China's tutoring crackdown: Is the Chinese government prepared for its consequences?

Over the past two weeks, China's capitalist market has been bleeding. The "double reduction" policy (reducing the burdens of homework and after-school tutoring) for K12 or basic education has brought a disaster on the tutoring industry, with all academic tutoring institutions disallowed to operate for profit, while listed companies will have to let go of their K12 operations and be registered as non-profit organisations. Investors will also not be able to invest in them through funding tools.

This executive order has greatly dampened market confidence in China's investment environment. Education groups like New Oriental and TAL Education Group saw their share prices fall by 90% in just three days, while China concept stocks saw an exodus of funds, with online titans such as Tencent, Alibaba, and Meituan not spared as their share prices generally fell by nearly 30%.

After damaging market confidence, can the Chinese government really meet its policy objectives? The answer is: "We do not know." The official explanation is that to encourage childbirth, the cost of having children has to be reduced and educational expenses lowered, and so the profits of the tutoring industry have to be brought down. However, the overdevelopment of the K12 market is fundamentally due to a rigid selection framework and the unfair distribution of educational resources.

Because demand outstrips supply in most areas, families spend a lot on education. Without adjusting demand, simply suppressing supply will further exacerbate the imbalance, which in the long term will lead to more "involution" in the industry.

Even worse, shrinking supply will lead to higher costs of off-campus tutoring, where it is conceivable that only "rich kids" will be able to get tutoring. It is worrying that a policy that seems aimed at fairness in education might end up widening the rich-poor gap.

Besides, the "double reduction" policy needs a series of measures to be implemented first. But so far, there is no sign of such measures, only disorder and chaos. The first to feel the impact are public schools, which the authorities have designated as substitutes for off-campus tutoring. But can they do the job? Will parents approve of them? And who will shoulder the additional expenses of these public schools? None of this has been planned, and everybody is just charging forward blindly. Also, what will happen to the huge numbers of people in the tutoring sector? Such real questions seem to have become secondary, and nobody is paying attention.

The Chinese government is not acting without reason. Encouraging childbirth will keep the demographic dividend going and ease the pressure on the social security fund, and provide a stable domestic market amid an increasingly polarised international situation. But it cannot be denied that this reform of the tutoring industry is extremely radical, with no reasonable basis and no framework in place. Such an extreme policy reflects the extreme rigidity of China's current bureaucratic system.

Zhou Xueguang, a sociology professor at Stanford University and guest professor at Tsinghua University notes that a rigid bureaucracy will freeze bottom-up transmission of information and feedback, and lead to the lack of professionals in the policymaking process. The messy and radical policymaking with regard to the tutoring industry is sufficient proof of this.

Notably, rigidity is no longer limited to China's bureaucracy, but is starting to show signs of becoming the new model of interaction between the government and society. Despite the word on the grapevine over the past few months about adjustments to the tutoring industry, the Chinese government is clearly far from aware of the importance of communicating with the market. The sudden impact of this radical policy has sent shockwaves through the financial market.

Under a rigid model of communication, once someone in office decides to implement a certain policy, that policy is confirmed and unshakeable. In contrast, the consequences of that policy are very uncertain. This is because any differing views from the ground or from the market will be seen as a challenge to the authority of those above, which might possibly lead to those who speak up becoming the next target of policymakers.

As a result, there is zero communication between those above and on the ground, and there is a far greater chance of major gaps and risks in policies. Due to a lack of employment opportunities elsewhere, grassroots officials can only choose to "lie flat"; but this is not true for capital, which is mobile.

Following the K12 policy kicking in on 24 July, Xinhua on 28 July tried to stabilise market sentiment and ran an article saying that the regulations were just to get some industries in order, and would not change China's path of openness. But this lone effort fell flat within just a few days. Following a hard-hitting article in Economic Information Daily (under Xinhua) that was deeply critical of the gaming industry, tech shares - led by Tencent - plunged again, and this time, sectors backed by the Chinese authorities such as semiconductors and new energy were also affected.

Following the K12 incident, investors could still console themselves by saying that out of ten birds on a branch, one was shot down and the other nine flew away, and they can hope that the birds will come back. But following this second shot, where is the market confidence?

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