China's "Double Reduction" Policy
The "Opinions on Further Reducing the Burden of Students' Homework and Off-Campus Training in the Compulsory Education", known as the "double reduction" policy,has caused a devastating crackdown for the Chinese EdTech recently. On 23rdJuly, New Oriental HK shares once plunged 50% during the day, creating the largest single-day decline in history with a total market value of nearly HK$40billion evaporated. Among the U.S. stocks, TAL Education plummeted 70.47%, "Gaotu Class" fell more than 63%, and 51talk more than 43%.
Despite the share price devastation, several leading education institutions quickly responded that they "will firmly support the decision and deployment of the Party Central Committee, and thoroughly study the importance of the double-reduction". In addition, the main business of these education companies has quietly changed. To better cater to the policy, these companies have added extracurricular training such as art, sports, science, and technology, as well as after-school care services for kindergartens, primary and secondary schools. In this article, we will interpret the "Double Reduction" policy, explore the reasons behind the policy and examine the future of education.
What is the "Double Reduction" and what is specifically reduced?
1. The policy calls for reducing the homework burden by cutting the total amount and duration of students' homework.
In China, homework is not only a student's job but also a parent's task. In most urban schools, teachers usually assign homework to students in WeChat parent groups and ask parents to tutor, correct, check, and take videos to upload to teachers. Homework has gradually become a common burden for parents and students.
Therefore, the policy establishes a homework management mechanism in response to families' demands: assigning homework to parents is strictly prohibited, and the amount of homework is reduced according to a different grade. The simplified name "Double Reduction" aims at reducing the burden for both students and parents.
2. The policy upgrades after-school services to meet diverse needs.
In order to develop quality education rather than exam-oriented education, schools need to organize and schedule students' after-school activities in a reasonable manner. Due to the limitation of after-school supplement tutoring by the institutions, the policy requires schools to improve the quality of teaching and provide after-school Q&A tutoring services. In addition, the policy proposes the establishment of online free learning tools to be used as a replacement for the role of after-school tutoring institutions.
3.The policy insists on strict governance of after-school training practices.
For investors who have been bullish on EdTech for a long time, the biggest blow from the policy is undoubtedly the regulation that all institutions providing subject-based trainingshould be registered as non-profit institutions.
The government will no longer approve new after-school training institutions targeted at subject-based training, and will not allow them to list in the capital market or raise funds. It also causes a great impact on the start-up EdTech companies and EdTech VC funds. In addition, the policy prohibits the use of EdTech software such as the "photo searching for answers "function.
To better regulate issues such as excessive fees and monopolies by several leading EdTech, the government will guide and regulate the fees charged by training institutions. The policy also bans the employment of staff from outside China to conduct training activities.
It can be said that the purpose and direction of this policy are very clear and the most stringent ever.
On the one hand, the government is reducing the workload of schools while strengthening the role of school education and providing better education for students. On the other hand, regulatory bans on the listing and capitalization of subject-based training institutions have caused overseas investors to complain about the arbitrary nature of regulation in the Chinese market.
This" double reduction" policy, however, did not come out of the blue, and it gave investors a cushion of more than three years. As early as 2018, the<<Private Education Promotion Law>> stated that private education should adhere to the public interest and should "set a no-go zone" for over-capitalized and commercialized educational institutions. Just three months before the policy was announced, the 2021 revised version of the <<Private Education Promotion Law>> once again reaffirmed the central government's reformation commitment to education industry.
The so-called "policies" are part of the broader legislation, rather than a one-sided statement formed outside the law. Whether it's the law or the policy issued by the two Offices are all in the broad category of legislation. When Wall Street investors complain about the uncertainty of Chinese policy ,they should also seriously consider if they truly studied the previous policies.
First, we need to understand the nature of education and the characteristics in Chinese education system. For the state, the essence of 9-year compulsory education is to screen and select those students who go to university or technical schools through the only fair way, the "college entrance exam", also known as the "Gaokao".
Through this exam, the state's vision is to screen out students with intelligence, self-learning ability, and self-discipline, not just with knowledge and highest grades. However, there is a contradiction between the will of the state and the will of the individual. Many parents spend additional money on after-school tutoring institutions to improve their children's grades. While this may seem reasonable ,in the broader vision, K-12 training institutions that help students from wealthy families to study earlier undermine the original purpose of the mechanism and deepen the inequality of educational resources.
Thus, the biggest failure with these K12 institutions is that they positively defeat the original intent and purpose of the state for education.
Moreover, by strictly banning extracurricular tuition, the financial burden on most middle-class families could be greatly reduced. The government also hopes to increase the fertility rate of middle-class families by reducing the excessive burden of education, especially after the introduction of the third child policy.
Given that education, real estate and healthcare are the basis of people's livelihood and determine the future of the country, the Chinese government normally introduces tough policies as all related institutions must survive under the state's policy guidelines. It is conceivable that the next government to move the knife may be the school district housing that straddles the education and real estate markets and is criticized by society.
What is the way out for the education industry?
The technology education industry is undoubtedly facing new changes, but the blow is not fatal. On contrary, if the EdTech can transform quickly in the next 2-3 years, they might be able to survive from this crisis. The education informatization can be considered as a transformational idea.
In April 2018, the Ministry of Education has released the << Education Informatization2.0 Action Plan >>, promoting the "Internet + Education". The rapid development of AI, big data, blockchain and other technologies will not only profoundly change the form of education but also change the way of teaching and learning to deeply influence the culture and ecology of education. As every school under the administration has a large amount of annual expenses for education informatization, there are many things these EdTech can do.
- For teachers: providing tools for lesson preparation, tools for exams, tools for teaching management, tools for online services.
- For students: providing tools for homework practice, tools for online exams, tools for school services.
- For schools: providing data system construction, teaching assessment platform, teacher and student management system.
- For local education bureau: providing online education services and management tools.
The independent brand Dali Education of ByteDance has a more profound and clear understanding in the education transformation. After noted the policy change in May, this EdTech declared that they will not lay off staff, but instead recruit talents in the field of education informatization, build related systems, and transform its core business into a school teaching aid technology tool.
In addition, EdTech can expand into other education or related fields beyond K12, such as vocational education. In the Chinese context, vocational education can be divided into training for civil service exams, training for various certificate exams, and interest-based skills training.
According to Frost & Sullivan estimates, the vocational education market in China will maintain a growth rate of 6.7% from 2017-2022 and is expected to exceed $1trillion in 2022. As a $100 billion market, vocational skills education is again facing the dual stimulation of policy and funding. As early as in the <<Report of the Work of the Government 2019>>, it was proposed to implement vocational skills upgrading actions and allocate 100bn yuan from the unemployment insurance fund balance for the skills upgrading and transfer training of more than 15 million workers.
Secondly, affected by the pandemic, the number of applicants for the national civil service in 2021 increased by 4.6% year-on-year compared to 2020, and the number of applicants for the provincial exam exceeded 5.37 million. As the society develops, China is experiencing a massive shortage of senior talent. The gap between school education and career requirements needs to be bridged by professional training, so this will become a rigid demand in the future.
Recent news in the education sector showed that major leading EdTech are also trying to transform into the vocational education field. TAL Education, Zuoyebang are developing their adult education business units independently. A new track has emerged where these EdTech companies have returned to the same starting line. Where and how far will they go? Only time will give us the answers.