Why Have Chinese Stocks Lost $740 Billion Since February?
China’s US-listed stocks have taken a turn for the worst, losing $740 Billion in the space of around five months. This downward spiral has also led to a dramatic 7% loss in the Nasdaq Golden Dragon China Index in a matter of days. This is the largest drop it has seen since 2008. Let’s examine what has caused this sharp decline, and what the economic landscape is looking like for Chinese businesses.
Troubles with China’s Education Sector
On July 26th, the Nasdaq Golden Dragon China Index, a market cap index made up of stock from Chinese companies that are publically listed in the US, fell drastically, marking significant fears from traders. This 7% drop has led prominent US investors such as venture capitalist and vocal Bitcoin supporter, Cathie Wood, to begin unloading Chinese stocks from her company’s ETFs.
The main source of this fear appears to stem from the government’s recent tightening of restrictions in both the tech sector and the education sector. The tech industry was hit first– in early July, the Cyberspace Administration of China (CAC) began opening investigations into high-profile tech companies under the guise of increasing data security.
However, the issue then spread to education, a field that has been exploding for several years, currently valued at $100 billion. The Central Committee of the Communist Party of China (CCCPC) released strict guidelines for education-focused businesses. The aim of these guidelines, released on July 24th, is to reduce the burden on its students, specifically with regards to homework.
China’s education system has been known to be problematic for decades. Chinese schools are notorious for overworking their students, providing limited national history lessons, and even mishandling student deaths. While the government’s recent move to try and reduce student workloads is welcomed, there are many other restrictions that have been introduced that accompany this, which seem to serve other (possibly political) purposes.
For instance, all companies that teach school curriculums have been forbidden from listing themselves on stock exchanges, making profits, or accepting foreign investments. This means many publicly listed educational companies will likely be forced to de-list and become private.
This has caused the Chinese stock market to enter a freefall, with many institutional investors such as BlackRock exiting and distancing themselves. This is also worrying for the private education sector, as venture capitalists from around the globe invest heavily in Chinese companies, including those focused on learning.
EdTech is on Thin Ice in China
The businesses caught most firmly within China’s crosshairs are those in the educational-technology (or EdTech) sector. Having been hit by regulatory action across the Chinese government, these companies are in a worrying position.
New Oriental Education, one of China’s biggest EdTech firms that trade on both the New York and Hong Kong stock exchange, has plummeted by 70% from July 22nd. The company released a statement on the matter noting that they expect these new restrictions to “have material adverse impact on its after-school tutoring services related to academic subjects in China’s compulsory education system”.
TAL Educational, another high-profile EdTech company in China saw a similar drop in value. Both this company and New Oriental focus on private tutoring, meaning that as they cover curriculum topics making them firmly within the grasp of the new crackdown.
EdTech startups are also in danger. Of the top five EdTech unicorn startups worldwide, three of them are located in China. This suggests that not only has EdTech in China been a huge area for investment but that these rules will likely harm the economic landscape on a global level.
With these actions, the Chinese government has made it clear that it is wary of the tech world, and that it is apprehensive about external investments. This echos its recent purging of Bitcoin miners from its country. Not only did this reveal China’s fears of crypto, but it also laid the foundation for the upcoming release of its own digital currency.
These rules mark a bittersweet moment in China’s legacy. While they spell good news for the welfare of students nationwide, the lack of external funding is sure to make additional educational services more scarce and harder to attain. This could also mark the end of China’s EdTech industry entirely.
Do you think China’s US-listed stocks will recover? Let us know in the comments below.