of “the project of childhood,” defined as the laser-focused drive to get ahead early in life, where having a leg up early on can define a child’s competitiveness from the middle school market, the high school market, the college and professional market, to the marriage and housing market, before reaching full circle as their offspring undergo the same ritual.

Savvy business minds leaped at the opportunity, creating alluring promises of miracle grade boosters. Marketers tapped parents’ guilt mentality of not giving their kids the best chances they deserve with anxiety-inducing pitches. Scammers prey on low-income households with misleading free trials and deep discounts, which subsequently lock families into expensive multi-year contracts.

On Chinese social media, where grievances about civil society are tightly controlled, signs of dissatisfaction surfaced.

Tracking the emergence of neologisms, China Media Project has identified a fabric of buzzwords in recent years reflecting this mentality. The so-called “996” culture describes the expectation that employees work from 9 a.m. to 9 p.m. six days a week. “Chicken child” (鸡娃), a subtle dig at the tiger mom concept, mocks parents who push their children extremely hard to excel at all costs. The emergence of “little joys” (小确幸) and a “buddha-like” (佛系) lifestyle reflects the conscious choice of a more relaxed, hands-off approach to life, arising from a broad sense of the desperation of “involution” (内卷). This term refers to the meaningless rat race in which “one does not grow or progress but merely spins in place, becoming more and more exhausted in the process.” Then comes “tang ping” (躺平), or “lying flat.”

In April 2021, a short Baidu post titled “Lying Flat Is Justice” emerged. “The stresses of life have been primarily generated by established ways of thinking and by the older generation,” says the post. The post resonated with so many that it created an overnight sensation.

“Gaping educational inequality, along with the perception that you have to enter the rat race of getting ahead, is the single biggest source of anxiety in the Chinese society,” says Yale Law School professor Zhang Taisu.

“People in policymaking circles and intellectual circles understand this. If you see this, then the crackdown seems a natural, long-overdue course correction.”

To Xiaobo Lü, associate professor at the Department of Government, the University of Texas at Austin, the new regulations aim to kill two birds with one stone. “The Chinese central government has been increasingly wary about the role of private capital in the private education sector, or more broadly, the tech sector.”

Still, as with almost all policy changes, there are winners and losers. The entire private tutoring and test prepping industry has been dealt a fatal blow. Reports of large-scale lay offs in the sector have surfaced on Chinese social media. Small-to-medium-sized providers face an existential crisis, expected to fold within a year if the current policy persists.

Tantalizing proposals for reorienting existing business models, including investing in extracurricular programs excluded from the new regulations, have been circulated.

“I think it’s going to be very difficult for them. It’s as if Ford couldn’t make the F-150 [truck] anymore. It’s their core competitive product and 80 percent of their balance sheet that got hit.” says Dychtwald.

But not all is lost, argues Dychtwald. “If there’s ever an entrepreneurial group in the world who is good at adapting, adopting, and evolving at incredible speed, it’s China. Chinese entrepreneurs, in many ways, are products of their ecosystem, where regulation can change on a dime,” says Dychtwald.

“The root of the problem is the widening social inequality, and the privileged and wealthy will come up with alternative ways to maximize their children’s education advantages, such as hiring private tutors to teach at home,” says Syracuse University Sociology professor Yingyi Ma.

A ream of bank think-pieces indicates Wall Street equity strategists are connecting the dots. Instead of tracking the fast-moving economic landscape and profit projections, investors would be better positioned by selling businesses that are perceived to exacerbate inequality, such as education and housing, and buying ones aligned with Beijing’s stated long-term policy goals.

In a speech delivered at the Communist Party’s Central Party School in January, Xi Jinping called on the government to proactively reduce the ever-growing income gaps to improve people’s sense of “empowerment, happiness, and security.” Reiterating the importance of “common prosperity,” Xi “warned it is “not only an economic issue but also a major political issue.”

This might sound like mundane, abstruse Communist jargon until one realizes China has joined the club of capitalist countries with the most skewed wealth distribution. According to a new paper by Thomas Piketty, Li Yang, and Gabriel Zucman, the share of national income earned by the top 10 percent of the Chinese population has increased from 27 percent in 1978 to 41 percent in 2015, while the share earned by the bottom half of the population has dropped from 27 percent to 15 percent.

The crackdown reflects Xi’s broader desire to take China out of its Gilded Age, as well as his preferred method to achieve that via command, argues Yuen Yuen Ang, associate professor of Political Science at the University of Michigan, Ann Arbor.

“He genuinely wants a society that is less corrupt and more equal. And he intends to do so through commands. Have poverty? Command its eradication. Have corruption? Command its eradication. Have unequal education access? Command its eradication,” writes Ang.

While acknowledging that these commands could be highly popular among the lower classes, Ang cautions that no leader can “command social problems out of sight.”

Further, when a government can electrocute an entire industry with a snap of its fingers, investors have good reason to be alarmed. The series of regulatory crackdowns has wiped some $400 billion off the value of U.S.-listed Chinese companies, setting off a fanatic run for exit last week.

“[The authorities] spent much of the summer going after private firms. There is a sense that they want to get everything done in one fell swoop,” says Zhang,

“If you have the gears of the bureaucracy churning in such a way, you might as well take advantage of that momentum.”

Dexter Tiff Roberts, a senior fellow at the Atlantic Council’s Asia Security Initiative, writes in a report: “While the importance of the private sector to China’s economy has not lessened, its status in the eyes of China’s top officials has undergone a real downgrading in recent years, and earlier efforts to make a fairer playing field have stalled.”

Barry Naughton, professor at the University of California, San Diego, and one of the world’s top researchers on China’s economy, cautions that the recent regulatory assaults are part of the great initiative of increasing government control.

“What’s the unifying feature of all these dramatic moves that the Chinese government has taken in the last couple of months? I think the answer is Beijing has decided that it has the ability and wants to even more actively steer the economy than it had before,” says Naughton.

Xi Jinping himself has been unabashed about his desire to contain the unchecked expansion of the education sector. Online education has been “hijacked by capital,” concludes People’s Daily, the paramount CCP mouthpiece.

If one looks close enough, the new raft of stringent regulations against China’s booming private-tutoring industry has long been on the official agenda. Still, to many, Beijing’s most recent abrupt moves feel like unpredictable bursts of wrath.

“China’s volatile style of policymaking… often leads to a policy control mechanism that fluctuates between very lax and very harsh enforcement,” posits Angela Zhang, director of the Center for Chinese Law at the University of Hong Kong, in a new article.

“It is a substantial reorientation in the attitude of the Chinese government, and I do not think that investors are overreacting,” says Naughton.

When China’s stock market imploded in 2015, authorities scrambled to stem the losses. “This time Chinese government is acting as if they don’t care if the stock market crashes,” says Naughton.

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