Policy Update: China's K-12 Education Industry Reforms
On Sunday 24th July, 2021, the Chinese State Council formally announced its new set of policies (source) on after-school education organizations. The document written by the State Council contains guiding principles on the regulation of supplementary (i.e. after-school or weekend) K-12 classes that will be circulated to local provincial and city level education bureaus for further refinement and implementation.
In this article, we provide a summary and interpretation of the key themes and policies included in the State Council's document, including the rationales behind and implications associated with the regulatory upheaval. We also answer the question as to why the Chinese government decided to restrict and downsize what seems to be a promising private education industry.
For preliminary context, we recommend reading our background information article (here), as well as our article on key trends in education consumption and China's supplementary education industry (here).
Note: for the purposes of this article, the term "education organizations" and "education institutions" refer to private education institutions that offer optional classes outside of the regular school hours (more often colloquially referred to as "cram schools"), as opposed to public or private schools which all children are mandated to attend.
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Why K-12 Classes?
The first question that arises is, undoubtedly, why is the Chinese goverment targeting K-12 classes in particular?
We think the answer to this is simple - because the college entrance exam and growing burden of education affect the lives of almost all Chinese families except perhaps the most affluent. As we've discussed in our background article (here), the college entrance exam is the chance of a lifetime for young people to change their future. Each year, over 10 million high school seniors take the exam to compete for spots at top universities in the country, where, for example, Peking University and Tsinghua University (China's top two universities), each accept only approximately 3,000 to 4,000 students per year. The significance of the college entrance exam and the intense competition to do well means that Chinese families are willing to invest and sacrifice substantial portions of their household income on their children's education.
For instance, a 2017 study from Peking University reveals that high school education constituted over a quarter of the average Chinese family's total household spending. Since public schools in China are subsidised by the state and school supplies are highly affordable, most of the education spending comes from supplementary classes taught by private education organisations. Moreover, a follow up study in 2019 shows that, among the sample group of Chinese families who do send their children to attend additional classes, each family spends an average of RMB8,438 per year on after-school and weekend sessions, equivalent to 27.5% of the average national disposable income. Narrowing down specifically to the families with high schoolers, the average household in the sample group spends RMB12,208 each year on supplementary classes, equivalent to 39.7% of China's average disposable income.
(Note: the 2019 study does not provide us with an average income figure for the sample group)
While education is a meaningful investment in their children's future, nevertheless, it is clear that education spending is a significant financial strain for many average families. We think that this financial burden is a crucial motivating factor behind China's new education reforms. In comparison, other areas of education such as supplementary classes for foreign K-12 curriculums (e.g. AP or A-level exams), study abroad test preparation (e.g. SAT, GRE/GMAT, or TOEIC/ TOEFL), and working professional exams (e.g. various industry licenses or government official exams) do not affect so many Chinese people on such a wide scale. As such, the new education reforms specifically target after-school and weekend classes based on the Chinese K-12 curriculum, and are not a sweeping attempt to target all forms of supplementary classes. Other areas of study are not affected by the new regulations.
Policy Themes and Rationales
From a big picture perspective, the officially stated goal of the State Council's new reforms is to "effectively reduce students' homework load and after-school education burden", although it is widely speculated that the true goal of the new policies is to alleviate parents' financial and time pressure, and to promote greater social equality. In light of our discussion above, we think that these speculations hold valid ground.
In this section, we go through an overview of the key overarching policy themes in the reform guidelines, along with what we believe are the supporting rationales for each theme.
#1: Shifting the Burden of Education
From a cultural perspective, Chinese parents take on a very proactive role in their children’s education, as is the case in many Asian countries. Most parents supervise their children while doing homework, including teaching and reviewing the relevant materials. This can be a significant burden to working parents with busy jobs, as well as to less educated parents who are not in the position to help their children with school work. Consequently, some education organizations were set up for the sole purpose of having a place for parents to take their children to after school where the children can complete their homework under guided supervision while the parents go back to work. Moreover, many children attend in-person classes at different after-school or weekend education institutes for different subjects. Taking children around to these different institutes can be a significant time (and of course financial) burden for parents.
