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China’s harsh education crackdown sends parents, businesses scrambling

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New Oriental is located at the West Yintai Campus, Hangzhou city, Zhejiang Province, China, on August 2, 2021.

Costfoto | Barcroft Media | Getty Images

The Chinese government’s sudden crackdown on after-school education companies is raising costs for many parents and throwing millions of jobs into uncertainty.

In a country where parents prize a good education — and good grades play an outsized role in determining career opportunities — tens of millions of students across China drown in after-school tutoring courses every year.

But this summer will be the last one for educational institutions to legally sell such tutoring programs.

Since the central government officially released the so-called double reduction policy last month, local authorities in several provinces, such as Shanxi and Hunan, have ordered private businesses to suspend online and offline tutoring classes for children from kindergarten to 9th grade.

The policy states that one of its major goals is to ease the burden and anxiety for Chinese parents wanting to give their children a good education.

The guidelines focus on the nine years of compulsory education before high school — from elementary to middle school, and call for academic tutoring businesses to restructure as non-profits.

The policy also prohibits those businesses from offering classes on weekends, holidays, summer and winter breaks — effectively only allowing tutoring on weekdays with a limited number of hours.

The scale of the crackdown is “far beyond expectations,” said Alan Wang, an analyst covering education at Beijing-based asset manager Harvest Fund Management.

The industry was preparing for some regulations, but it didn’t expect an order for restructuring that included a ban on public listings, making the sector basically “not investable,” he said in Mandarin, according to a CNBC translation.

Some parents will still pay up for tutoring courses they can find, sending costs higher, he added.

CNBC interviews across the education industry reveal that the new regulations shocked parents and left businesses struggling, as millions of employees braced for job losses.

Chinese parents scramble for options

If the local Beijing government bans after-school tutoring institutions, one mother surnamed Zhang said she will consider forming a small group with other parents to hire private tutors for their children. 

That means hourly rates will go up and parents will pay less up-front deposits than if they had gone through an institution, said Zhang, who declined to share her first name on privacy concerns. 

Zhang said she will spare no efforts to invest in helping her two children compete for “very limited” high quality education in China. The family lives in Beijing’s top public school district of Haidian, and the older child, who is set to begin middle school in the fall, spends about three hours a day at online group classes and one or two hours of one-on-one tutoring a week. 

That’s less than her peers in the district, who study all day or at least half a day during the summer break, Zhang said. 

Her younger child, who just finished the first year of elementary school, is spending about half an hour daily on online group classes. Zhang had hoped to enroll her daughter in more offline tutoring classes as staring at the screen is damaging her eyesight. But the latest crackdown means it will be almost impossible.

“I feel this approach is kind of one size fits all,” Zhang said in Mandarin, according to a CNBC translation. 

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After-school tutoring can be costly, but many parents feel compelled to sign their children up so they stand a chance in the highly competitive college entrance exam system. 

Luna Cheng is raising her 13-year-old daughter in Shanghai’s downtown Jing’an district. She told CNBC she paid about 5,000 yuan ($774) for a two-week summer course with about 20 other students, comprising of three hours a day on mathematics. 

That’s a hefty sum for most households, who also face high housing costs. 

A 5,000 yuan course is about 71% of the average monthly disposable income of 7,058 yuan for urban residents in Shanghai, according to official data for this year. 

But the same course would far exceed the average monthly disposable income of 3,756 yuan for rural residents working in Shanghai, the data showed, although rural workers have seen their incomes grow more quickly than urban ones. 

In Beijing, the hourly rate of a private one-on-one class anecdotally ranges from around 500 yuan to 2000 yuan.

Despite the cost, Cheng said she wanted to enroll her daughter in more courses this summer, but her daughter did not want to sign up.

“I am a bit anxious,” Cheng said. Her daughter will begin physics class in the fall, and Cheng estimates that 90% of her classmates will be studying for it during the summer break. Without extra studying time after school, Cheng said she is afraid her daughter will not be able to catch up, let alone excel in the new subject.

Such fears push parents in China to spend a lot on after-school tutoring and help fuel a burgeoning industry.

According to a 2020 report by Oliver Wyman, the market size for China’s after-school tutoring for kindergarten to 12th grade students reached 800 billion yuan ($123.7 billion) in 2019.

The consultancy predicted the market will break 1 trillion yuan by 2025. The growth was further accelerated by the Covid-19 pandemic, especially for online tutoring.

The new policy may actually have adverse effects in the short term, especially since poorer families typically send their children to tutoring schools only because of peer pressure, Claudia Wang, partner at Oliver Wyman and lead of the firm’s Asia education practice, told CNBC on Monday.

“Now, they’ve probably given up,” she said.

Millions of jobs at risk

The consequences reach far beyond business owners and parents: the future of millions of workers also hangs in the balance.

As education companies struggle to comply with the new policies, many businesses will likely be forced to shut down.

The education service industry provides about 10 million jobs in China, according to a report in January by Beijing Normal University and TAL Education in 2021.

Tutoring centers focused on academic subjects should pivot to another industry as soon as possible, Citic Securities, a major Chinese investment bank, said in a note sent to its clients on July 23.

