What happened

The Chinese government might tell for-profit education companies to become nonprofit organizations, according to a report by Bloomberg. The news led to a violent industrywide sell-off.

Here's how some of the U.S.-listed Chinese educations stocks fared on Friday:

  • New Oriental Education & Technology Group (EDU 3.18%) was down 58%.
  • TAL Education Group (TAL 2.95%) was down 70%.
  • Youdao (DAO 1.36%) was down 42%.
  • Gaotu Techedu (GOTU 2.60%) was down 62%.
  • 17 Education & Technology Group (YQ 1.01%) was down 39%.

So what

The potential restrictions could prevent China's currently for-profit education companies from raising capital in the financial markets or acquiring other businesses. Regulators are also expected to intensify their scrutiny of online learning platforms, as well as place an outright ban on tutoring services during the weekends and vacations. 

A downwardly sloping stock chart.

China's educations stocks plunged on Friday. Image source: Getty Images.

The moves are believed to be related to China's goal of increasing its birthrate. Government officials have been taking steps in recent months to reduce education costs to incentivize parents to have more children.

Now what 

Chinese companies have long offered investors intriguing growth opportunities. However, while many of these stocks have delivered sizable profits to shareholders, they also come with relatively higher risk profiles, mainly due to the threat of government intervention.

If China's officials decide that an industry needs to be revamped, they take whatever action they believe is necessary -- even if leads to devastating losses for investors. Unfortunately, it appears that this could soon be the case for the country's private education industry.