September 23, 2021

China’s escalating crackdown on business is moving stocks

The whims of regulators in Beijing have always posed a risk to investors looking to tap into growth in China, the world’s second largest economy. But navigating a worsening crackdown on private business is becoming increasingly tricky.

What’s happening: After humbling many of the country’s top technology companies, including Alibaba and Didi, Chinese officials have turned their attention to the education sector. New rules published over the weekend take aim at fast-growing tutoring companies, barring them from turning a profit or raising funding on stock markets. The announcement from China’s Ministry of Education has wiped billions of dollars off the market value of several major, publicly-traded education firms.

See here: New Oriental Education & Technology (EDU) plunged nearly 50% in Hong Kong on Monday. Combined with similar losses on Friday, when reports of a crackdown on the sector first emerged, the company has lost roughly $7.7 billion dollars in market value. Asian markets were also broadly shaken Monday. The Hang Seng index fell more than 4%, its worst day in more than a year. The Shanghai Composite slumped more than 2%. Watch this space: It’s tempting for foreign investors to see this as a regional problem. But the fallout from Beijing’s latest moves is global.

New Oriental Education & Technology is also listed in New York, where shares fell 54% on Friday. New York-listed TAL Education crashed some 70%, losing more than $9 billion, while Gaotu dropped more than 60%, erasing $1.5 billion in value. The chaos is part of a wider clampdown on private Chinese businesses that’s making investors nervous. The government has taken forceful action against some of the country’s best-known tech names, such as ride-hailing service Didi. Regulators announced they were investigating the company just after its high-profile US IPO last month. The S&P/BNY Mellon China Select ADR Index, which tracks American depository receipts of top US-listed Chinese firms, is down 7.5% in the past week and 24% so far this year. (For comparison, the S&P 500 is up 17.5% year-to-date.)