8 June 2021
The revised Regulation on the Implementation of the Law on the Promotion of Private Schools (《中华人民共和国民办教育促进法实施条例》) (the "Regulation") was promulgated by the State Council on May 14, 2021. The Regulation will come into force on September 1, 2021. Almost four years would have lapsed since the revision first began in June 2017. Since then several drafts have been released. What are the major differences in the Regulation as compared with the 2018 Regulation on the Implementation of the Law on the Promotion of Private Schools (Draft) (“2018 Draft”)? How does the Regulation address issues such as the “participation of public schools in private schools”, “school group management”, “related party transactions” and other key issues? What impact will the Regulation have on the business of private education? Let’s take a further look at some of these points.
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More detailed policy regarding the “Participation of a Public School in a Private School”
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Distinctly positive news for vocational education
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Further strengthening of the regulation and control of private schools for compulsory education
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Significant changes to related party transactions
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Change of sponsor is allowed regardless of the type of a private school
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Minor changes to “School Group Management” policies
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New provisions governing online and offline training institutions
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Registered capital of schools to be paid upon establishment
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Cross-regional admissions
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Reduction of the allocation for development funds
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Easing of school land policies
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Increased severity of legal liability
I. More Detailed Policy regarding the “Participation of a Public school in a Private School”
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 7 A public school shall not run or participate in the running of a for-profit private school. Where a public school runs or participates in the running of a not-for-profit private school, it shall obtain the approval of the competent authority, and shall not use any State financial funds, nor affect its own educational and teaching activities, nor gain profits by means of brand output.
A private school with the participation of a public school shall have the status of a legal person. It shall have a campus and basic educational and teaching facilities that are separate from the public school, and an independent full-time faculty, adopt an independent financial and accounting system, recruit and admit students separately and issue academic certificates independently.
A public school that participates in the running of a private school shall, in accordance with the law, be entitled to the rights and interests of a sponsor and fulfill the obligation of managing the state-owned assets.
A public school offering compulsory education shall not be transformed into a private school.
Article 7 A public school offering compulsory education shall not run or participate in the running of a private school, nor be transformed into a private school. Other public schools may not run or participate in the running of for-profit private schools. However, a public school offering vocational education may run or participate in the running of a for-profit private school offering vocational education with capital, technology, management and other elements attractive to enterprises.
Where a public school runs or participates in the running of a private school, it shall not use any State financial funds, nor affect its own educational and teaching activities, nor participate in the running of such private school by means of brand output only, and shall obtain the approval of the competent authority. Where a public school runs or participates in the running of a not-for-profit private school, it shall not gain or gain in disguised form profits from, inter alia, management fee.
A private school run by or with the participation of a public school shall have the status of an independent legal person. It shall have a campus and basic educational and teaching facilities that are separate from the public school, and independent full-time faculty, independently follow accounting practices according to the unified accounting system of China, recruit and admit students separately and issue academic certificates independently.
A public school that runs or participates in the running of a private school shall, in accordance with the law, be entitled to the rights and interests of a sponsor and fulfill the obligation of managing the State-owned assets.
Our view:
Compared with the 2018 Draft, the policy in the Regulation regarding “participation of a public school in a private school” is more detailed, in particular:
1. A public school offering compulsory education shall not run or participate in the running of a private school;
2. A public school other than those offering compulsory education shall not run or participate in the running of a for-profit private school;
3. Public schools offering vocational education are an exception. They may run or participate in the running of for-profit private schools offering vocational education using the capital, technology, management and other elements from other enterprises, which is also one of the merits of the Regulation to support vocational education.
4. Where a public school runs or participates in the running of a private school, it shall not participate in the running of such a private school by means of its brand only, meaning that China will allow or even encourage public schools to run or participate in the running of private schools. The public schools are required to do so with a substantial output of their educational resources instead of outputting their brands only.
5. Where a public school runs or participates in the running of a not-for-profit private school, it shall not gain or gain in disguised form profits from, inter alia, management fees, which is consistent with the basic management principles of China regarding not-for-profit schools.
