China Bans For-Profit Schools

After more than a decade of a mainly pro-business, pro-markets stance, the Chinese government has changed tack. This has been made abundantly clear as the government has begun enforcing a variety of measures to deal with a range of concerns such as monopolistic practices, financial regulation, and data security.

Initially, China wanted its own homegrown companies to serve as a counterweight to the influence and power of American tech companies, so it was enthusiastic about these companies growing and becoming more powerful. However, their ardor waned as these companies expanded into new markets with their founders and CEOs becoming more outspoken. The final straw seems to have been American tech companies' de-platforming former President Donald Trump, underscoring the power of these platforms.

Education Crackdown

The latest move is likely the most aggressive and involves basically shutting down an industry that is estimated to be worth $100 billion - China's for-profit education sector. Some of these stocks include TAL Education Group (NYSE: TAL), New Oriental Education & Technology Group (NYSE: EDU), and China Online Education Group (NYSE: COE). This is also adversely impacting some of the largest companies in China such as Alibaba (NYSE: BABA), TenCent, and ByteDance who are large stakeholders in these companies.

While some of the moves made by Chinese companies against tech companies can be seen as part of a strategic gathering of power, it's banning of the for-profit sector seems more benign. China is dealing with an aging population and increasing inequality. This has created a rat-race and stressful situation for children and families.

For-profit education companies were able to capitalize on this anxiety and become very profitable. However, it quickly became almost mandatory for children who aspired to join the upper-ranks of the country's economic stratosphere and started contributing to more inequality.

Of course, these anxieties and competition also have further depressed the birth rate which China is now attempting to revive. The new regulations are especially focused on subjects like math, science, and programming, while classes for subjects like music and art will remain available. The country will instead focus on providing free, online educational resources that will be available to all citizens.

Outlook

Many of the education stocks are down by over 90% due to this news. Currently, investors should avoid all Chinese stocks as the government seems intent on other priorities even at the expense of stock prices. On top of this, there are the inflamed tensions between the U.S. and China. Essentially, the welfare of shareholders in Chinese companies is not a priority at the moment, therefore these stocks should be treated as trading vehicles rather than investments.