Review of Signals: Online Education
Review of signals from OC on previously generated JPM published research: Online Education
Note that this covers the reports sent through by Anurag. The request on early signals and structure of laws covered in Section One for 2018 and Section Two for 2021. Section Three outlines ways that Bilby could be used to improve analysis and offer earlier and clearer signal identification. Section Four gives a quick overview of the overarching regulations that will apply nationally, drawn from Bilby.
Section One: 2018 Regulations
JPM: 1H 2018 >> lots of discussion on after-school tutoring regulations (but it’s translated as off-campus training), including Draft Law on the Promotion of Private Education (higher-level discussion that emcompas schools and ASTs) and Circular 80 on AST regulation by MoE and State Council. The formal regulation was out in August 2018, I think.
In late 2018, the Chinese government began releasing a series of new regulations governing both after-school tutoring and online education providers.
The background of 2018 matters enormously. China has long been worried about educational quality.
Part of that is China’s formal education system is enormously complex from a regulatory and government perspective. There are a number of regulators, each in charge of different rules. The diagram below describes.
The central government has too many regulators that are charged with affecting education. Changes to education regulation, for example, could come from the Ministry of Education – but these could interfere with curriculum and content orders from the Propaganda department and fiscal mandates passed down by the Ministry of Finance. Only the local Standing Committee (ie, the body in charge of the local government) can resolve this conflict.[i] The local leaders hold the cards, as they control the allocation of land, perquisites such as cars and housing, evaluation of performance, etc. The higher body above mainly passes down orders and occasionally comes to verify matters. But these local leaders have to arbitrate all conflicts, and that is a Herculean task. The average county Party secretary’s performance for example is measured through more than 2000 indicators. There is no way they can be across everything that is occurring. They can only change some of the incentives, but it cannot change all the different decisions made by local governments and their schools. When this is multiplied by the thousands of different counties, hundreds of municipalities, and dozens of provinces, it shows how regulations are very fragmented.
This is why there are so many confusing and multiple regulations issued. There are also different parts of the system involved. Teachers are bound by rules forcing ideological compliance as well as normal educational rules.[ii] Curriculum changes are the front line of fights over education. Central education bureaucrats are developing an idea of a ‘comprehensive training system’. The Party rewrote various school curricula in order to focus on students’ “patriotism, law-abiding, innovative thinking, physical standards, aesthetic ability, labor practice and other aspects.”[iii] The Ministry of Education’s own Director of Basic Education said that the new ‘comprehensive training system’ will make moral education the ‘first priority’ of China’s education curricular.[iv] Recent ideological policies mandate that all local governments must compile files on all teaching staff by the end of 2020.
China has a major issue with teacher quality, in that local government still provide the teachers to the schools and this greatly affects what is provided offline versus what is provided online. The Ministry of Education’s Opinion Regarding Regulating After School Online Tutoring (2018 no. 8) restricted who could teach at off-campus online training facilities. Signals make clear that there will be further restrictions based on one’s Party affiliation.
Previously, it relied on many foreign education providers to improve quality. Beijing allowed foreign entities to partner with local government-owned schools (the ‘variable interest entities’) to minimise tax and soften local government scrutiny. Local governments had nearly total discretion over investment, school accreditations and land approvals for campuses; Shanghai, for example, was notorious for being stricter than Shenzhen. Local governments were able to reclassify schools: “private” schools could also become schools solely for the disadvantaged and thus attract benefits for example.[v] This made a bit of a mockery of central government rules, such as those outlined by the State Council with a target of 80 percent of Chinese kindergartens as either public schools or socially responsible private schools that are not backed by publicly listed companies.[vi] (Kindergartens previously were the only area where foreign offline providers could enrol Chinese students under compulsory funding regulations). Local governments, in response, just reclassified the schools.
This shows that even should the central government give a final order, it is not binding on any provincial government. Local governments can do whatever they want. They don’t order companies based on money. Ministry of Finance figures show that central spending on education is 171 billion RMB, or around 6.5% of total spending. To put this in perspective, China as a whole spends 240 billion just on early childhood (0-5 years) education, or $70bn more than the total official government budget. Government spending as a proportion of total spending will also continue to decline in the next two years. Based on the normal rate of budget increases, central spending on education will be around 5.6% of totalspending.
