Larry Chen lost $22 billion after China imposed laws that decimated the tutoring industry

It’s been a rough year for Larry Chen, who has lost $22 billion since the year began.

The former school teacher (turned online education tycoon) was one of China’s richest men, until its government imposed a policy that decimated his business.

On July 24, Beijing unveiled a set of regulations that banned the lucrative tutoring sector — worth $140 billion — from earning profits.

To understand the scale of China’s tutoring industry, Australia’s is only worth a tiny fraction of that figure (about $1 billion), according to data provided by the Australian Tutoring Association.

Despite China’s slowing economy, these new policies suggest President Xi Jinping is not interested in pursuing growth at any cost — living up his party’s Communist ideology.

The Ministry of Education said it was cleaning up the for-profit education industry because it had been “severely hijacked by capital”.

Its so-called “double reduction” policy (referring to the amount of homework getting slashed for kids) was ostensibly introduced to relieve the financial strain felt by most families.

That way they could worry less about the high cost of living and have more children to offset China’s big economic problem (its rapidly ageing population) — which is a consequence of its former one-child policy.

How extreme is China’s tutoring ban?

As part of its “double reduction” policy, the Chinese government said private companies (that teach core school subjects) had to become non-profit organisations.

Tutoring businesses were prohibited from listing on the stock market or raising capital from overseas.

Nationalistic goals were also evident with China banning foreign companies from investing in Chinese tutoring companies. It also banned the teaching of foreign curriculums, and the hiring of foreigners to teach.

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There was also the sense that China wanted to improve the work-life balance of its school-aged children.

The government also banned online tutoring and teaching of the school curriculum for kids younger than 6 years old.

Another nail in the coffin was that Beijing’s ban on all tutoring related to core school subjects during weekends and holidays. That’s usually prime time for tutoring companies, and when they make the most money.

Billionaires no more

This sudden injection of socialism was bad news for the industry, which had boomed amid China’s hyper-competitive education system.

It was no surprise that a bout of panic-selling ensued across Chinese education stocks (listed in Hong Kong and the United States).

This caused Mr Chen’s “education tech” company, Gaotu Techedu, to lose 98 per cent of its market value.

Other tutoring giants, TAL Education and New Oriental, have also shed more than 90 per cent of their value since the beginning of 2021.

JP Morgan analysts declared the rule changes made China’s education sector “un-investable”.

Meanwhile, Mr Chen has become a shadow of his former self (in dollar terms). He lost his billionaire status, with his net worth plunging to $328 million ($US235 million), according to Bloomberg.

The chairman of New Oriental, Yu Minhong, has also been booted out of this exclusive club — as the value of his stake sunk to $807.5 million ($US579 million).

However, the biggest impact is likely to be felt by millions of employees, who are now facing extreme uncertainty and the prospect of losing their jobs in the tutoring sector.

The government’s harsh tutoring crackdown may be its attempt to address China’s problems with “social inequality”, said Richard McGregor, senior fellow at the Lowy Institute.

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“Many families are having to spend nearly all their disposable income investing in their single child to make sure that they can get into a good school or later into a good university.

“It’s no wonder that the Chinese birthrate is falling and why the population is going to into free-fall these coming years.

He also said another factor behind the crackdown was China “eliminating or cutting down to size tech billionaires who they thought were getting too powerful and perhaps too popular”.

‘Disorderly expansion of capital’

Lee Tenhao, an industry veteran in Taiwan’s after-school tutoring sector, believes “the industry is under the control of foreign capital”.

“This was because during the COVID-19 pandemic, on-site teaching was challenging, so it quickly moved online,” he said.

He said “the scale and number of people in this industry exploded” last year, as it seemed like everyone wanted to cash in on the online learning boom.

“I believe that was the last straw, which broke the camel’s back.”

Tutoring is not the only sector in the firing line. In recent months, China’s government has also clamped down on its most valuable technology companies for anti-competitive conduct and breaches of data security laws.

As a another reminder that China’s economy is not a free market, its press agency Xinhua said the government planned to strengthen its “anti-monopoly efforts” and contain the “disorderly expansion of capital”.

Some China experts say the “tipping point” was a bold speech by flamboyant billionaire Jack Ma, in October last year.

He had criticised the Chinese financial system for lacking innovation.

Many of the companies that were targeted have shares listed on Wall Street, and are also consumer-facing businesses where the CEO’s power and influence rivals that of the ruling party.  

They include Alibaba (the Chinese equivalent of Amazon), Tencent (which owns the WeChat social media app), Baidu (which owns a Google-like search engine), Didi (which is similar to Uber) and ByteDance (the owner of TikTok).

‘Competition overdose’

China’s new tutoring laws have been controversial and, unsurprisingly, the reaction has been mixed.

Some have argued that the tutoring crackdown doesn’t address the underlying problem — China’s ultra-competitive school system.

About 75 per cent of Chinese students attended tutoring, according to a government survey in 2016.

The average cost of tutoring for a student was more than 12,000 yuan ($2,580) per year, which is much higher than a month’s salary for many workers.

Some families spend as much as 300,000 yuan (about $64,500).

“There’s almost like a competition overdose in the tutoring sector, and I believe that’s a reason behind China’s crackdown,” said Angela Zhang, a law expert at Hong Kong University.

“China is also trying to address a demographic problem as the government is seriously concerned about the birth rate.

High pressure sales tactics

However, Dr Zhang was doubtful the policy would spark a “baby boom”.

“It will actually increase the time the parents need to spend on tutoring their own children,” she said.

“So the parents actually have less free time. And then it will actually lead the parents to produce fewer babies as it will become more stressful for the parents.”

But some parents are big supporters of Beijing’s sweeping policy, saying it will help many parents. amid the tutoring industry’s high-pressure sales tactics.

“In order to sell their courses, those companies are telling parents you need to make sure your kid ‘wins at the starting line’,” said Huo Yan, who works as a university researcher in the eastern province of Jiangsu. 

“Parents will then worry about impacting their children’s future — because they haven’t invested enough in their education and training — so they’ll keep paying for those tutoring courses.

Many parents, like Ms Huo, are afraid that if they do not send their kids to tutoring, it will result in them failing the all-important national college entrance exam — known as the Gaokao.

Scoring very high marks in that exam is the ticket for students to get into most university courses in China.

The young mother is also relieved that the crackdown is “good for children” in the long run, as they can focus on sports and other hobbies (other than studying). 

She said it meant her 10-year-old daughter could finally just “enjoy her childhood”.