What happened
Shares of Gaotu Techedu (GOTU 3.18%), a Chinese tutoring company, were tumbling today even as tech stocks were broadly higher for most of the day. There was no company-specific news today, but several Chinese education stocks were down in what seemed to be a rotation out of Chinese stocks and back into U.S. tech names.
As of 2:53 p.m. ET, Gaotu Techedu was down 11.6%.
Image source: Getty Images.
So what
There are signs that the Chinese economy is bending from the impact of its COVID-zero policy, in which lockdowns and shutdowns are frequently imposed in an attempt to control the spread of COVID-19, something that's become more difficult with the spread of the omicron variant. Ahead of the Beijing Olympics, authorities are particularly focused on controlling the spread of the virus, and that's likely to impact the broader economy.
Additionally, a CNBC article detailed how Chinese IPOs and tech stocks could face lower valuations if they're forced to list in Hong Kong, a warning for investors following Didi Global's delisting and the potential for other stocks like Gaotu Techedu to be delisted. That's been a concern of Gaotu investors for some time, as the company has been accused of perpetrating fraud by short-sellers like Carson Block.
Now what
Following the crackdown on Chinese tutoring stocks last year as the Chinese government banned them from making a profit on most of their tutoring services directed at children, Gaotu Techedu is down a whopping 98.5% from its peak roughly a year ago. Given the fact that the business was essentially broken by Beijing, investors are better off staying away from this one.
The company has not reported quarterly results since the new policies went into effect but it did say in November that it would cease offering tutoring services to K-9 students, which is expected to have a "substantial adverse effect" on its revenue. It said it would continue to operate its business outside of K-9 tutoring, but that decision could decimate the business.
