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Why Chinese Education Stocks Bounced Back Today

By Rich Smith – Aug 24, 2021 at 2:36PM

Key Points

  • China's stock market suffered a rout last month.
  • China's own regulators, passing harsh laws to rein in the tech sector, were to blame for that.
  • Investors today are betting that all the laws that were going to be passed have passed already, and that it's now safe to resume buying.

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Investors begin searching for bargains in the rubble of the Chinese stock market.

What happened

Stock markets are glowing green once again on Tuesday, but you probably won't believe what some of the greenest tickers of all are today: Chinese education stocks.

That's right, the industry that saw declines of as much as 74% for New Oriental Education (EDU 3.75%), 76% for TAL Education (TAL -0.95%), and 78% for Gaotu Techedu (GOTU 12.39%) last month in response to China's sudden crackdown on for-profit education companies, is bouncing back today.

As of 1:40 p.m. EDT:

  • TAL Education stock is back up 17.3%;
  • Gaotu Techedu is rising 22.2%; and
  • New Oriental Education is up an astounding 29.7%.
Three colorful arrows racing straight up on a black background.

Image source: Getty Images.

So what

Crazily, the reason for all this excitement seems to be... more Chinese regulations! So far this year regulators in China have enacted "anti-monopoly rules targeting so-called platform companies," "draft rules to stop unfair competition in the internet sector," and a major data privacy law -- all on top of regulations specifically designed to curtail the popularity, and profitability, of for-profit education services.

That certainly doesn't sound like it should be good news for Chinese education stocks, but here's the thing: CNBC reports that with the passage of the data privacy law -- the "Personal Information Protection Law" -- China's regulators may have finally put in place the last piece in their planned legislative agenda to bring the tech industry to heel.  

Now what

The hope now, according to CNBC, is that China's "unabating lawmaking for the tech industry" is at an end, and that regulators will finally "take a pause in 2021" -- allowing investors to assess the damage and maybe even do a bit of bargain shopping in stocks that have been punished worse than the legislation merits.  

That sounds like good advice to me. My only real worry is that, well, it's only been a few days since the Personal Information Protection Law was passed Friday. That could prove to be too little time to be certain that the "unabating lawmaking" really has stopped, and that there aren't more shoes yet to drop.

While I certainly understand the attraction of trying to buy in at the bottom after these stocks have fallen so far already, there's still a danger that, in reaching out and trying to snatch a bargain, you might instead grab hold of a falling knife. The better strategy might be to wait a few days, make sure no new laws appear, and then evaluate how profitable these companies can still be in light of the laws that have already been passed.

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 Stock Quote
New Oriental Education & Technology Group
EDU
$27.98 (3.75%) $1.01
TAL Education Group Stock Quote
TAL Education Group
TAL
$5.71 (-0.95%) $0.06
Gaotu Techedu Stock Quote
Gaotu Techedu
GOTU
$1.27 (12.39%) $0.14

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

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