The “double reduction” is just the beginning, and more supporting policies will come to regulate nine-year compulsory education, said Citic Securities. The analysts said the risks for high school education-related businesses are not high at this time.

A senior employee of 17 Education & Technology Group — a U.S.-listed after-school tutoring company in China — told CNBC the company plans to halve the number of employees.

The source asked to resign when the central government released its harsh policy on the sector, but chose to stay longer to help the company pivot its business. However, “nobody really knows how,” he said in Mandarin, according to a CNBC translation.

Other education industry giants are reportedly preparing for a 30% to 70% cut in their labor force, depending on how local authorities implement the central government’s regulation and how much the firm relies on income from tutoring students who are kindergarten to 9th grade.

The ban on tutoring on weekends and summer or winter breaks particularly hurts the businesses, since those classes account for more than 65% of class hours for most privately run after-school tutoring companies, the source said. Banning those courses means the majority of employees will no longer be needed.

In the wake of potential layoffs, Chen Xiangdong, the founder and CEO of Gaotu, said in a letter to employees last week that he is “very, very sorry that we have to make this tough decision,” according to a report by Chinese financial media Lei News.

However, Wang, the analyst from Harvest Fund Management, said he did not expect much fallout from potential job losses because the government would likely have already considered employment issues before making the policy decision.

U.S.-listed stocks plunge

Some of China’s largest after-school tutoring companies — U.S. listed firms Gaotu Techedu, New Oriental and TAL Education — were riding a business boom before the summer crackdown.

These three tutoring giants reported double-digit growth in the latest quarterly earnings reports.

In the quarter ending Feb. 28, New Oriental recorded a 29% year-on-year increase in net revenues to $1.19 billion, with student enrollments in academic subjects tutoring and test preparation courses increasing by 43% to nearly 2.3 million registrations.

During the same period, TAL’s net revenues increased 58.9% from last year to $1.36 billion.

Gaotu said net revenue rose 49.5% year-on-year for the quarter that ended March 31.

Chinese education stocks listed in the U.S. plunged after news of the government crackdown, and lost more than half their value that day. New Oriental and TAL postponed their earnings report plans scheduled for this week.

New Oriental, TAL, Gaotu and 17EdTech did not immediately respond to CNBC’s request for comment on this story.

Among the privately held businesses, major players like Yuanfudao, Zuoyebang and Huohua Siwei successfully completed several rounds of fundraising during the pandemic, raking in billions of U.S. dollars. These “mega unicorns” are reported to have planned to list in the United States just before the policy announcement.

Companies that managed to go public ahead of the crackdown are suffering as well.

Beijing-headquartered 17EdTech was listed on the Nasdaq in December with an offering price of $10.50. Now, its share price is around $1.

— CNBC’s Evelyn Cheng contributed to this report.

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JPMorgan to launch digital bank in the UK next week

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Signage outside a Chase bank branch in San Francisco, California, on Monday, July 12, 2021.

David Paul Morris | Bloomberg | Getty Images

LONDON — JPMorgan Chase is gearing up to debut its hotly anticipated digital bank in the U.K. next week.

The move will see the U.S. banking giant take on major British lenders including HSBC, Barclays, Lloyds and NatWest, as well as start-ups like Monzo and Starling.

JPMorgan will also step up its rivalry with Goldman Sachs, which launched its Marcus digital bank product in the U.K. in 2018.

New York-based JPMorgan first unveiled plans to launch its Chase brand in the U.K. earlier this year. Rather than establishing physical branches, JPMorgan will only offer its services through a mobile app.

It marks the first international expansion of JPMorgan’s consumer bank brand in its 222-year history.

The news was initially reported by the Financial Times and later confirmed by CNBC.

Sanoke Viswanathan, CEO of JPMorgan’s international consumer division, said the bank’s U.K. expansion was a “very big strategic commitment.”

“We will spend hundreds of millions before we get to break-even and get to a place where this is a sustainable business, and we’re not in a rush,” he told the FT.

Chase will initially offer checking accounts along with a rewards program. It also plans personal loans, investments and mortgages further down the line.

The U.K. is home to an increasingly crowded retail banking market. Fintech-friendly regulations have enabled challengers like Monzo, Revolut and Starling — which offer checking accounts and other services via smartphone — to flourish and become billion-dollar companies.

These digital banks have gained millions of customers between them, while some have even tried their luck at entering the U.S. market. Revolut, which now has over 15 million customers, was last valued at $33 billion, making it the U.K.’s most valuable tech start-up.

JPMorgan’s arrival in the U.K. will place further pressure on the country’s traditional lenders. State-backed lender NatWest notoriously tried and failed to take on fintech challengers with a competing digital bank called Bó.

Under CEO Jamie Dimon, JPMorgan has sought to combat the threat of fintech stars like PayPal and Square through a number of acquisitions.

As part of its effort to expand in the U.K., the bank agreed to acquire online wealth manager Nutmeg in June. Later that month, it announced a deal to buy OpenInvest, an ethically-minded investment platform based in San Francisco.