Parents, meanwhile, need to navigate China’s enormously competitive education system. Hence, the constant growth in enrolment in after-school tutoring (“AST”, as noted by Anurag), and in online education: everyone is racing hard to keep up.
The impact of this mixed salad of regulations can be seen in the impact of a number of changes to private education in 2018. The Promotion of Private Education law was first released in April 2018, without any impact on market price of major listed education providers. In August 2018, however, the Ministry of Justice issued a draft revision of the law which proposed restricting foreign capital investment in kindergartens. The proposed new legislation sought to bar foreign for-profit education firms from benefitting from the resources that government non-profit schools exclusively receive, such as land rights and lower tax rates. A draft legal revision from a ministry has absolutely no legal standing, and is completely non-binding nationally. Yet, many listed online education companies saw their stock price collapse.
That was because provincial governments read the tea leaves and took it upon themselves to enforce and discuss changes with companies that were headquartered in the province. You don’t need settled regulations to change China. When the centre is unclear, then the provinces can do what they want. This is particularly an issue with online providers; nearly all of them are headquartered in Beijing. (There are some small pockets in Hangzhou, Guangzhou, and Shanghai; we also have trackers on these areas). So whatever happens in Beijing can have a disproportionately high impact on online education.
What does this mean for analysing education signals? First, one cannot just look at central signals, but rather need to mix provincial level actions. Secondly, there are multiple regulators that affect education that also need to be tracked. Thirdly, Beijing is the most important local government. All of these factors are discussed below in our review of 2021 regulations and JPM reporting.
Section Two: 2021 Regulations
JPM: 1H 2021 >> crazy amount of discussion ON-GOING on further tightening of ast industry. No formal-formal announcement on final outcome, but the big-picture direction has been known as “double reduction” policy – see attached of our few notes in the past month or so…
To begin, a Bilby search shows that there was considerable action in 2020 as well that set the groundwork for 2021. Early in 2020, the Ministry of Education, along with five other central authorities, a campaign to check the operations, course content, and teaching qualification of online training providers. The release of the final report in January 2020 said that central regulators checked “3,463 courses and 115,622 teachers of the 718 online training course providers.” Official media reported that the campaign is expected to result in a provincial blacklist of the unqualified or poorly run online training providers and to suspend or shut down their services.
With that in mind, this section goes through recent changes to show early indicators or appropriate metrics for measurement for each of the JPM reports sent to Official China.
27 March article
This report discusses AST stocks plummeting 18 to 45% on market speculation that the government may introduce draconian regulatory measures.
According to China Fund News there is a document circulating online which alleges that Ministry of Education and other authorities held a talk on 15th of March discussing measures to reduce the burden from homework, and from after school tutoring for compulsory education students. This is the so-called “double reduction”. The allegation is at 9 cities including Beijing, Shanghai, Guangzhou, have been selected to carry out a one year pilot project to reduce the students burdens by limiting the number of institutions that are able to offer after school tutoring, by limiting the amount of teaching time that one is able to be quote prices for, and by reducing the price of after school tutoring. The document alleged that regulations are expected to be issued by the State Council at the end of the month.
To do this the government will introduce three specific measures: strictly reviewing and approving after school tutoring institutions, and no longer approving knew after school tutoring bodies. Second, standardising tutoring services, which will reduced the ability for after school tutoring bodies to charge price premiums. Also all prices will have to go through education regulators. Thirdly, ban advertisements for online or offline after school tutoring bodies. It is alleged that public schools are designed to provide more after school services to students, focusing on the development of comprehensive and quality education.
JPM makes the following hypothetical scenarios should this be true: they are not concerned about the impact on prices, as they view current prices for offline small class teaching as being fairly reasonable, while the pricing of online large classes is very reasonable. However, the worry is that blocking new offline after school tutoring bodies from opening up new centres would significantly way on their growth. This will hurt companies like new Oriental, and TAL.
Banning advertisements for after school tutoring would greatly hurt online education market. Nearly all major online players currently lose money due to higher customer acquisition costs, as the vast majority of new students are required through ads on popular online platforms. Should businesses be unable to advertisement advertise their wares on we chat etc, they would not be able to have explosive growth, rather relying on retaining students, word of mouth, and expanding their services throughout China. This will help their profitability, as marketing spends at present is very high, but will not lead to explosive growth in enrollment, and that will greatly hurt valuations.