II. Distinctly Positive News for Vocational Education
Compared with the 2018 Draft (which didn't mention private vocational education), the Regulation added several favorable policies for vocational education, in particular:
1. Article 7 provides that, “a public school offering vocational education may run or participate in the running of for-profit private schools offering vocational education using the capital, technology, management and other elements from enterprises.”
2. Article 9 provides that, “China encourages enterprises to, in accordance with the law, run or participate in the running of private schools offering vocational education by means of sole proprietorships, joint ventures or cooperation.”
3. with respect to institutions offering educational examinations, vocational qualification examinations, technical grade examinations and other examinations certified by China, it has changed from Article 13 of the 2018 Draft “… shall not run private schools relating to the examinations offered by them” to Article 14 of the Regulation “… may run or participate in the running of private schools relating to the examinations offered by them in compliance with the relevant rules of China.”
Our view:
Although there are not many provisions referring to vocational education, combined with the favorable policies on vocational education that China has constantly issued since 2019, it has become obvious that China’s attitude veers towards supporting and encouraging vocational education. Therefore, we have robust reasons to believe that the next 5-10 years will be a golden age for the development of private vocational education.
III. Further strengthening of the regulation and control of private schools for compulsory education
Compared with the promising news for private vocational education, the regulation and control of private schools for compulsory education has been strengthened, in particular:
1. Article 8 adds that “local government shall not make use of the resources of state-owned enterprises or public schools to run or participate in the running of private schools offering compulsory education.”
2. Article 13 details that “neither any social organization nor any individual shall, by merger and acquisition, franchising, VIE arrangement or otherwise, seek control over any private school offering compulsory education or any not-for-profit private school offering pre-school education.”
3. Article 26 adds that “members of the council, board of directors or other form of decision-making bodies of a private school offering compulsory education shall have Chinese nationality, and comprise of representative(s) appointed by the approval authority.”
4. Article 29 specifically provides that, “a private school offering general senior high education and compulsory education may, based on the national curriculum standards, offer its own courses with special features and implement the innovation of education and teaching, with independently offered courses filed with the competent education administration. A private school offering compulsory education shall not use foreign textbooks.”
5. Article 31 retains the provision that “a private school offering compulsory education shall recruit and admit students from the jurisdiction of the competent approval authority of such a school, and be subject to the centralized administration of such approval authority.” However, the exception that “and if the school has the capability to provide boarding and accommodation for students, may recruit and admit students from other regions” in the 2018 Draft has been deleted.
6. Article 45 specifically provides that, “a private school offering compulsory education shall not conduct any transaction with any related party. Where other private schools conduct any transaction with any related party, they shall have reasonable pricing and standardize decision-making in compliance with the principles of openness, fairness and impartiality, and shall not damage the interests of China and the school or the rights and interests of the teachers and students.” It also provides for the corresponding legal liabilities thereof.
Our view:
We can clearly feel the efforts made by China to control private compulsory education; combined with the keynote speech delivered by President Xi regarding private compulsory education when he chaired the 15th Meeting of the Central Committee for Deepening Overall Reform on September 1, 2020, we are looking forward to more details when the Opinions on the Implementation of Regulating the Development of Private Compulsory Education (《关于规范民办义务教育发展的实施意见》) are issued in the near future.
IV. Major changes to related party transactions
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 45 Where a private school conducts a transaction with any interest related party, it shall comply with the principles of openness, fairness and impartiality, and shall not damage the interests of China and the school or the rights and interests of the teachers and students.
A private school shall establish an information disclosure system for related party transactions. The education administration and human resources and social security authority shall strengthen the supervision of not-for-profit private schools entering into agreements with interest related parties, and audit the necessity, legitimacy and compliance of agreements involving significant interests or performed on a long-term or repeated basis.
Where the council, board of directors or other form of decision-making bodies deliberate on any transaction with any interest related party, any member of such decision-making body who has an interest in the transaction shall abstain from voting on the transaction, and not exercise the voting right as proxy for other members.
