"A Terrible Storm": How is EdTech in China Overcoming Restrictions?

Contents:

• Reasons for the easing of some restrictions in China.
• Is there hope for easing restrictions in the future?
• The impact of the situation on Russia and international relations.
• Strategies for the successful adaptation of Chinese EdTech companies.
  

In the summer of 2021, the Chinese government introduced new regulations for educational technologies aimed at schoolchildren. Supplemental education centers in the country were no longer able to advertise, hold classes on weekends and holidays, teach according to the school curriculum, or attract investment from foreign companies. These changes in the rules of the game effectively dealt a serious blow to China's supplemental education sector. At the time, it was valued at over $120 billion and covered 75% of schoolchildren aged 6 to 18. Rumors of possible restrictions alone led to a $126 billion loss in market capitalization for Chinese edtech companies listed on US, Chinese, and Hong Kong stock exchanges, according to Bloomberg analysts. This news only exacerbated the already-incipient decline. How have market assessments changed six months later and should we expect a softening of the Chinese authorities' stance—in a review from Skillbox Media.

• Who are the chicken children and why are the Chinese authorities willing to make concessions for them?
• When will the most difficult period in the regulatory sphere end, and what events can we expect in 2022?
• How the regulatory virus is penetrating other countries and affecting educational technologies outside of China.
• Chinese enterprises are adapting to new requirements and regulations by implementing appropriate strategies and approaches. In the face of changing legislation and market conditions, companies are rethinking their operating methods and business models. They are actively studying updated regulations and trying to integrate them into their processes to not only comply with requirements but also maintain competitiveness.

  One of the key areas is improving corporate governance and compliance with safety standards. Companies are also investing in technology and innovation to improve the efficiency of their operations and ensure compliance with new standards. An important aspect is employee training, which helps raise awareness of new regulations and their impact on work processes.

  Furthermore, Chinese companies pay attention to interaction with government agencies to stay informed of all changes and be able to respond to them promptly. This approach not only promotes compliance with the law but also helps strengthen the companies' image in the eyes of consumers and partners.

Reasons for the easing of some restrictions in China.

According to Joey Jiao, vice president of investment at Blue Elephant Capital, the new regulations were discussed widely, even among taxi drivers. His company has invested in 90 early-stage education startups. The restrictions left Jiao with mixed feelings: regret as an investor, but joy as a citizen.

In recent years, marketing specialists at major companies have skillfully exploited parents' guilt, encouraging them to purchase ever more educational courses to ensure their children's future success. According to analysts, more than a third of Yuanfudao employees who acted as "teaching assistants" were actually engaged in sales.

Many students spent 13 to 17 hours a day studying.

Foreign teachers often noted that their students were barely able to attend classes, and parents expressed dissatisfaction with late-night calls from online learning platforms. In China, a special term has even emerged: "chicken child" (鸡娃), which refers to children overwhelmed by the educational load due to their parents' ambitions. Therefore, many Chinese citizens supported the government's initiative to ban online platforms from operating on weekends. In addition, officials required that classes end no later than 9 p.m. and that there be at least 10-minute breaks between them.

The main opponents of the reform were so-called "tiger mothers" – parents striving for outstanding achievements in their children. Journalists from the Chinese publication Sixth Tone interviewed 30 families in Shanghai and Beijing. The majority of respondents, namely 92%, continued to seek extracurricular activities for their children even after the ban was introduced. At the same time, three-quarters of respondents noted that the authorities did not make the upbringing process easier, but, on the contrary, increased the level of stress in families' lives.

Preparation of Chinese schoolchildren for final exams begins in elementary school, as reported by Skillbox Media, citing Olga Bolkunova, founder and CEO of China Insiders. In the face of pressure from determined parents, the authorities are willing to find compromise solutions. In November 2021, The Wall Street Journal reported that China plans to allow educational platforms to profit from college and high school students. However, in exchange, these services will be required to offer free classes for students up to ninth grade. Negotiations in this context involved the companies Gaotu and Yuanfudao, according to the publication's sources. Olga Bolkunova notes that the changes only began to take effect in July, and it is premature to draw conclusions at this point. Starting in mid-December, private tutoring organizations will be reclassified as non-profits and resume operations. The government is introducing price controls and establishing a number of requirements: the company's director must be a Chinese citizen residing in the country; courses must align with the school curriculum; and the school itself must offer offline classes and have the appropriate teacher certifications. Bolkunova believes that the reforms were initiated due to the low qualifications of specialists in the field of additional education and the excessive prices of courses.

