Chinese private education stocks dropped on Friday after Beijing stirred to tighten the reins on the early education segment, referring child security issues that have hit some companies over the previous year and saying that others were making excessive profit.
China’s State Council said on Thursday it would not enable private kindergarten to go public as individual entities or as part of advantage packages and would block listed companies from buying private kindergartens by shares sales or by cash.
The move could agitate a private education market expected to be worth $260 billion and which has been estimated to see deals worth billions of dollars this year.
U.S.-listed RYB Education Inc., which was hit by a child abuse case in China a year ago, fell over 50 percent overnight, smearing $200 million from its market evaluation. In Hong Kong and Shenzhen, peers fell sharply on Friday.
The move by Beijing is the most recent regulatory clampdown to rattle investors, coming after its moves to rein in segments from online loaning to gaming.
"It came as a surprise," said one Hong Kong-based investor in China's education segment, who declined to be named due to the sensitivity of the issue. "If the education companies are legal, they should be treated as any other business."
The investor said the guidelines had created a lot of disarray about what officially recorded private education companies ought to do, including whether they would be compelled to delist.
In a draft document laying out the ideas, China's bureau said it would look to standardize pre-education, support "lagging" teaching standards, and look to control extreme profit-seeking.
"Some kindergartens are overly profitable and some child safety issues have occurred," the state council said.
"This relates to the healthy development of millions of children, social harmony and stability and the future of the Party and the state."
Brokerage Jefferies said in a note the move was likely part of an administration push to gain more control over the segment as it looks to develop access to pre-school education.
"We believe the new regulations may be a response to the large amount of private equity money flooding the market trying to buy up private kindergartens, driving up prices," it said.
Jefferies added a last draft of the rule would probably be turned out by the first quarter of next year and that important questions were whether rules would be applied retroactively and if mutable interest entity ownership would be permitted.
China's general private education market is worth around $260 billion, according to a June note from LEK Consulting, and is rising at around 9 percent for each year. The consultancy expects around $3.5 billion worth of education deals in China in 2018.
China has been turning up regulation of the private education segment this year, with previous draft rules released in August also startling the market.
The RYB case a year ago, linking charges of child abuse, had flashed extensive anger in China about the lack of skilled teachers, low wages and poor regulatory oversight in the enormous and fast-growing private pare-school segment.