The interest related party referred to in the immediately preceding paragraph means the sponsor, actual controller, member of the council, director and supervisor of the private school, as well as the organization or individual that controls or affects or is controlled or affected by the said organization or individual, which may lead to the transfer of the interests of the private school.
Article 45 A private school offering compulsory education shall not conduct any transaction with any interest related party. Where other private schools conduct any transaction with any interest related party, they shall have reasonable pricing and standardize decision-making in compliance with the principle of openness, fairness and impartiality, and shall not damage the interests of China and the school or the rights and interests of teachers and students.
A private school shall establish an information disclosure system for related party transactions. The education, human resources and social security and financial authorities shall strengthen the supervision of not-for-profit private schools entering into agreements with interest related parties, and review the related party transactions on an annual basis.
The interest related party referred to in the immediately preceding paragraph means the sponsor, actual controller, principal, member of the council, director, supervisor, and financial controller of the private school, as well as organization or individual that controls or affects or is controlled or affected by said organization or individual, which may lead to the transfer of the interest of the private school.
Our view:
The rumors that have been circulating have come to fruition that there can be related party transactions and the principle remains the same, provided that a private school offering compulsory education cannot have any related party transactions. Once breached, the sponsor and the actual controller, and the members of the decision-making body or supervisory body of the private school shall be punished in accordance with Article 62 of the Regulation.
V. Change of sponsor is allowed regardless of the type of a private school
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 11 Where the sponsor of a not-for-profit private school changes, it shall execute a change agreement, and shall not derive benefit from such a change; the sponsor of an existing private school may, according to the legitimate rights and interests it is entitled to according to law, agree with the succeeding sponsor to change the earnings, provided that it shall not be for the purpose of making profits or involve the legal person property of the school. The agreement with respect to the change of sponsor shall be submitted together with other materials to the approval authority for approval in accordance with Article 54 of the Law on the Promotion of private schools.
Where the sponsor of a private school no longer meets statutory conditions, an application shall be filed within six (6) months to the competent authority for change of sponsor; failing which, the school shall be ordered to change the sponsor by the approval authority or competent authority.
Where the sponsor is a legal person, its controlling shareholder and actual controller shall meet the conditions for running a private school under laws and administrative regulations; in case of a change of the controlling shareholder or actual controller, it shall be filed with the competent authority and be publicized.
Article 12 Where the sponsor of a private school changes, it shall execute a change agreement, provided it shall not involve the legal person property of the school, nor affect the development of the school, nor damage the rights and interests of teachers and students; where the sponsor of an existing private school changes, it may, according to the legitimate rights and interests it is entitled to according to law, agree with the succeeding sponsor to change the earnings.
Where the sponsor of a private school no longer meets statutory conditions, an application shall be filed within six (6) months to the approval authority for change of sponsor; failing which, the school shall be ordered to change the sponsor by the approval authority.
Where the sponsor is a legal person, its controlling shareholder and actual controller shall meet the conditions for running a private school under laws and administrative regulations; in case of change of the controlling shareholder or actual controller, it shall be filed with the competent authority and be publicized.
If the change of the sponsor meets statutory conditions, the approval authority shall handle the matter within the prescribed time limit.
Our view:
1.The Regulation affirms that the sponsor of any private school, either for-profit or not-for-profit, can change;
2.With respect to restrictive provisions on transfer, compared with the 2018 Draft, the Regulation has deleted the provision that where a sponsor of a not-for-profit private school changes, it shall not derive benefit from such a change, and the criteria “not for the purpose of making profits” which is not easy to assess, retained the principle of “not involve the legal person property of the school”, and added the principle of “nor affect the development of the school, nor damage the rights and interests of the teachers and students”. We understand that these provisions reflect the purpose to lift unnecessary restrictions on the change of sponsor for private schools.
VI. Minor change to “School Group Management” policies
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 12 A social organization which runs or actually controls several private schools as a school group shall be a legal person and have such funds, personnel, organizational structure, and other conditions and capabilities sufficient for it to carry out school activities, and shall be responsible for the management of and the supervision of the private schools run by it. Such social organization shall not seek control over any not-for-profit private school by merger and acquisition, franchising, VIE arrangement or otherwise.