Is there hope for easing restrictions in the future?

In China, there is a persistent lack of information among civil servants, which leads to inconsistency in policy decisions. Often, a lack of understanding of reality forces the leadership to hesitate between extremely lenient and overly strict measures, notes Angela Zhang, head of the Center for Chinese Law at the University of Hong Kong.

The main goal of the current reform is to ease the burden on students and reduce the financial costs of parents on education. These costs are often so high that they become a serious obstacle for families wishing to have more children. It is unlikely that the authorities will completely abandon this strategy, since a declining birth rate is seen as one of the potential threats to China's economy in the future. Unsurprisingly, the country's Ministry of Education, in addition to introducing concessions, also imposed new restrictions. In December 2021, registrations for homework apps that allow students to upload assignments and search for answers were suspended. According to industry publications, the new restrictions affected platforms such as Xiaoyuan Souti and Yuanfudao's Zuoyebang, which will now be required to re-register with local education authorities.

Despite the introduction of new restrictions, the number of negative headlines has noticeably decreased. This is fueling optimism among investors who only recently recommended avoiding Chinese tech stocks. Alibaba, JD.com, and Baidu have all seen gains on the US stock market in early 2022. Perhaps major EdTech players will also benefit from their success. The worst of the regulatory changes in the tech sector is behind us, although legislation continues to be updated, and these changes could have a long-term impact on the sector's development, according to experts at Societe Generale. 2022 is expected to bring fewer unexpected situations, which, in turn, will lead to a decrease in uncertainty. According to Olga Bolkunova of China Insiders, it's not the entire EdTech market that has suffered negative consequences, but only supplementary K-12 education related to subjects in the school curriculum. "Educational technologies in China have not ceased to exist. This is neither dramatic nor even surprising." Olga Bolkunova

State innovation policy is traditionally based on the principle: "First, we provide freedom of action for businesses and closely monitor processes, and then introduce the necessary regulations." Significant relaxations should not be expected, but, in her opinion, we can expect the emergence of new forms of cooperation between private enterprises and educational institutions.

The impact of the situation on Russia and international relations.

Soon after the introduction of the new regulations, analysts began to predict that users would migrate to Western online education platforms, including American ones, due to the cessation of Chinese services. Valery Yemelyanov, an expert at BCS World of Investments, noted in an interview with RBC that it's possible that shares of American EdTech companies could rise significantly on news about their adaptation to the needs of the Chinese market.

Experts have expressed concern that measures taken in China could serve as the basis for the creation of strict online education standards and controls in Russia and other countries. Their concerns are partially justified. In India, starting in January 2022, authorities have warned universities against interacting with platforms providing distance learning services. Analysts and journalists point out that programs for senior managers such as Upgrad and Eruditus could be at risk.

The initial reaction from experts in Russia was largely emotional. It reflected our internal concerns about the potential for stricter government control. "Could they really want to repeat something like this here?" shares Margarita Aranovskaya, co-founder of Smart Ranking, an agency that compiles quarterly rankings of leading EdTech companies. "Comparing the reactions of Russia and Western European countries is interesting. In Russia, the emphasis was on alarming phrases like 'bans on foreign ownership, private capital, and NGOs,' while in Europe, terms like 'decommercialization of education,' 'bans on profiting from children's education,' 'equal access,' and the like proved important," adds Aranovskaya. Russian companies will feel the consequences of lost opportunities in the future as they begin their expansion into international markets. They will miss the Chinese market. Although Russian businessmen have only recently begun to explore the Beijing market, their attention is focused on supplementary education for children. If they were to achieve the same level of success in mathematics and programming that American firms have in foreign language learning, they could capture 1% of that market, which could significantly increase their revenue.

"The number of schoolchildren in China is almost 15 times greater than the number of students in Russia. This is a unique market, unparalleled." Margarita Aranovskaya.

According to the expert, India is the second-largest market. However, the main difficulty is that, although there are many children in the country, families have limited financial resources.

Strategies for the successful adaptation of Chinese EdTech companies.