JPM is unable to tell if it is fake news or not. We assess it as unlikely to be true. It is the right regulator to do these things: the State Council would indeed issue regulations blocking new centre opening and also education. But such a specific order is almost always left to local governments. Moreover, changing advertising restrictions needs the support of the Party, so it could not be a standalone State Council decree. The same applies for curriculum changes; that would need to go through the Party.
31st March
The State Council and the Ministry of Education held a press conference to discuss the 14th Five Year Plan for education. The Minister of Education then commented on the AST industry. It says a number of problems within the industry that increase the academic and financial burdens of students and parents, and says it will work with other departments to take more effective measures to increase supervision over after school tutoring. It would strictly approve new AST and other institutions; strengthen the supervision of fees; and regulate what is taught beyond the common school syllabus. It also said it would strictly implement relevant laws and regulations. There was no comment on advertisements.
JPM predicts that advertisements and promotional spending will be scrutinised, but they're not sure how. They think that a ban on after school tutoring advertising is likely to be too drastic. We would add that the Ministry of Education doesn’t hold the power to ban advertising. JPM argues that “some restrictions such as banning ads on state owned media or restricting ads during certain hours are very likely”. We disagree on this point, however, due to the inability to regulate that for the Ministry of Education. (That is, not to say that it won’t happen, it just won’t use this signal).
25 April 2021
This report conflated two different types of regulations that affected online K12 after school tutoring companies.
In the first report the Minister of Education carried out an initial investigation, and named 4 large online education companies for violating the education ministry regulations. The companies were then ordered to fix these problems, and publish corrective measures.
The violations themselves were largely to do with selling courses in advance, in violation of the advance admission and fee collection rule of the Ministry of Education. This was a Beijing inspection similar to activities that has occured for other offline AST companies that had been hit by regulations since March. The target for the Ministry of Education activities was to keep tuition fees sold to three months duration only, and not force students to do combination courses.
The early indicator for this was published in the Beijing Youth Daily, on the 18th of February. This pointed out that the education market had become very heated and made a number of claims. The other early indicators that could have been used were the Beijing government inspection notice requiring requiring the centers to remain closed for inspection but saying they can reopen after review and approval.
The second article was issued by the State Administration for Market Regulation. It found that four online AST companies, two of which were named the day before as being in violation of the Ministry of Education regulations, wer violating the price law. This meant that the companies had listed fake original prices in order to make it look that they had cut their prices by a greater amount than the reality. This is actually a very different kettle of fish from the education regulations.
Why? Because the two different activities at different stages of China's policy lifecycle. The Ministry of Education regulations are early inspection that find violations enforce the firms themselves to publish how they will rectify. In doing so they act as a form of policy itself. Using inspectors is much less permanent, and quicker, then drafting an actual policy. Following that getting the companies to publish publicly what they would do tells the regulators what the final policy should be. The next wave of this that will come will use the corrective measures published by the companies themselves in order to form a more permanent, more specified bunch of directives that online after school tutoring companies headquartered in Beijing must follow.
As Section Two showed, education is not governed by a classic topdown policy making process. The city in which an online company is headquartered regulates its conduct across the nation, and indeed the globe. As such the activities that occur in Beijing are themselves able to act in a lawlike way. In other words, rather than waiting for a law to figure out what is happening, Beijing authorities are punishing a certain number of firms to act as an example to the others, and using the response of these firms to calibrate how it will direct the entire industry. There are no significant online education players in China not headquartered in Beijing.
The use of SAMR however, and the price law, is at the end of the policy lifecycle. The administration for market regulation traditionally is a weak regulator. It was only established in 2018. It has very significant capacity and personnel issues. However, its recent use to go after China's Tech Giants has seen it being used more and more by Chinese leaders as a form of overall indicator of bad behaviour. In this case, though, it is prosecuting a legal breach (end of the policy lifecycle) rather than announcing an investigation (what they did to Alibaba and others, and a measure at the start of the policy lifecycle).
What we don't know, but appears relatively clear, is how coordinated these two actions are. Both of these actions must be signed off on by the Beijing city leadership. This means that they are two different types of ways of signalling to online education providers what the Beijing leadership, and by implication the very top leadership of China (see below) want firms to do.
The key to understanding this is to see that the next wave of regulations will target education provisions, and this is not yet settled. That is what will affect the operations of the online education firms in the medium and long term. Applications of the price law are settled conduct. They will result in fines and punishment for the specific companies, and will actors warnings for others not to breach laws, but are not designed to shape the direction nor the path of the sector as a whole.
