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Private Education Industry in China: New Investment Opportunities And Restrictions For Foreign Players

Posted: 9th June 2021 09:20

New regulations for investing in China’s private education industry clarify the levels of access available to foreign investors and address other industry concerns and opportunities.

China unveiled new regulations that will restrict foreign investment and the use of foreign curricula in private tutoring, according to a State Council decree signed by Premier Li Keqiang that was released on May 14, 2021.

The amendments to the law, the Regulations for the Implementation of the Private Education Promotion Law (the “Law”), will come into effect on September 1, 2021.

The new regulations are the latest in a broader reform effort designed to maintain government oversight over China’s lucrative private education industry.

According to a report by Deloitte, China’s after school private tutoring market more than doubled from RMB 203.2 billion (US$31.58) in 2011 to a projected RMB 564 billion (US$87.65) in 2021. Yet, while education is among China’s largest and fastest growing service sectors for foreign investors, private and foreign investment is strictly regulated by Chinese authorities.

Here, we look at some of the key features of the Law and its implications for foreign investment in China’s education industry.

Role Of The Party In The Education System

The Law reiterates the Chinese Communist Party’s leading role in education at multiple points. This includes references to the Party and state’s regulatory authority, as well as to the Party’s role in the nature and substance of education.

According to Article 4, private schools should adhere to the Party’s leadership, strengthen the education of core socialist values, and cultivate morality. To ensure this is done, grassroots party organizations will participate in private school administration to ensure that school decisions adhere to Party and state policies.

The role of grassroots Party organizations is further explained in Article 27, which states that private schools should set up supervisory agencies consisting of grassroots party representatives and staff representatives. The member in charge of the supervisory agency should also sit in on the school’s decision-making body as a non-voting member.

These articles underscore the importance of following the Party’s educational and social goals when running schools and designing curricula, as well as ensuring compliance with state laws.

Investing In China’s Private Education Industry

Restrictions On Foreign Ownership And Curricula

Article 5 states that foreign-invested enterprises and social organizations controlled by foreign parties cannot establish or operate private schools implementing compulsory education. Further, Article 26 states that the board of directors of private schools implementing compulsory education must solely consist of Chinese nationals.

In China, compulsory education refers to primary/elementary and junior secondary education, or grades K-9, which generally cover ages six to 15. Accordingly, foreign-invested private schools cannot offer full time education for children in these grades but can offer them supplementary before and after school private tutoring. Prior to the amendments to the Law, foreign investors were already prohibited from running compulsory K-9 schools.

The updated Law, however, also restricts the use of foreign curricula and educational materials by Chinese-operated private schools. According to Article 29, private schools implementing compulsory education are forbidden from using foreign teaching materials. Private schools teaching grades 10 and above, or international students, are still able to use foreign teaching materials that comply with Chinese regulations.

Additionally, Article 16 states that foreign staff teaching online are subject to the same rules and regulations as other foreign education workers in China, and that schools are responsible for ensuring that online teaching materials align with relevant laws.  

Investment Incentives

According to Article 54, private schools enjoy preferential tax policies as set by the state. Not-for-profit private schools enjoy the same tax privileges as public schools.

Further, Article 55 allows local governments to offer not-for-profit private schools preferential land use policies, while Article 56 offers preferential credit policies for schools set up in western, remote, and minority regions.

Beyond these, Article 61 allows regional governments to offer their own incentives and support policies to promote private schools in accordance with local conditions.

Article 67 clarifies that support and incentive policies also apply to Chinese-foreign joint ventures.

These various articles explicitly state that private schools are able to access incentives, but their specific nature largely depends on the region and the priorities of local governments.

Tightening Regulation Of The Education Industry

The amendments to the Law represent the latest effort by Chinese policymakers tighten regulations on the education industry. Some recent policies target the role that foreign investors can play within the industry, while others seek to address industry-wide issues and concerns.

In 2019, the Chinese government made public two development plans for the education sector, one covering the years 2018-2022 and the other goals to achieve by 2035. These plans provide the context for education reforms within China.

On the one hand, the Chinese government is seeking to improve the quality and consistency of education across the country, and emphasizing skills training and internet technology-oriented development. On the other hand, the plans also highlight the importance of teaching political subjects such as Xi Jinping Thought, which explains the sensitivity towards foreign investment.

Accordingly, China is simultaneously promoting foreign investment in areas like vocational education training centers, while also restricting foreign investment in K-9 education and increasing scrutiny on foreign teachers.

Private tutoring is not the only education sub-sector recently subjected to new regulations. Since 2018, policymakers have been developing a regulatory framework to govern online education in China. These efforts gained momentum after the COVID-19 pandemic forced the rapid adoption of online education and the proliferation of service providers.

Due to the size of China’s education industry, its fast growth rate, technological changes in the sector, and its political importance, further regulatory reforms in the near future are likely.

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