One of the State Council's key themes is thus to shift the burden of school-subject education from parents to regular schools. By doing so, parents may have more time and money to spend on other areas, thereby boosting domestic consumption. Alleviating the pressure that comes with raising children could also reduce the Chinese people's increasing reluctance to give birth (as witnessed by China's declining birth rate).
#2: Education for All
In China, the majority of school-aged children attend public schools. Elementary and middle school are compulsory for all children and are subsidised very heavily. High school is not compulsory but is still subsidised, with public school tuitions ranging from RMB600 per year in rural areas to RMB3,000 per year in top urban districts. However, with the importance of the college entrance exam, Chinese families tend to invest heavily in their children's education outside the public school system, where, according to the 2019 Peking University study cited above, the average rural Chinese family that sends their children to attend supplementary classes spends RMB3,581 per year on the sessions, while the equivalent average urban Chinese family spends RMB13,628 annually.
China's rising income levels and increasing demand for supplementary private education spurred tuition prices for after-school and weekend classes to soar over the years. Similarly to other countries that share a similar "cram school culture", China saw education organizations become a hot topic of debate where after-school and weekend classes aimed at boosting students' test performance in school have been frequently accused of promoting social inequality. Specifically, the argument is that students from wealthier family backgrounds are more likely to do better on the college entrance exam due to their families being able to pay more for supplementary classes with better (i.e. more effective) teachers.
Unsurprisingly, the second major theme is to promote education for all by ensuring that students from all backgrounds will be able to compete on equal footing on the college entrance exam. To do so, the State Council is pushing for regular schools to play a bigger role in children's education, which not only helps to alleviate parents' financial and time burden as discussed in the first theme, but can also allow for less student stress and fairer competition among the 10 million high school seniors who take the college entrance exam each year.
#3: Downsizing the Private K-12 Education Industry
The third and final theme is the gradual wind-down of supplementary K-12 classes and overall downsizing of the private education industry. Given the regulatory goals of shifting the burden of education from parents to regular (public) schools and the promotion of fairer competition and equal education for all, it is clear that there will be a significant reduction in demand for supplementary K-12 classes. We reiterate again that the new guidelines proposed by the State Council only affect after-school and weekend K-12 classes rather than all forms of supplementary classes, meaning that other subject areas will not be impacted by the new rules. However, since most of the demand in China's education industry is for supplementary K-12 classes, we expect to see significant downsizing in the overall market.
Why Downsize a Successful Industry?
As has been witnessed already in the stock markets and as we'll illustrate further below, the policies implemented as part of the new education reforms severely hurt Chinese education organizations. Many Chinese education companies have been high fliers in recent years, with what many analysts believe to be strong growth prospects for a number of years to come. The question is, of course, why are the Chinese regulators targeting such a promising industry? We think that the answer lies in the mission of the Chinese Communist Party (CCP). The CCP's goal is to promote the good of the average people, and for many average Chinese citizens, the education sector and culture have evolved to a point where education is starting to become a social problem. From the government's perspective, it is more beneficial in the long run to alleviate a problem that afflicts society's majority, even if that comes at the sacrifice of a successful and growing industry.
In the subsequent sections below, we go through each theme in turn and summarize corresponding policies from the State Council's guidance document.
Shifting the Burden of Education
The first theme we look at is the the shifting of the education burden from parents to regular schools. This theme is encapsulated by an overall policy that pushes for regular schools to take on a greater role in children's K-12 education.
Policy #1: Regular Schools Will Take On A Greater Role in Children's Education
The State Council's proposed reforms with regards to regular (public) schools are as follows:
Regular schools will offer after-school activities and/or study sessions which should not end before the time local companies finish work.
Middle schools can have self-study evening sessions.
(High school students already have self-study evening sessions at school)
Students' homework load must be capped at 60 minutes for primary school students and 90 minutes for middle school students.
The majority of students' homework load should be completed on campus.
Schools will no longer be allowed to require parents to grade their children's homework.
(Some Chinese teachers ask parents to review their children’s homework before
formally submitting at school)
We think that the central government's decision to push for regular schools to take on a greater role in children's education is primarily to alleviate parents' financial and time burden.
Education for All
The second theme we look at is the promotion of equal and accessible education for all. This theme is encapsulated by two key policy areas: (1) stricter operating requirements for education organizations, and (2) the regulation of advertisements published by education organizations.
