China vs. China – The authoritarian moment pt. III

China does the USA another favour.

• China’s potential crackdown on its education industry is likely to have the opposite impact of that which is desired holding back the next generation of innovative entrepreneurs.
• This will hinder its ability to keep up with the USA in the long technology war that I see being fought in the coming years.
• A leaked memo strongly hints that Beijing is thinking of preventing the private education sector from making profits and raising capital which would have the effect of reducing the equity value of companies in this space to zero.
• Not surprisingly, the share prices of the New York-listed Chinese education companies were hammered on Friday with TAL Education falling a massive 70.8% with 7x the 15-day average number of shares changing hands.
• Other companies suffered almost as badly with Gaotu Techedu falling 63.3% and New Oriental Education falling 54.2% both on very heavy volume.
• It is important to remember that this is only a memo and the education companies were quick to point out that they have received no such orders from the Chinese government.
• Regardless of whether this particular action will be implemented, the Chinese government is clearly unhappy with the way the sector is currently being run meaning that something is going to change.
• The main question is why is it unhappy and what does this mean in the long term?
  • First, inequality: The for-profit tutoring is creating an environment of haves and have-nots depending on whether parents can afford to pay for after-school tutoring for their children.
  • Education is taken very seriously in Asia (and China is no exception) and it is well known that the best way for children to win admission to the best schools is by taking extra tutoring.
  • This gives an advantage to children who come from wealthier families over children whose parents are less well off.
  • The Chinese government (CCP) thinks that this is unfair, and it hopes that by killing the for-profit sector, education outcomes will become less uneven.
  • History is not on the CCP’s side as my colleague Alastair Newton of Alavan Independent points out.
  • In the 1960s and 1970s, the UK’s Labour Party enacted an ideological campaign against Grammar Schools which resulted in a degradation in education standards rather than the reverse as had been hoped.
  • Second, ideology which is demonstrably always at the top of the CCP agenda.
  • Here, Beijing has identified “ideological problems” in some of the courses that have been taught by non-Chinese nationals.
  • By killing the profit incentive and banning foreigners, the rewards from tutoring will collapse, and with it both the ability and desire of non-Chinese nationals to tutor Chinese students.
  • This will ensure that Chinese students are taught from a syllabus that has been approved by the CCP.
  • Third, control: which is another major priority for the CCP.
  • Alastair points out that the CCP is probably worried that educational disparities based on ability to pay could trigger social unrest which most governments who come to power via revolution are terrified of.
  • This could also be a driver behind the banning of foreigners whose influence may be seen to make such unrest more likely.
  • This fits well with the CCP’s actions against Jack Ma and the rest of the technology sector which has now been very clearly reminded who really is in charge in China.
  • Fourth, economic decoupling: where Beijing believes that it now has the scale and strength to no longer need foreign capital to continue developing its industries.
  • This is a key part of the growing rivalry with the USA where the CCP does not like to see its national champions preferring to list overseas as this casts a shadow over national pride and undermines China’s reputation as a good place to grow and invest in technology.
  • I think it is likely that we will see this trend continue to gather pace as China meters out punishments for companies that are listed overseas and prevents new ones from listing.
  • The net result is that many if not all Chinese companies on US and European stock exchanges may delist and come home.
  • Whether China views Hong Kong as a foreign listing remains to be seen as while it is nominally part of China, it is open to foreigners and it uses the same VIE structure that all overseas-listed Chinese companies use.
• The net result of this move is likely to be far more damaging to China than any inequality or hardship that the current, for-profit education sector has created.
• The action could also well drive the sector underground making the best tutors more scarce, more expensive, and have the impact of widening the gap rather than closing it.
• Furthermore, while there may be greater equality across China, the overall level will be lower than it is today.
• This is likely to mean that there are fewer entrepreneurs to create and drive the Chinese technology sector forward meaning that its pace of development slows down.
• China’s actions are doing more to help the USA reach its ambitions to curb the rise of China than any action that the USA is taking on it’s own.
• The best example is the actions that the USA proposed to make life difficult for Chinese technology companies listed in the USA but with China’s recent rulings, the CCP has done the US Congress’ job far more effectively.
• With ever more draconian measures likely to come, China is unintentionally tipping the balance in favour of its rival.
• This damages its very real chances of supremacy in some of the up-and-coming technologies where RFM has identified the real technology war will be fought.
• An own goal for China resulting in a win for team USA.