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Why Chinese Education Stocks Sold Off on Monday

By Rich Smith - May 24, 2021 at 12:21PM

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China's crackdown on for-profit education continues.

What happened

In what has become a recurrent theme over the past couple months, shares of three of China's best-known publicly traded education stocks -- TAL Education Group (TAL -4.09%)GSX Techedu (GOTU -4.17%), and New Oriental Education (EDU -8.57%) -- collapsed this morning.

As of 10:20 a.m. EDT, TAL stock is down 11.4%, GSX fell 11.7%, and New Oriental is doing worst of all -- tumbling 12.9%.

Investor examines a declining stock chart superimposed on a Chinese flag

Image source: Getty Images.

So what

It's no secret why. For months rumors have been rumbling that China would crack down on the growing industry of private education and private tutoring of K-12 students with the aim of lowering the cost of education for parents and decreasing academic workloads for students. In March China forbade companies like TAL, GSX, and New Oriental from advertising their services in the state-owned media, forbade for-profit tutoring of pre-K kids, and banned online education courses after 9 p.m. This month, Reuters described new restrictions in the works.  

According to the news agency, China is now clamping down further on for-profit private education businesses. Private tutoring on academic campuses will be banned, as will weekend tutoring off campus and the teaching of "foreign curricula" up to grade 9.  

Of specific concern to investors is that the government is also proposing to limit the fees that companies can charge for tutoring services and to ban foreign control of private K-9 schools (which could affect shareholder rights).

Now what

China's new education rules might not be revealed in full until the end of next month, and Reuters says the new education law won't come into effect until September 1, so the effect of all these rules won't be immediate. That said, the restrictions appear to be getting more and more onerous.

Between now and September 1, I expect investors to get increasingly nervous about just how bad these new rules will be for business -- and I expect Chinese education stocks to suffer in consequence.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends New Oriental Education & Technology Group and TAL Education Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

New Oriental Education & Technology Group Inc. Stock Quote
New Oriental Education & Technology Group Inc.
EDU
$24.54 (-8.57%) $-2.30
TAL Education Group Stock Quote
TAL Education Group
TAL
$4.46 (-4.09%) $0.19
Gaotu Techedu Inc. Stock Quote
Gaotu Techedu Inc.
GOTU
$1.61 (-4.17%) $0.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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