Policy #2: Stricter Operating Requirements for K-12 Education Organizations
The new regulatory requirements for supplementary K-12 classes offered by education organizations are summarized below.
Education organizations cannot operate K-12-related classes on weekends, during summer or winter school breaks, or on public holidays.
Online K-12-related classes cannot have a duration of longer than 30 minutes per class and cannot end after 9PM.
Note: the official document cites the "preservation of students' eye vision" as the main rationale for the specific requirement above concerning online classes. We note that much less detail has been released regarding offline-based organizations compared with online-based organizations. We think that regulation of offline-based organizations will most likely be delegated to the local provincial or city level, although the central government may also release further requirements for offline-based organizations later on.
Education organizations cannot pre-educate students with contents above their current K-12 school year level.
(In order to get ahead and be more competitive compared with their peers, many
students study materials that are more advanced than what is covered at school
during their after-school or weekend sessions)
All education organizations with K-12 teachers will need to have proof of valid teaching certificates.
Education organizations focusing on K-12 subjects will no longer be able to hire teachers who are physically based abroad.
Note: the official document does not cite any specific reason for the latter requirement, although we think the rationale has to do with supervision. For example, some Chinese education organizations that specialise in teaching English online have hired foreigners living outside China in the past without particularly strict checks on their credentials.
Education organizations will be prohibited from using exorbitantly high salaries to hire public K-12 school teachers.
Traditionally, Chinese public school teachers are compensated largely based on their students' performance on the exams, leading many teachers to invest significant time and effort in identifying the most effective teaching and learning methods for students. Some of the top public school teachers in the country are also exam contributors who come up with questions for the college entrance exam each year, thus being very familiar with the exam format and commonly tested topics.
Initially, large education organizations in China hired these highly sought-after top public school teachers as part time employees, while a number of public school teachers also founded their own education institutions as a part time job. The central government subsequently banned public school teachers from working part time at such organizations, although many large institutions reacted by offering very high salaries to attract outstanding public school teachers for full time positions.
We think that the policy of deterring education institutions from "buying over" public school teachers is consistent with the directive to increase the role of regular schools in children's overall education.
Furthermore, the stricter operating criteria for K-12 education organizations as a whole can be viewed as a way to deter parents and students from relying too heavily on extra classes outside of school. From the regulator's perspective, doing so may ensure a more equal playing ground for all students on the college entrance exam.
Policy #3: Regulation of Advertisements Published by Education Organizations
In the past, some education organizations published advertisements that intentionally induced anxiety by, for example, convincing parents that their children would be the worst performers in class if they didn't send their children to attend extra classes. The new advertisement control policy aims to stop such corporate behaviour.
Education organizations are prohibited from advertising on mainstream media (e.g. newspapers, tv channels), alternative media (e.g. social media), internet platforms, or at public locations including schools and neighbourhoods.
Advertisements that exaggerate the benefits of attending supplementary classes or create anxiety will be penalized.
Downsizing the Private K-12 Education Industry
The third and final theme we examine is the downsizing of the private K-12 education industry. This theme is represented by four key policy areas: (1) a ban on new K-12 education organizations, (2) stricter approval criteria for existing K-12 education organizations, (3) a reduction in funding to private K-12 education companies, and (4) a mandated shift to non-profit for K-12 education institutions.
Policy #4: Ban on New K-12 Education Organizations
Under this policy, new education organizations targeting the subjects taught and examined in the regular K-12 school curriculum (including pre-school, primary school, middle school, and high school) will not receive approval for establishment.
Policy #5: More Stringent Approval Criteria for Existing Education Organizations
In the past, in-person-based (i.e. offline-based) education organizations went through an approval process when registering with local education authorities. In contrast, online-based education organizations only had to go through a registration process but did not need to obtain approval for establishment.
Going forward, a new regulatory entity (Chinese name: 校外培训监管司, translation: Bureau of After-School Education Supervision) will be set up to regulate both offline-based and online-based education organizations in a more scrutinized and consistent manner. Moreover, existing registered online-based organizations will need to go through a proper approval process analogous to the approval process for establishment that offline-based organizations went through. Both online-based and offline-based organizations will be required to submit documents showing that they comply with the new regulatory requirements described in Policy #2.