A social organization that runs a school group shall provide the teaching materials, curriculum, technical supports and other services for the private schools in the group and organize the education and teaching activities of such schools, in each case, in accordance with the applicable laws and regulations of the PRC, and shall establish the relevant quality standards and quality assurance mechanisms for such schools.
A social organization that runs a group school shall not abuse its dominant position to exclude or restrict competition, and each private school in the group shall carry out its school activities independently in accordance with the law. All the assets of such private schools shall be managed and used by such schools themselves in accordance with the law during its term.
Article 13 A person that runs or actually controls several private schools shall have such funds, personnel, organizational structure, and other conditions and capabilities sufficient for it/him/her to carry out school activities, and shall be responsible for the management of and the supervision on the private schools run by it/him/her.
A person that runs or actually controls several private schools shall provide teaching materials, curriculums, technical supports and other services for the private schools run or actually controlled by it/him/her and organize the education and teaching activities of such schools, in each case, in accordance with the applicable laws and regulations of the PRC, and shall establish relevant quality standards and quality assurance mechanism for such schools.
A person that runs or actually controls several private schools shall: (i) ensure that each private school run or actually controlled by it/him/her shall carry out school activities independently in accordance with law, and that during their term, all the assets of such private schools shall be managed and used by such schools themselves in accordance with law; (ii) not, for the purpose of obtaining profit from running of schools, change the nature of any not-for-profit private school run or actually controlled it/him/her; and (iii) not abuse its/his/her dominant position in the market to exclude or restrict competition.
Neither any social organization nor any individual shall, by merger and acquisition, franchising, VIE arrangement or otherwise, seek control over any private school offering compulsory education or any not-for-profit private school offering pre-school education.
Our view:
1. The wording “a person that runs or actually controls several private schools” that replaces the wording “runs…as a school group” is more accurate under law.
2. The wording “any not-for-profit private school” is replaced by the wording “any private school offering compulsory education or any not-for-profit private school offering pre-school education”. As such, can we say that it can seek control over a not-for-profit senior high school or university by merger and acquisition, VIE arrangement or otherwise?
3. We must think about another issue, i.e. how to understand the seemingly conflicting application of the provision in Article 12 which provides that a “change of the sponsor is permitted” and the provision in Article 13 which provides that “it shall not, by merger and acquisition, franchising, VIE arrangement or otherwise, seek control over a private school offering compulsory education or a not-for-profit private school offering pre-school education”?
4. The greatest influence of such a provision is its applicability to any company that primarily provides compulsory education and has gone public by VIE arrangement. We will discuss this issue later.
VII. New Provision Governing Online and Offline Training Institutions
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 16 A private school offering academic education online by virtue of internet technology shall have obtained a school license for providing academic education of an appropriate level and appropriate kind as well as an internet operation license.
Any and all agencies offering training and education, occupational qualification-related training or vocational skill training online by virtue of internet technology and internet service platforms providing services for the online activities above shall have obtained the appropriate internet operation license and completed relevant filings with the education administration and human resources and social security authority under the provincial people’s government in the jurisdiction where such agencies or the platforms (as applicable) are located, and shall not carry out any schooling or education activity for which a school license is required.
An internet platform offering training and education shall have reviewed and registered the identity of each agency or individual that has applied for accessing the platform.
Article 16 A private school may offer education online by virtue of internet technology, which is encouraged by China.
Online education activities based on internet technology shall be provided in accordance with laws and administrative regulations of the PRC in relation to the administration of internet. A private school offering education online by virtue of internet technology shall have obtained an appropriate school license.
A private school offering education online by virtue of internet technology shall establish and put in place an internet security and management system and internet security technical measures in accordance with law. If it is aware of any release or transmission of information which is prohibited under laws or administrative regulations, it shall stop the transmission immediately and remove or take any other action to dispose of the information, so as to prevent the dissemination of the information, and shall maintain a record of such information in order to report the same to the competent authority.
