Wall-Streeters saw an unprecedented sell-off of Chinese private education firms in the past week, triggered by the latest tightening policy on China’s education sector. In essence, the new policy stipulates that all existing firms providing services related to compulsory education, such as on math and biology, should register as non-profit , and shall not be listed or controlled by listed entities.
A year ago, many of these firms were stars in the eyes of institutional investors, who produced numerous reports advocating their bright future. However, capital has always been swift in switching attitudes. Take TAL, a leader in this sector listed in NYSE in 2010, as an example, its shares are now traded at USD 6.4 (July 28), less than 10% of the price in April 2021.
Many analysis has been produced on this topic to explain the crackdown. Some of them argue that this is a move to encourage birth rates. Others regard this as sign to call firms listed in the US to go back to China (most of them are listed in the US). Extremists even regard this as evidence of Communist party’s seek for absolute power and control.
I am not an expert of the education industry, so it would be arrogant to completely deny any of the above analysis. Yet I feel that I could offer another perspective.
Forcing firms in a star industry to become non-profit will trigger a chain reaction with huge consequences, and I believe ministerial-level officials or even vice premiers are not dare to make the call. If coming from the ultimate authority, the decision would be a high-level political one, rather than a technical one. In this case, a political perspective is needed to fully understand what the leader wants.
The political role of education in the Chinese society is to offer the have-nots a chance to become the haves. Namely, education and the examination system made it possible for the wise and diligent ones in the bottom of the society to up-flow to the medium. This political role of education has been in the minds of the Chinese politicians since the setup of Keju (the imperial examination system) in Tang dynasty. To fulfill this role, education and examination, to the most possible extent, must not favor the children of the haves over the have-nots. In other words, the haves cannot expect their children to be automatically admitted to good universities in China, while the kids of the have-nots will have a real chance to receive high quality higher education provided they are smart and diligent.
However, this ideal political role of education and examination creates a natural problem. The haves, especially those in the medium of the society whose up-flow of social status was only possible because of their success in Gaokao, would try their best to make sure their kids also become winners of examinations. The most serious guilt of the education firms, in my eyes, is that they identified this problem and tried to make money out of it, endangering, or at least on the track of endangering, the political role of education.
Given the political will behind the scene, I would bet that services regarding examination-related courses would shrink. Some of them may exist underground, but only minority of the families would have the social capital or the money to send their kids to these classes. In a broader sense, this policy, together with the tightening of property developers and online platforms, signal that the politicians would, from now on, only welcomes entrepreneurs, but not capitalists.
The political role of education: an opportunity of social up-flow
The haves and the have-nots coexist in each society, but not every one offers systematic channels for the flow between the two groups. Naturally, the haves would want their children to stay as the haves. In the Chinese society, this was first achieved with aristocracy, where only blood relatives of the emperor are selected as government officials. In the Northern and Southern Dynasties (AD 420-589), as the power of the emperor weakened because of warfare, senior officials in the government forced the emperor to recognize their role as sole graders of all candidates of civil servants. Of course, only the children of senior officials were graded as capable and noble.
The problem of such inter-generation solidarity is two-folds. On the one hand, although the first generation of the haves are motivated and capable of doing business or politics (otherwise they would not become the haves), their children with security blankets could be much less wise and hardworking, and would not be able to stand against competition, such as an invasion of neighboring countries. On the other hand, some of the kids of the have-nots, who are wise and capable but without proper channels to become the haves, will take chances to rebel fiercely.
Therefore, to ensure social stability, there should be a selection process which offers a chance for the wise and capable children of the have-nots to become the haves, and prevents the children of the haves automatically enjoys all the privileges of their parents. This selection process of children should involve as little as blood relations (aristocracy), money (plutocracy), and the social capital of parents.
Education and examination, as a selection process, has been shouldering this function in the Chinese society since the inauguration of Keju in Tang Dynasty. In the past thousand years, the ultimate goal of Keju and Gaokao roughly stays the same, which is testing the intelligence and the diligence of a kid. Reciting classics (Keju) and solving elementary math problems requires a basic level of IQ (but not necessarily an IQ of a talent) and the perseverance of repeated practices.
Whoever passed this selection would be qualified for mobilizing social resources, regardless who your parents are. In the old days, passing examination means one can leverage administrative power. In the past 40 years, it means enjoying the training of best universities and the recognition of good employers. Complicated as today’s society is, it would be naïve to say that go to Peking University or Tsinghua University would be enough to become an upper class in the society. However, for a student coming from a poor village, a degree from a good university would almost guarantee a decent job in the city where the university locates. In this sense, education and examination today is still a reliable channel of social up-flow.
That is why there is a famous saying in Chinese, “教育改变命运（education can earn a person a new life）”. That is also why, in the past thousand years, whoever distain examination with bribery and plagiarism would, to the most serious extent, sentence to death and disgraced by the entire society. Education and examination is a political issue in China, not a technical one.
The guilt of the education firms
So why are the education firms targeted? Personally, I do not think prime reason is that they made children stressed out, because I clearly remembered studying till mid-nights in junior high schools although I seldom take classes outside school. Homework was easy, but one had to do extra exercise to get good grades. Nor do I think these firms are falling beyond the government’s control, for none of the bosses in the industry is as famous as Jack Ma from Alibaba. My speculation is that their guilt related to endangering the political role of education.