9 May
On May 7 the Beijing Party secretary and mayor met with representatives from public schools and leading after school tutoring companies. This was a high level discussion on the so-called “double reduction” policy. JPMs read on the meeting was that they think the purpose of AST reform is to clean up and regulate the industry rather than to kill it.
We agree, but with some rather large caveats. Firstly, cleaning up and regulating the industry will involve multiple regulators, and not just education. (See Section Two above). ASTs are now being “asked to build and strengthen Party organisation within the company to closely follow the Party's leadership.” AST firms are also to be “deeply aware of existing problems and to promote healthy developments under strengthened regulation” as the “original purpose of after school tutoring should be the same as that of public schools and that the industry must adhere to its public welfare nature as a supplement to public education.”
To us we think that this makes it much more likely that there will be more inspections, and this also makes it possible to go after advertising. The Beijing Party secretary is able to unify the different regulators of advertising and education.
With regards to early signals, note that much of the language is nearly identical to the 18 February Beijing Youth Daily article discussed above.
11 May: new developments in banning after school tutoring.
This used online media and an authoritative government newspaper. It argued that two counties have penned after school tutoring classes for compulsory education students. This is in order to follow a so-called double reduction policy from the central government. Interest based classes such as art and music are still allowed. JPM believes that detailed guidelines for the much discussed double reduction policy that reduces student burdens from school homework and after school tutoring could be out in the coming weeks before the end of May, and that this is consistent with industry expectations.”
We disagree. Company information and rumour is saying that. But we think that inspections are far more likely.
Section Three: Some common things that could be added with Bilby
We believe our product adds four areas which could be improve online education analysis.
First, we make clear which regulator should be doing which job. There is a focus on a top down, centrally-led model of how policy and regulation works. This is at odds with all evidence of how education regulation has been carried out. Not having the right regulator isolated makes predictions less likely to be correct as signals are being missed.
Secondly, we distinguish between official and unofficial signals, and that affects how predictions are made. The reports sent presume that anything published that may or may not reflect official gossip has a possible impact on this sector. This is consistent with a top down model. However, the main signal which was missed came from an official newspaper, and the policy lifecycle was followed perfectly thereafter.
This links to the third area, which is that we can determine which stage of the policy process the different regulator is at. For example, the use of a price law versus how inspections that force self-criticism work. The general function is that private line and social line both actors initial triggers that force various responses. This relationship is not clear, except when you have information that covers both. Note that this early signal is not always followed. But the second signal is: that comes from the policy line and is when the regulator or the official ministry responsible, issues a statement telling people what to do. This can come in the form of inspection which is not always made public, or in the form of an official announcement or warning to others. This is not however settled policy. The final signals are the enforcement or execution of settled policy, which shows regulatory preferences but is not a steady leading indicator.
In both cases, there are two dynamic processes. The first one is far more regular, which is the signals being sent out on a daily level including changes in languages etc. The next one is a much slower moving but still slightly dynamic process in which the body issuing the signal or the type of signal changes. At present, there is too much noise to carry out this sort of analysis, based on the reports sent.
Finally, trackers should be created for ministerial and regulatory changes that pre-date what is pushed through Bilby. This can be done through a custom JPM tracker. Articles that make it into the People’s Daily are themselves often taken from China Higher Education’s magazine (周刊) section, and that choice acts as a guide to what the leaders want. So for example, the recent meeting of the ‘the Law Enforcement Inspection Team of the Higher Education Law’[vii] made clear that the central government wanted a crackdowns on higher education through more inspections of schools,[viii] but did so by placing the story in the most prominent position an education story had received in many months. This is an example of a fairly reliable prima facie indicator of future regulatory shifts.
Section Four: Overarching and authoritative regulations (from Regulatory Line)
2002 Non-Public Education Promotion Law: allowed private higher education and various actors. Allowed private capital to enter the Chinese market.
2013 Ministry of Education Interim Administrative Measures for High School International Programs: Made it harder for public schools to introduce international divisions
2014 Ministry of Education guiding opinions on education. Issued an opinion requiring all localities to establish a comprehensive quality evaluation system.
2016 Several Opinions of the State Council on Encouraging Social Resources to Invest in Education and Promote Sound Development of Non-public Education: tried to establish party leadership over private schools by developing a classification system.
