A crackdown by China’s regulators on the country’s fast-growing edtech companies will have financial consequences for the leading vendors, impacting the timing of several companies’ initial public offerings (IPOs).

Beijing’s flexing of its regulatory muscles is likely to culminate in the creation of an agency to oversee all private educational platforms, a move that will seriously affect companies like the online education platform VIPKid, and online tutoring firms Zuoyebang and Yuanfudao.

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The three, which were heading for an IPO, will now have to consider whether they will instead need additional funding rounds. In December last year, Zuoyebang announced it had raised $1.6bn in Series E funding, with the investment round led by Alibaba.

The likelihood is that those firms still planning IPOs will have to rewrite their prospectuses to caution investors about the Chinese government’s tougher regulatory stance. Understanding China’s regulatory position on edtech and its impact on funding will take at least three months.

Pressure grows on China’s edtech sector

There has been a steady ratcheting up of pressure on the Chinese edtech sector since March. President Xi Jinping suggested that the surge in after-school tutoring was putting immense pressure on China’s children. That led to warnings in state-owned media and calls for greater regulation.

China’s Ministry of Education also announced that education departments should limit the times primary and secondary school students take part in online learning to ensure they are getting enough sleep. The Ministry announced that departments in all regions of China should strengthen the management of online training and online training platforms and carry out supervision to ensure that live online broadcasting training activities end no later than 9 pm.

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Delegates at China’s recent Two Sessions conference also called for greater regulation and management of private online tutoring, both in terms of content and consumer rights.

In May, Chinese regulators imposed the maximum penalty on Zuoyebang and Yuanfudao for unfair competition. More action is possible, including bans on online courses for younger children, restrictions on homework, and mandatory licensing for all teachers.

The uncertainties brought by regulation risk putting a dampener on edtech enthusiasm from venture capitalists and individual investors.

The Chinese government’s action is also starting to have an impact on jobs. Yuanfudao is reported to have withdrawn or delayed job offers to new employees, most of them graduates, in pre-school tutoring. The job offer change affected about 2,000 people and coincided with layoffs at GSX Techedu, which is shutting its pre-school education business for children ages 3 to 8.

Learning from fintech

The Chinese government has taken a similar line with edtech as it did fintech. Light touch banking regulations enabled Alibaba and Tencent to grow vast and ubiquitous online financial services businesses. However, as discussed in GlobalData’s China Tech (2020) – Thematic Research report, the state worried that these firms had become too powerful, too independent, and potentially a systemic risk to the whole financial system. Chinese regulators promptly pulled Ant Group’s blockbuster IPO in December last year, and there is no sign of it returning.

For fintech, read edtech, except that edtech is perhaps even more critical to China’s future. China wants its edtech firms to flourish, but it is increasingly obvious it also wants them to toe the party line.

Edtech needs to be an effective tool for delivering the nation’s curriculum, and so, it demands close monitoring. What is now becoming painfully clear for China’s fledgling online education industry is that 2021 is going to be a much more challenging year than expected.