To act as a selection process, the supply of relatively-good education would always fall below the demand. In economics, whoever owns a commodity, which is of limited supply and excess demand, would be able to collect economic rent , meaning that price would exceed the marginal cost of producing this commodity. However, in China, the governments never intended to collect this rent.
Compulsory education aside (primary school and junior high in China), my family only paid a tuition fee of RMB 18,000 (USD 2800) for the three years of my senior high studies, and my high school was the best in the whole Jilin Province, because I got fairly good grades (590 out of 600) in Zhongkao (municipal examination to go to high schools).
For students who got a score of 570 to 585 (roughly this range), the tuition fee is around RMB 100,000 (USD 15,384). Students whose score were below 570, unless their families were extremely powerful, could not be admitted whatever their parents would like pay. This means a kid need to rank among the top 2,000 among the 60,000 students in the City of Changchun to go to my school.
For universities, the tuition fee is even lower. In Peking University, each year I pay RMB 5,000 tuition and RMB 1,020 for dormitory, which is about USD 1,000. For those whose family cannot afford this amount, the national student loan is provided with no interest before graduation (5% to 6% after graduation per year).
By avoid levying high prices on education, the government made its intention clear that education and examination in China aims to treat the children of the haves and the have-nots fairly, and no other objectives should jeopardize this. About fifteen years ago, top universities in China were allowed to keep a portion of their annual admission quota to a special pool, which can admit students based not only on the score of Gaokao, but also on extra-curriculums and interviews. This was a response to the criticism that Chinese students focus too much on examinations, but created equality issues because only kids from the haves would be able to learn English from foreigners, participate modeled united nations, and do volunteer work during summer vacations in low income nations. In recent years, quota for this pool has been shrinking quickly under the guidance of Ministry of Education. For education and examination, equality is weighed more against efficiency.
With all the analysis above, the guilt of the education firms is clear enough. Education firms are fulfilling the demand of the haves to secure better education for their kids, which should have been left idol. Clearly, they are not able to increase the supply of good high schools and good universities, which are controlled by the government, nor are they genuinely increasing the learning capabilities of kids. I draw from my personal experience that the key of learning, even just to get good grades in Gaokao, is self-motivated and repeated reflections and practices, not receiving lectures day and night. Having children sit through lectures and enabling them to search solutions to a problem via uploading a picture through cell phones instead of thinking hard for themselves are making them bad learners.
Worse, education firms are making money out of it. Some news report show that it is not uncommon for a family to spend RMB 4000 on courses per month. For comparison, my single-room apartment in Lujiazui, Shanghai, costs about RMB 5000 a month. Many education firms report negative net profits, but this is mainly contributed by the large scale promotion costs. Their gross margin (operation profits as a share of operation income) remains around 40% to 50%. Each dollar paid for classes is a blow to the effort of separating education from money and power. This is the most serious guilt of education firms.
What comes next?
Firms offering education services are not new to China in 2021. For instance, Yu Minhong, the founder of XDF, has been regarded as a role model entrepreneurship in China for almost 20 years. The difference between the past and the present is the volume of families involved. Previously, education firms mainly facilitates English exams, such as TOEFL, IELTS, and SATs, which means that the takers are wealthy families that can afford the tuition of western universities. Therefore, 1) only a small portion of families would take the courses and 2) they will not participate Gaokao and will not impact the domestic selection process. There were also private courses on math and physics 15 years ago, but on a much smaller scale. It is only with the vast promotion techniques in the digital age did courses become almost compulsory because teachers in school are forced to jump many materials because most students say that they have already learnt this.
With the crackdown of the sector, things may roll back to the state of 10 years ago. The demand for better education from the haves will not vanish, which means underground and informal courses would exist on higher prices. Nonetheless, only a small portion of families with ample social capital and wealth would be able to attend, and the rest students would still compete with each other on a fair term. Meanwhile, education services not related to examinations, such as art, music, and international competence, would continue their prosperity because the haves would always find a way to show-off their kids.
From a broader perspective, China may have entered a new phase in terms of the relationship between capital and other production factors. In the past forty years, capital earned a very high return due to its relative scarcity. Today, capital has become relatively abundant and is facing fewer good investment opportunities because the Chinese economy is no longer in shortage of supply for most goods and services. However, there are many cases showing that capital is not willing to give up its share of pie to others. They try their best to earn more by 1) pushing labor over the edges by working 9 am to 9 pm 6 days a week (so called “996”), 2) claiming a high risk-adjusted rate of return when investing in new sectors, and 3) squeezing out other competitors to gain market power and then earn the money back.
Are these actions justified? Many economic models can be set up to agree or disagree. Mathematically aside, the ultimate question is how much should capital been compensated in an age when talent act as the ultimate driver of economic growth. The tightening of the real estate sector, the platform economy sector, and the education sector in the past year may have symbolled that the Chinese authority are rethinking the role of capital in the society. Entrepreneurs and capitalists are not the same. Entrepreneurs maximize a dream subject to business viability, which means that making ever-increasing profit is not the ultimate aim. Capitalist, on the other hand, always maximizes return subject to laws and regulations. Entrepreneurs will always be welcome, but capitalist may experience a harder time.
