Beijing's newly announced education sector reforms, which limit foreign investor involvement in so-called edtech companies, may have come as a surprise. But asset owners, fund managers and consultants believes the far-reaching rules changes will not reduce the overall appeal of China as an investment destination.
“Notwithstanding developments, our fundamental long-term view on China remains unchanged,” said a Temasek spokesperson, in responding to AsianInvestor’s request for comment on rules that China’s regulators introduced last week that ban curriculum-based, private tutoring firms from seeking profits, publicly listing or receiving foreign investment.
Private tutoring has been a fast-growing sector in China in recent years, as rising numbers of families pay for their children to receive additional tutoring outside of school hours or during public holiday periods. That growth led global asset owners such as Temasek and GIC to pour funds into the $100 billion sector, as well as large private equity and venture capital firms such as Warburg Pincus.
The sector’s rapid growth and the prominent involvement of foreign investors appears to have irked Beijing – although it did not mention this as an issue. Instead, the Chinese government said the new rules are designed to help relieve the mental burden on students and financial strain on families, which it argued would help to reverse China’s declining birth rate and promote social equality.
The country’s watchdogs are yet to specify a timeline or process for how existing foreign investors into Chinese education companies can exit their holdings. But the announcement of the new requirements caused a rout in the shares of large, listed edtech companies such as New Oriental Education and Technology Group, TAL Education and Gaotu Techedu.
The MSCI China Index and the Nasdaq Golden Dragon China Index – which tracks 98 of China’s biggest firms listed in the US – fell 5.6% and 7% respectively on Monday (26 July).
While the abruptness of the rules changes may have caught asset owners and fund managers off-guard, they appear to be taking them in their stride.
The Temasek spokesperson pointed to a statement made by managing director Mukul Chawla in a media conference at the launch of its 2021 results regarding its stance towards China following the recent clampdown on Didi and other tech companies, which he said still holds true:
“It's one of many risks in any country that we invest in, not just in China, that we are mindful of regulation and changing regulation, so I don't believe that it changes our stance on China anyway. We will continue to invest, we will consider regulation as it comes forward…our stance on China remains unchanged in our optimism.””
The ongoing appeal of China as an investment destination was echoed by others.
“We retain our long-term positive stance on Chinese equities, with a focus on structural growth areas such as technology, healthcare and domestic consumption,” Chaoping Zhu, global market strategist at JP Morgan Asset Management, told AsianInvestor. While some sectors face regulatory headwinds, others such as semiconductors, software and carbon neutrality could enjoy policy support, he added.
Similarly, Asia equity portfolio specialist at Eastspring Investments Ken Wong agreed that investors will be most likely to seek to build exposures into these areas rather than reduce their overall exposure to China. “A lot of investors are taking a step back, seeing where the next opportunity lies, but they're not jumping ship,” he said.
EYES ON EDUCATION
The imposition of tougher rules on edtech firms appears to be part of a broader approach by Beijing to rein in companies in consumer-focused technology sectors, particularly if they are seeking to list abroad.
Earlier this month, the Chinese government launched a data security investigation into Didi Global and banned new user registrations mere days after the ride hailing company listed on the New York Stock Exchange. In November, regulators halted Ant Group’s planned $37 billion initial public offering – expected to be the largest in history – citing regulatory issues. Losses in Chinese tech and education stocks since February have exceeded $1 trillion, according to Bloomberg.
Rather than bemoan the new edtech company rules, long-term investors should revel in the fact that China is taking steps to address market inefficiencies and education inequality, argued Liang Yin, director of investments and China project lead at Willis Towers Watsons.
“Education has been one of biggest hurdles for countries moving out of the middle-income trap. In this context, structural reforms to address macroeconomic challenges should be broadly applauded,” he told AsianInvestor. He noted that the previous absence of regulation allowed tutoring companies to maximise profits by exploiting parent paranoia about the importance of good grades. Beijing, meanwhile, say says the sector has been "hijacked by capital".
However, Liang admitted that the abrupt rules changes underscore the idiosyncratic regulatory risks of investing in China.
Experts who AsianInvestor spoke did not have data to confirm whether investment outflows from education companies have been driven by retail investors. But they argued that long-term investors should not read too much into short-term market events.
BNP Paribas’s head of Asia equities Zhikai Chen told AsianInvestor the firm reduced its exposure to China on Monday, but not dramatically. He explained the asset manager had been underweight on China as a whole before the rule changes were announced.
“As we digested the news over the weekend, we decided that there are probably risk factors that we need to be more aware of and as a result took down our exposure a bit more.”
Chen added the opportunities for investors created by China’s growth over the past two decades has not disappeared. “There has not been any directive or insistence by our institutional investors that this is an unacceptable risk,” he said.
However, the latest clampdown underscores just how sudden and wide-spanning rules changes can be in the country. Investors will no doubt wonder which sector will next feel the heavy hand of the country’s regulators.
Still, no experts that AsianInvestor spoke to thought that the recent changes set a precedent for other sectors.
“The policy on edtech was particularly harsh, but at this point in time I probably say that that’s still limited to that particular area,” Chen said.