The private education industry in China suffered a major blow in July 2021 after the central government released new regulations known colloquially as shuāngjiǎn, or “double reduction.” The policies were focused on reducing the pressures on students in China’s notoriously intensive K-12 education system. Yet, rather than reduce students’ burden as intended, the regulations have instead increased Beijing’s influence over, and permanently reduced the private sector’s role in, the landscape of Chinese education. Companies affected by “double reduction” are responding in a variety of ways, primarily by shifting to offer educational services that are not restricted by the new policies while also expanding their services outside of China.
These regulations cover both public and private education, but their impact on the latter has been far greater. Publicly-traded education companies, many of whose valuations have plummeted over 90% since the regulations were announced, are in a rush to modify their business models to be in accordance with the new policy. Parents and students have been impacted as well. Parents across China, whose primary concern is to help their children succeed in a hyper-competitive environment, generally reacted negatively to the regulations. In fact, most students will continue to face the same workload and pressure as before – but now without the same access to industry resources.
What Is the “Double Reduction” Policy?
The “double reduction” regulations were announced in a policy document released by the Ministry of Education (MOE) on July 24, 2021. The regulations ostensibly intend to reduce the burden on primary and middle school students (i.e., students in the compulsory stage of the Chinese education system) by addressing two aspects of students’ workload: homework and off-campus supplementary courses.
In China, students typically spend several hours every night completing homework assigned at school and attending off-campus courses provided by private education companies. This sees students in their school classroom for six days a week, and at tutoring schools for half of the last day, if not more. The intense competition within China to attend a top-tier university fuels a vicious cycle, often referred to as involution, wherein students are subjected to increasing amounts of pressure. This is not the first time Chinese leaders have declared their desire to reduce students’ workload – Jiang Zemin did so back in 2000. Others have echoed him since, but the “double reduction” regulations are unique because they are motivated by ulterior intentions.
Why Has China Introduced the “Double Reduction” Reforms?
The “double reduction” policy can be best understood in two contexts, with the first being Beijing’s recent regulatory crackdown. Since 2020, Beijing has announced major regulations covering several industries and companies – especially but not limited to the technology sector – whose rapid, unrestrained growth has worried central planners. In the case of the private education industry, after-school tutoring firms have been notorious for false advertising and other manipulative marketing tactics. In the run-up to the “double reductions” harsh measures, Beijing provided major warnings by placing strict caps on tutoring fees in March 2021, and then slapping fifteen tutoring firms with US$5.73 million in fines in May. The “double reduction” policy was a natural progression for regulators.
Another contextual factor was the introduction of China’s new three-child policy in May 2021. In the three-child policy, the CCP had promised to lower educational costs for families. Given the average Chinese household spends more than 50% of their total budget on educational expenses, these supportive actions from Beijing were intended to reduce the economic burden of education, thus incentivizing a higher future birth rate among a looming aging population issue.
Is China’s Education Crackdown the End of Private Tutoring?
Off-Campus Courses and the Private Education Market
“Double reduction” regulations stipulate that education providers in China are no longer allowed to offer academic courses to primary and middle school students on a for-profit basis. Any entity which wishes to provide such academic services must be converted to a non-profit and registered in a new government-organized approval and monitoring system. Companies may continue to profit from educational services and products that are not covered by these new regulations, such as adult courses, non-compulsory courses, and educational materials. In addition to reducing the burden on students, another stated goal of the regulations is stopping the unregulated flow of capital into the education market. To this end, entities which provide academic services to primary and middle school students are no longer allowed to raise private capital.
The policy dealt a paralyzing blow to – although not quite a dagger in the heart of – China’s private education market, of which primary and middle school students had been the main customers. New Oriental, for instance, reported that 50-60% of its profits in the last couple years had come precisely from its academic courses to compulsory age (primary and middle school) students. Thus, “double reduction” has struck at the core of these companies’ business models by removing both private capital and their key student base from the equation.
