Implications Of China’s New Private Tuition Sector Rules For Foreign Investors.

China’s State Council and the Central Committee of Chinese Communist Party, continuing the trend of intensifying regulation on the private tuition sector which has gained traction in recent months, on 24 July 2021 jointly issued the Opinion on Further Alleviating the Burden of Homework and AfterSchool Tuition for Students in Compulsory Education (the “Opinion”). The Opinion aims to reduce the burdens of homework and after-school tuition for students going through the “K9” 1 years of compulsory education in China.
 

Regulation of the private tuition sector has intensified in recent years. The “2018 Rule” 2 , issued in August 2018, was the first rule to systematically regulate private tuition. In May 2021, the State Administration for Market Regulation imposed a maximum penalty on several EdTech giants for false advertising and misleading marketing. The Opinion introduces additional risks to the operations of tuition providers and consequential uncertainty for foreign investors.
 

Business operational requirements
 

The Opinion divides private tuition into (1) curriculum-based tuition3 and (2) non-curriculum-based tuition4
 

The key new requirements of the Opinion in the regulation of curriculum- and non curriculum- based tuition are analysed below (as a comparison with the current position).
 

Item	2018 Rule	The Opinion
1. Tuition fees	Tuition fees shall not be charged for more than three months at a time	The government will introduce guidance pricing for curriculumbased tuition
2. Development of public schools’ afterschool tuition service	Public schools are required to provide afterschool tuition to students. These should be non fee-paying, and mainly be used for activities cultivating students’ interests and limited curriculum-based tuition.	Amongst others:    > public school teachers are required to provide more after-school tuition;   > public schools can appoint non curriculum-based tuition providers (to be selected from a list published by the Ministry of Education) to deliver the tuition; and   > education authorities are required to provide more free online educational resources.
3. Prohibition of tuition beyond the syllabus	The details of curriculumbased tuition must be filed with local education authorities, and align with the standard syllabus. Tuition beyond the difficulty level for the student’s grade may not be provided.	Curriculum-based tuition beyond the difficulty level for the student’s grade may not be provided.

 

Notably, guidance pricing for curriculum-based tuition is to be introduced for in the first time. Though untested, we expect there to be limited scope for differential pricing for curriculum-based tuition if the Opinion, including its requirement for curriculum-based tuition to be run on a non-profit basis (see below), is fully implemented.
 

Regulatory scrutiny
 

Whilst it remains to be seen how strictly the Opinion will be enforced, it will clearly have more significant impact on curriculum-based tuition, in seeking to de-commercialize and significantly reduce the number of such tuition providers.
 

Comparatively, the Opinion leaves more room for providers of non curriculum-based tuition to operate in accordance with normal market rules, although certain restrictions would also apply to them.
 

General principles

Strict control of capital: the Opinion generally provides that strict controls should be imposed on the excessive influx of capital into the tuition sector.
 

Anti-unfair competition and anti-monopoly: the Administration for Market Regulation is called to continuously impose scrutiny on deceptive pricing and other unfair competition practices and monopoly practices in the tuition sector. This echoes the maximum penalties imposed on several EdTech giants in May (see above)
 

Market entry

New establishment and conversion: no more new providers of curriculumbased tuition to K9 students will be approved. All existing providers must be converted into non-profit institutions, whose tuition fees will be subject to the maximum fee set by the government.

Additional scrutiny of online providers: all existing providers of online curriculum-based tuition will have to be reapproved before they can continue their operations. Comprehensive assessment over these institutions will be carried out. Failure to pass the assessment will lead to deregistration and cancelation of their ICP license – whilst it is not entirely clear what requirements must be satisfied for the purpose of obtaining the new approvals, all such providers may, in any case, need to make significant adjustments to their existing business models in order to pass the assessment (if possible at all) and a significant number will be shut down.

Investment restrictions

> Curriculum-based tuition providers are barred from raising money through listings or other capital-related activities. The term “capitalrelated activities” is fairly vague and general, but on the face of it, this points towards such providers (which must now become non-profit institutions) being no longer allowed to seek any equity financings from external investors

> Listed organisations (though not clearly provided, the primary focus is likely to be on mainland China-listed entities) must not invest in curriculum-based tuition providers (whether through financing, share for asset swaps, or paying cash).

> Foreign investors are prohibited from controlling or participating in curriculum-based tuition providers by any means including M&A, entrusted operations, franchises, and VIE structures, regardless of the percentage of their stakeholding or beneficial interests in curriculumbased tuition providers.

Transition issues

> The Opinion also provides that institutions that are now in violation of the abovementioned requirements must take steps to rectify the situation. Thus, foreign investors who have already invested in curriculum-based tuition providers (even at the offshore level) may have to divest. However, the Opinion does not provide any details as to how and when to divest, or any consequences for failing to rectify. It remains to be tested in practice how relevant authorities will enforce the Opinion.
 

Non curriculum-based tuition
 

> The Opinion contemplates that the government authorities are to formulate industry standards and supervisory regimes for non curriculum-based tuition providers. The allocation of regulatory responsibilities for these providers among the regulatory authorities remains to be clarified
 

> The Opinion is silent on the issue of investment into non curriculumbased tuition providers.
 

Is the crackdown a surprise?
 

It is widely touted that the release of the Opinion was unexpected, and that investors (especially foreign investors) have been caught off-guard. In reality, considering the regulatory changes already seen in the tuition or wider private education sectors, it is apparent that tighter regulation of investments in private education has become a trend. Similar restrictions in other education sub-sectors include:
 

> private preschool education: according to the Opinions on Deepening Reform and Standardized Development of Preschool Education (jointly issued by the State Council and the Communist Party of China Central Committee), private capital is prohibited from investing into state-owned, collective or non-profit kindergartens by any means including M&A, entrusted operations, franchises, or VIE structures. This concept has been adopted in the Opinion in prohibiting private capital from investing into curriculum-based tuition providers. 

> private K9 schools: under the Implementation Measures on Private Education Facilitation Law, from 1 September 2021, both direct and indirect foreign investments, whether controlling or non-controlling, in private schools that provide compulsory education will be banned. This is a possible indication of China’s drive to remove foreign investor participation in K9 education – a trend continued in the Opinion which expressly expands such restrictions to, among others, curriculum-based K9 tuition providers.
 

Compared to private schools, private tuition providers have been underregulated even before the Opinion, with local practice varying as to whether they need to be formally registered as private schools. Some unregistered providers are instead registered as “education consulting companies” (the majority presence in the market, especially before the 2018 nationwide inspection), it being a grey area as to whether they would then need to comply with relevant rules applied to private schools. This uncertainty still exists, given that the definition of a private school in the Implementation Measures on Private Education Facilitation Law has not expressly included private tuition centres (reversing the position in the draft Measures), and is not changed by the Opinion.
 

Conclusion
 

Whilst the Opinion’s primary focus is on K9 level tuition, it also provides that preschoolers may not be offered online tuition and offline curriculum-based tuition in any form, and high school-level tuition is to be regulated by reference to the Opinion. 
 

Post high school-level tuition, and vocational training, are not covered by the Opinion and can be expected to continue to operate as in the past.
 

The Chinese government has chosen nine cities (including Beijing, Shanghai and Guangzhou) as pilot cities to implement the Opinion on a trial basis in three areas including, amongst others, significantly reducing the number of curriculum-based tuition providers and capping the fees such providers can charge. In addition, each province is also required to designate one city for implementation. As at the date of this alert, detailed implementing rules have yet to be published in any pilot city.