2017 Non- Public Education Promotion Law: aimed at prohibiting for-profit schools for compulsory education
2017 State council 13th Five-Year Plan for Education Industry Development of the People’s Republic of China; put out the education performance targets for all the different governments and ministries
2017 Ministry of Education guidelines on curriculum released. Includes also new teaching materials under Guidelines for Elementary and Junior High Schools on Organizing Comprehensive Practice Activities
2017, Several Opinions on the Amendment to Non-public Education Promotion Law; clarified the definitions of non-profit and for-profit schools, delineates the definitions of legal personality and property of schools.
2018 The Regulations for the Implementation of the Law on the Promotion of Non-public Schools of PRC; put out by the Ministry of Finance rather than the Ministry of Education, .
2018 Patriotic Education regulations; Party Propaganda department trying to remove foreign influences from education, including foreign history courses, self-taught foreign material and making textbooks reflect communist ideology (according the Ministry of Education, “patriotism” and “core socialist values”, reflecting a “love for the motherland”).
2019 State Council: "Guiding Opinions on Promoting the Reform of Educational Methods in Ordinary Senior High Schools in the New Era"; put out new curriculum and teaching materials for senior high schools (whose curriculum affects all other schools). Goal was to improve students’ ‘overall development’, make them more Party friendly, and also to change how high schools are evaluated. In response to Party ideological commands.
November 2018 , Ministry of Education, notice on improving working mechanisms and special rectification of after school training institutions, circular number 10. This forced all after school online training bodies to file their curriculum we've provincial education authorities. Provincial regulators then needed to cheque these against telecommunications companies records to make sure that no harmful content was distributed.
December 2018, Ministry of Education, Notice on the prohibition of harmful online applications from entering primary and secondary schools , circular #102. This notice forced all primary and secondary schools to file which applications were used by the schools, and to establish a double check system to scrutinise all online applications.
July 2019, Ministry of Education, opinion on the regulation of after school online tutoring , opinion #8. Any after school online tutoring activity targeting primary and secondary school students must have all content and class teacher information filed with regulators. A so called blacklist will be established for companies which fail to comply.
August 2019, Ministry of Education, opinion on guiding and regulating the development of educational mobile Internet apps , opinion number 55. Providers of educational mobile Internet apps are required to file with the provincial education authorities of the area in which they are registered after they have obtained an Internet licence. An educational mobile Internet app is defined as any mobile app used by teachers, students, or parents in any educational setting.
February 2020, joint State Council and central committee opinion, the opinion on deepening regulations on educational supervision and guidance system in the new era. This opinion outlines how educational regulatory agencies shall strengthen their supervision of overall activities at all political levels.
[i] This is particularly the case as Propaganda is a Party organ, and the other two are ministries
[ii] 北京列出高校教师11大失范行为 严重者或被撤教师资格 - 教育 - 新京报网 http://www.bjnews.com.cn/edu/2019/06/11/589768.html
The guideline was issued by the Beijing Municipal Education Commission (BMEC) on Tuesday for the capital's university teachers. Misconduct involves pursuing irrelevant things at work, such as playing the stock market and engaging in online business, taking bribes from students, spreading wrong and false information, having an inappropriate relationship with students, revealing national secrets and endangering national security and authority of the Communist Party of China.
[iii] Guiding opinions 2014; note that these are referenced in Section Four.
[iv] Lv Yugang, Director of the Department of Basic Education of the Ministry of Education, said that building comprehensive training system requires "Educating people first, moral education first" and "highlighting the timeliness of moral education" are placed in the primary position of building a comprehensive training system
[v] Or those without local residence permits, and therefore the most successful of these schools could then easily take on local residents as parents could bribe their way into the classes with the best teachers
[vi] Xinhua: “the State Council set a target that more than 85 percent of children between the ages of 3 to 6 should be enrolled in certified kindergartens by 2020. By 2020, the country also aims to enroll more than 200,000 university students into preschool education programs annually and to train 1.5 million preschool principals and teachers. By 2035, preschool education, which lasts for three years, would be available for all children of the appropriate age, with a national preschool network set to be established.”
[vii]王晨在高等教育法执法检查组全体会议上强调, 加强高等教育法贯彻实施 推动我国高等教育更好发展《 人民日报 》（ 2019年06月20日 02 版）
[viii] ‘Wang Chen stressed that law enforcement inspection should focus on the key points’