China Cracks Down on For-Profit Grade Schools

By Sofia Horta e Costa and Jeanny Yu

Bloomberg

Education firms are in the Chinese government’s crosshairs, roiling stocks and reminding investors how quickly their fortunes can change in a country rife with regulatory risk.

RYB Education Inc. and Bright Scholar Education Holdings Ltd. both plunged by records in U.S. trading, while Vtron Group Co. and China Maple Leaf Educational Systems Ltd. sank in Shenzhen and Hong Kong after the government unveiled new rules that prohibit companies from financing for-profit kindergartens via the equity market.

While policy makers say the new rules will help protect consumers, they’ve taken many investors by surprise. That’s adding to jitters in a $5.8 trillion stock market already grappling with a trade war and the weakest economic expansion since 2009.

“The education sector had massive growth potential and was once red-hot among equity investors,” said Steven Leung, executive director at Uob Kay Hian (Hong Kong) Ltd. “It’s a pity that the government is stepping up regulation. What’s more annoying for a lot of sectors which rely heavily on the government is that you can’t expect a timeline, and many sudden changes in policies are a surprise.”

Chinese parents spend an average of $42,892 on their children’s education, almost double that of counterparts in countries like Canada and Britain, according to a report last year from HSBC Holdings Pic. The potential for growth helped propel shares of schooling firms to record highs as recently as June, with recently-listed China New Higher Education Group Ltd. and China Education Group Holdings Ltd. more than doubling in value within six months. Both dropped at least 4.5 percent in Hong Kong on Friday.

In new guidelines for the industry published late on Thursday, China’s government said it wants to build more public kindergartens.