Foreigners intending to offer education online by virtue of internet technology shall do so in accordance with laws and administrative regulations with respect to education and the administration of foreigners working in China, as well as other applicable laws and administrative regulations.
Our view:
1.The provision in Article 15 of the 2018 Draft with respect to offline training institutions has been deleted. The previous concern that the provision with respect to offline training institutions as contained in the 2018 Draft may conflict with the Opinions of the General Office of the State Council on Regulating the Development of Off-school Training Institutions (《国务院办公厅关于规范校外培训机构发展的意见》) (国办发〔2018〕80号) no longer seems to be an issue. We understand that off-school training institutions targeting primary and secondary school students shall be governed by the existing regulations promulgated by the relevant authorities, and off-school training institutions offering pre-school education shall be governed by the Pre-school Education Law (《学前教育法》).
2.It is expressly set out that a school license is required for online training activities. However, it needs to be further clarified by the relevant authority how such a school license may be obtained.
VIII. Registered Capital of Schools to be Paid up upon Establishment
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 21 A for-profit private school offering academic education shall have registered capital appropriate for the type, level and scale of the school. Specifically, a for-profit private school offering higher academic education shall have a minimum registered capital of RMB 200 million; and a for-profit private school offering other kinds of academic education shall have a minimum registered capital of RMB 10 million.
As of the date when a for-profit private school as above is approved to be established, at least 60% of the registered capital of the school shall have been paid up by the sponsors of the school; and as of the date when the school is established, its registered capital shall have been fully paid up.
Article 21 A private school shall have such start-up capital and registered capital as appropriate for the type, level and scale of the school. At of the date when a private school is established, its start-up capital and registered capital shall have been fully paid up.
Our view:
1.The requirement regarding the minimum registered capital for for-profit private schools has been deleted.
2.The registered capital of a private school shall be fully paid up before or at the date when the school is duly established. If any sponsor of the school fails to contribute to the registered capital of the school in full and on time, or withdraws the capital contribution made by them, such a sponsor shall assume relevant liabilities under Article 62 of the Regulation.
IX. Cross-Regional Admission
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 31 A private school offering pre-school education or academic education shall have the same admission rights as a public school at the same level and of the same category as it, and may, at its sole discretion, determine the scope, standards and methods of admission subject to its scale approved by the competent approval authority and recruit and admit students at the same time as public schools. A private school offering compulsory education shall mainly recruit and admit students from the jurisdiction of the competent approval authority of such a school, and if the school has the capability to provide boarding and accommodation for students, may recruit and admit students from other regions. The proportion and number of students admitted by such across-regional admission approach shall be subject to filing with the local education administration. The recruitment and admission of students for higher academic education shall be conducted in accordance with the applicable regulations of the PRC.
The education administration and human resources and social security authority under the local government at or above the county level in a region, shall offer private schools from other regions such conditions as favorable as those provided for the local private schools to recruit and admit local students, and shall not put in place any cross-regional admission obstacles to effect a regional barrier.
A private school shall recruit and admit students in accordance with the admission rules and on an opening, fair and equitable basis, in order to secure a good admission order. no private school offering compulsory education shall organize any entry examination directly or indirectly in a disguised form.
A private school may recruit and admit foreign students subject to the applicable regulations of the PRC.
Article 31 A private school offering pre-school education or academic education shall have the same admission rights as a public school at the same level and of the same category as it, and may, at its sole discretion, determine the standards and methods of admission subject to its scale approved by the competent approval authority and recruit and admit students at the same time as public schools.
A private school offering compulsory education shall recruit and admit students from the jurisdiction of the competent approval authority of such school and be subject to the centralized administration of such approval authority. A private school offering general senior high education shall mainly recruit and admit students from the municipality (comprising of districts) where the school is located and may, to the extent permitted by the applicable regulations and rules of the education administration under the people’s government of the relevant province, autonomous region, or municipality directly under the General Government, recruit and admit students from other regions. The recruitment and admission of students for higher academic education shall be conducted in accordance with the applicable regulations of the PRC.
