Chinese Education Stocks Tumble on Policy Change


Beijing is tightening the rules on kindergartens—upsetting investors who bet on huge and rapidly growing Chinese demand for education.

What’s Happening

China’s state-controlled news agency, Xinhua, late Thursday unveiled a draft overhaul of preschool education. The guidelines from China’s cabinet, known as the State Council, would ban privately owned kindergartens from going public and stop listed companies from buying peers with shares or cash. The proposal follows several scandals about alleged child abuse.

Asia Markets Snapshot

  • Japan’s Nikkei 225 fell 0.6%
  • Benchmarks in Shanghai, Hong Kong and South Korea advanced modestly
  • Beijing fixed the yuan at 6.9377 to the dollar, little changed from Thursday

It sent the shares of Chinese education operators tumbling in the U.S. and Hong Kong. In New York trading Thursday,

RYB Education


RYB 1.53%

plunged 53%—its biggest single-day drop since the stock went public last year—and

Bright Scholar Education


BEDU 2.37%

fell 17%, wiping a combined $477.6 million off their market values.

The magic is leaking out of Chinese kindergarten stocks.

The magic is leaking out of Chinese kindergarten stocks.


Photo:

Andy Wong/Associated Press

In Hong Kong,

China Maple Leaf Educational Systems
Ltd.


1317 -18.69%

fell 19% while

China Yuhua Education
Corp.


6169 -14.55%

was down 15% Friday. With smaller drops at four other listed education operators, including

Hope Education Group


1765 -8.45%

and

Minsheng Education Group
Co.


1569 -5.41%

, more than US$1 billion of market value was erased.

What It Means

Chinese policy-making can be opaque, and rules can change quickly. In recent months that has caught out investors in other sectors such as peer-to-peer lending and videogames.

Shares in U.S.-listed payday lender

Qudian
Inc.,

for example, have fallen 63% this year. Online giant

Tencent Holdings
Ltd.

, grappling with a freeze on videogame approvals, is off 28% in Hong Kong.

Meanwhile there has been a pickup in Chinese companies going public in the U.S. So far this year, 29 have listed, raising $7.96 billion in total, according to Dealogic, more than twice last year’s $3.8 billion haul.

The new guidelines set “a more foreboding policy tone,” said Nomura analyst Andrew Orchard and his team in a note on Friday. To grow, the note said, listed education companies will have to open new kindergartens themselves rather than buying rivals, adding that the government might also tighten control over for-profit high schools.

Write to Joanne Chiu at joanne.chiu@wsj.com

Correction
Bright Scholar Education’s share price fell 17% in New York trading Thursday. An earlier version of this article incorrectly stated this was its biggest single-day drop since listing last year. (Nov. 16)

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