The cases of New Oriental, Gaotu, and TAL offer an illustrative window into the policy’s impact on China’s private education market. After spiking in mid-2020, falling near the end of the year, and spiking again in early 2021, these companies’ valuations were dealt a blow in March after President Xi Jinping publicly called out the education industry, whose expansion had arguably added to students’ burden. In July, when the new regulations were officially announced, the bottom dropped out: these companies’ values all dropped 86% or more on the New York Stock Exchange.
Prior to the new regulations, these companies’ risk disclosure statements superficially acknowledged that new regulations from Beijing could adversely impact profits. However, their boilerplate language failed to prepare investors for the seismic shift that was to come. These risk disclosures often mirrored each other, mostly focusing on branding, licensing, and the pandemic. By the time these companies updated their disclosures to reflect the risks “double reduction” regulations posed to their business models, it was far too late.
By the end of 2021, education companies will have ceased offering educational services that are banned by the new regulations. Their business models will shift by expanding overseas and broadening their domestic offerings to include services that are not regulated (e.g., arts, ICT, and sports courses). Companies with an international presence may continue to operate in China on a non-profit basis for the sake of improving their brand and maintaining visibility in China.
Homework and Involution
The “double reduction” policy also orders schools to limit the total amount of homework assigned to students each night: a maximum of 90 minutes in middle school, 60 minutes in grades 3-6, and absolutely zero homework in grades 1-2. The government will attempt to enforce these limitations by creating a unified, systematized homework management system to regulate homework quantities.
Instead of welcoming the policy’s changes, many parents were concerned that limiting homework and off-campus courses would handicap their children’s pursuit of academic excellence. There was so much push back that the MOE released a follow-up document in September to assure parents that the changes would not lead to reductions in academic performance.
Parents and teachers recognize the heavy burden their children carry but feel powerless to change it or, in some cases, think the pressure is a positive, motivating force for children. Today’s parents and teachers were children not too long ago; their expectations vis-à-vis homework and studying were forged in a hyper-competitive, dog-eat-dog environment. There will be minimal change to students’ lived experiences with regard to homework as long as parents and teachers genuinely believe students should be doing homework all night. Students might be compelled to do homework at home or school rather than at private tutoring centers, but they will be doing homework all the same.
The notion that children should spend all their time pursuing academic excellence may seem unreasonable to some Westerners, but these attitudes emerged in a context wherein career advancement is tied to the rank of one’s university, and admission to top universities is determined by high-stakes tests.
Likewise, the regulations covering online classes will not reduce the burden on students. The new rules stipulate that online courses must not exceed 30 minutes, and there must be at least a 10-minute break between classes. The 3-1 work-rest ratio implied here is completely inconsistent with the reality of China’s highly-competitive education system. Even where official class schedules seem to obey this rule, students still feel pressured to do work during scheduled breaks.
These limitations on online classes, like China’s recent regulations on video games, are designed to protect students’ eyesight – kids shouldn’t stare at screens all day, right? In both cases, the regulations are likely to affect the platforms that provide these online services more than kids’ eyes. Individual consumers are often finding creative workarounds, but the tech companies that had been providing these online services can not.
Daily life for Chinese students has hardly changed, but the operating environment for private education has changed dramatically. Education was not the first industry to be crippled by Beijing’s regulatory crackdown; however, the tutoring crackdown may have been the harshest. In many cases, private education businesses’ operating models have to be entirely thrown out.
While the damage done to China’s private education market was harsh and swift, the long-term outlook may be less dire. Domestic consumption of educational services not covered by “double reduction” regulations are likely to grow substantially in the coming years. Chinese education companies will also have opportunities to expand overseas, especially in the Asia-Pacific region. Thus, some analysts are bullish on the industry’s future, arguing the worst of the damage has already been done. Indeed, there is always room for growth in Chinese education, but investors will rightfully be weary before entering this battered industry.