The education administration and human resources and social security authority under the local government at or above the county level in a region shall offer private schools from other regions such conditions as favorable as those provided for the local private schools to recruit and admit local students, and shall not put in place any cross-regional admission obstacle to effect a regional barrier.
A private school shall recruit and admit students in accordance with the admission rules and on an opening, fair and equitable basis, in order to secure a good admission order. no private school offering compulsory education shall organize any entry examination directly or indirectly in a disguised form, nor shall it recruit and admit students before the time specified by laws and regulations.
A private school may recruit and admit foreign students subject to the applicable regulations of the PRC.
Our view:
The admission of students as well as cross-regional admissions are issues that raise the highest concern of all for private schools. The biggest difference between the 2018 Draft and the Regulation is the division of provisions governing schools of different levels.
A private school offering compulsory education shall recruit and admit students from the jurisdiction of the competent approval authority of such a school and be subject to the centralized administration of such an approval authority. The exclusion provision “if it has the capability to provide boarding and accommodation for students, it may recruit and admit students from another jurisdiction” has been deleted. As mentioned above, such a deletion reflects the strengthening of the regulation over the private schools offering compulsory education.
X. Reduction of the Allocation for Development Funds
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 46 By the end of each fiscal year, a not-for-profit private school shall allocate at least 25% of the incremental amount of its annual net assets at that year, and a for-profit private school shall allocate at least 25% of its annual net profit of that year, for the development fund to be used for the construction and repair and maintenance of the school, the purchase and update of teaching equipment, the staff training, etc.
Article 46 By the end of each fiscal year, a private school shall appoint an accounting firm to audit its annual financial report. A not-for-profit private school shall allocate at least 10% of the incremental amount of its audited annual limited net assets at that year, and a for-profit private school shall allocate at least 10% of its audited annual net profit of that year, for the development fund to be used for the development of the school.
Our view:
In the Regulation, the allocation proportion for the development fund has been reduced from 25% to 10%, which is the first reduction in 20 years. The Regulation has, subject to the actual situation, made a distinction between the allocation base applicable to a not-for-profit school and a for-profit school. Such a division is consistent with the actual development of private schools, which honors the facts and is an improvement of the legislation technique.
XI. Easing of School Land Policies
Regulation on the Implementation of the Law on the Promotion of Private Schools
2018 Draft
Regulation on the Implementation of the Law on the Promotion of Private Schools
2021 Regulation
Article 6 An individual or social organization sponsor of a private school shall have a good credit standing, and may make capital contributions to the school in cash or in kind, or by land use rights, intellectual property rights, or any other non-monetary assets (except for those prohibited by laws and administrative regulations from being used to make capital contributions) that may be valued in money and transferred to another person according to the law.
Subsidies granted by China, tuitions and fees charged from students and money borrowed and donations received by a private school shall not be deemed as a capital contribution made by a sponsor of the private school.
Article 6 An individual or social organization sponsor of a private school shall have a good credit standing. In order to establish the private school, the sponsor may make capital contributions to the school in cash, in kind, or by construction land use rights, intellectual property rights, or any other non-monetary assets (except for those prohibited by laws and administrative regulations from being used to make capital contributions) that may be valued in money and transferred to another person according to law.
Our view:
The Regulation only provides that a sponsor may make capital contributions with “construction land use rights”, but does not require that such land shall be “land for technological and educational purposes”. The Regulation also deletes the provision in Article 55 of the 2018 Draft which provides that “land for the construction of private schools shall be managed as the land for technological and educational purposes”. We understand that such a deletion releases the restriction on the use of land by private schools.
XII. Increased Severity of legal liability
Our View:
Chapter XIII of the Regulation imposes stricter legal liability, and expands the scope of the persons liable from “the sponsor and actual controller of a private school” to “the sponsor and actual controller, and members of the decision-making body or supervisory body of a private school”.
With the promulgation of the Regulation on the Implementation of the Law on the Promotion of Private Schools, many issues have been settled, but several new issues have arisen. However, it is certain that the promulgation of the Regulation poses a new challenge to the education administration at various levels, numerous private schools, education investors and education industry practitioners. We will discuss on the specific issues further in the future.