Earlier this month, JPMorgan said it plans to buy a majority stake in Volkswagen’s online payments unit.

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UAE real estate shows signs of recovery as Aldar predicts sales surge

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An Emirati woman paddles a canoe past skyscrapers in Abu Dhabi, United Arab Emirates, on Wednesday, Oct. 2, 2019.

Christopher Pike | Bloomberg | Getty Images

Abu Dhabi’s property market is showing signs of steady growth, as the oil rich capital of the United Arab Emirates recovers from the deep blows of the coronavirus pandemic.

“Business in Abu Dhabi and the real estate sector is actually very buoyant,” Aldar Properties Chief Financial and Sustainability Officer Greg Fewer told CNBC’s “Capital Connection” on Wednesday. 

“We’ve just come off a strong second quarter where we announced growth across all our major business lines,” Fewer said. 

“We’re on pace to exceed 5 billion dirhams ($1.36 billion) in sales this year, driven by new launches that we’re going to be bringing in the third and fourth quarters.”

The latest comments signal a further improvement in the UAE’s economy and its often crisis fraught real estate sector. Pandemic related job losses forced nearly 10% of the UAE’s expat population to leave, hitting property prices and increasing vacancies last year.

But low lending rates and improving business conditions in the UAE have helped to stoke demand for Aldar’s major community and housing development projects in Abu Dhabi, where it is the developer of choice for the Abu Dhabi government.

Total sales topped 3.4 billion dirhams in the first half of the year, and the recovery has helped to push its shares up more than 100% in the past 12 months. Aldar Properties is now the largest listed developer in the United Arab Emirates with a market value of nearly $9 billion.

Residential sales prices in Abu Dhabi had fallen on average by 2% in 2020, while prices in Dubai, where a supply glut has weighed on prices for more than half a decade, fell by 7.1%, according to Knight Frank. Price falls were largely concentrated in the apartments segment of the market, but demand for larger villas in both cities held up.

But Dubai’s largest developer, Emaar Properties, saw its sales surge to a record $2.65 billion in the second quarter of this year, while Damac Properties saw losses narrow. Shares of both have risen 42% and 33%, respectively, in the past 12 months.

“Our customer bases are expanding,” Fewer said. “70% of our recent launches have gone to new customers and a lot of them are tenants who are converting the ownership,” he added, suggesting people were upgrading to bigger homes and villas to accommodate the rise in remote work and learning.

Expatriate homeowners and foreign investors made up more than 40% of Aldar’s buyers in the second quarter.

A high national vaccination rate, improving mobility trends and government reforms to company ownership rules, paired with more flexible residency visas have also helped to improve sentiment within the sector broadly.

 

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Skype, Wise, Bolt thrive in absence of tech giants

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Bolt CEO Markus Villig speaks on stage at the 2019 Web Summit technology conference in Lisbon, Portugal.

Horacio Villalobos | Corbis via Getty Images

Estonia’s tech companies have been able to thrive in the absence of large multinationals like Facebook and Microsoft, the country’s president told CNBC.

Home to just over a million people, Estonian founders have produced several tech firms with multibillion-dollar valuations. Skype, which was sold to eBay and then Microsoft, is the most well-known, while others include the recently listed currency exchange app Wise and mobility app Bolt, which is backed by Silicon Valley VC heavyweight Sequoia.

President Kersti Kaljulaid said multinationals have traditionally set up their overseas headquarters in countries with generous tax systems, adding that Estonia has never been a tax haven.

Facebook, Google and Apple all employ thousands of people at their European headquarters in Ireland, where corporation tax is 12.5%. In Estonia, it’s 20%. The tech giants also employ thousands of staff across other European countries including the U.K. and Switzerland, but they don’t have a significant presence in Estonia.

“Estonia is a country that has never offered special deals or special treatment to any kind of company,” Kaljulaid said in an exclusive interview last week. “When I was advising the prime minister 20 years ago, everybody always came and asked what are your special conditions? We said none and I think it has served us right.”

She added: “This probably, might be, one of the reasons why Estonia has so many homebred start-ups from which you now see unicorns coming out more often.”

Estonia has developed a reputation for being one of the most technology-friendly countries in the world, with the government moving many processes online well before other nations. It has embraced online voting and digital IDs, for example, and free wi-fi is widely found across the country.

Kaljulaid said the country’s leaders want to make sure Estonia’s legal space is safe but permissive for new technologies like the grocery delivery robots that have been built by Starship Technologies, which was set up by Skype co-founder Janus Friis.

Kaljulaid said the nation’s entrepreneurs and coders have been educating politicians on the technologies that are poised to change the world.

For example, Skype co-founder Jaan Tallinn has been teaching her and others all about artificial intelligence.

“In Estonia, he [Tallinn] is well known as somebody who warns us and informs us,” she said. “He’s worried, but not unnecessarily.”

Tallinn told CNBC that he has one major concern when it comes to AI.

“AI is still fairly domain specific and fragile,” he said. “The one big concern I have is that countries will start applying more AI to a military context.”

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