Education organizations that do not offer classes based on the K-12 school curriculum will be classified according to subject area (i.e. arts, sports, or technology) and will have a separate regulator and approval process from education organizations that offer K-12-related classes.
Policy #6: Reduction in Funding to K-12 Education Organizations
The State Council's new rules with regards to the funding of private K-12 education companies are as follows:
Education organizations that focus on subjects taught in the regular K-12 school curriculum are not allowed to be publicly listed.
Publicly listed companies may not invest in education organizations that focus on subjects taught in the regular K-12 school curriculum.
Foreign companies cannot acquire, invest in, or operate Chinese education organizations that focus on subjects taught in the regular school curriculum, including the use of variable interest entities (VIEs).
(We discuss VIEs and their role in China's anti-trust crackdown here)
Any existing violations will need to be corrected
Policy #7: A Shift to Non-Profit
The State Council mandates all education firms focused on K-12 education to register as a non-profit organization while conforming to new pricing regulations.
Education organizations that focus on subjects taught in the regular K-12 school curriculum will need to register as a non-profit organization.
Education organizations are prohibited from setting overly high prices or excessively seeking profit.
(Local education authorities will release tuition setting guidelines for supplementary
The central government is piloting a new approval-based system in certain cities whereby education organizations need to submit their tuition information and class schedules for regulatory approval.
(The difference between this and Policy #5 is that for Policy #5, specific regulatory
guidelines will be given by local education authorities. As long as companies comply
with the guidelines, they will be approved. Under the approval-based system that is
being piloted, education companies would need to submit the required information to
the local regulators for closer scrutiny, with approval being given on a case-by-case
As mentioned above, the issue of rising private education prices has long been a contentious topic in China as well as in other similar countries. As income levels rise and more parents are able to invest further in their children's education, education organizations have met the increased demand by raising tuition fees. In the case of China, the private supplementary education industry has proliferated in recent years with established market players such as TAL Education Group, New Oriental, and Gaotu Techedu, as well as many new entrants. The intense competition has led some education companies to invest heavily in marketing in order to obtain more students, while charging higher prices to cover for the expansion cost.
In this section, we discuss a number of vital policy implications.
#1: A Policy for the Average, Not the Rich
As the reforms target supplementary classes for K-12 subjects covered in regular public schools, the most affluent families will probably not be affected since they can afford to hire private one-on-one tutors (which is not covered by the new rules), or their children would choose to study abroad and thus not have a need to take the college entrance exam. However, the reforms would still have a significant impact in reducing the differences within the vast spectrum of China's middle class families.
#2: Education Companies Will Need to Adjust Their Revenue Drivers
We expect the new policies on funding to have a profound impact on education organizations. A number of education start-ups may go out of business due to the significant lack of funding and shift to non-profit, while the large players that are publicly listed will need to come up with transition plans in order to be compliant with the new rules. Transitioning may be less challenging in terms of business model for the large incumbents that have other subject areas offered in addition to K-12-related classes, although an important concern is that for most education companies, K-12 education dominates in terms of revenue generation, while the demand for other subject areas is much smaller.
#3: Major Structural Changes for the Large Incumbents
The regulatory upheaval requires education organizations to alter their business structures and funding models, with large, publicly listed companies being particularly hit. Of course, changing a company's business structure is not easy, and many considerations need to be taken into account. Publicly listed companies would most likely need to privatize, while listed companies that have more than one area of focus may wish to separate their K-12 business so that other education areas can continue to operate under a public entity and receive further funding. The VIE structure used by Chinese companies that list abroad could also complicate the legal process.
#4: Externalities in the Housing Sector
It's worthy to note that since Chinese elementary and middle school students are assigned to public schools based on their housing district, the competition (and prices) for housing in good school districts could be intensified as more responsibility is placed on public schools. Nevertheless, in the past one or two years, there has been increasingly strict control of housing prices to ensure that prices don't rise too unreasonably.
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An Introduction to China's After-School Education Industry
15 Key Trends in China's Education Sector
Policy Update: China's K-12 Education Industry Reforms
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