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Practical Guide on the Education Sector in China

With over 290 million students and 18 million teachers, China has the world’s largest education system. The sector broadly includes three areas: formal education, supplementary education, and education services, with an estimated US$300 billion in annual revenue.


According to the Ministry of Education, there were 529,000 schools in the country in 2021.


In 2019, the State Council issued a blueprint for the country’s education development in the coming decade, called China’s Education Modernization 2035. The plan’s objective is to establish a modern education system of lifelong learning with universal quality pre-school education, balanced compulsory education, enhanced vocational education, and more competitive higher education.

The supplementary education sector covers early childhood enrichment and care, K-12 academic tutoring, K-12 enrichment, junior English language training (ELT), foreign counselling and test prep, skill-based vocational training, white collar professional development, adult tertiary programs, and corporate training.


Other services include education software (including LMS, SaaS, etc.), education content, education supplies and online program management.


A massive population of parents interested in exposing their children to a premium and high-quality instruction is the key engine behind the education spending in China.


Chinese parents are investing in up skilling, vocational training, corporate training, and continuous learning, besides K-12 instruction. This has created massive demand for high-quality private education offerings (all recent sectoral growth has been in the private rather than public education sector).


Rising per capita disposable income in urban China and the emergence of education as “the ultimate consumer good” has driven demand for premium education. Bilingual schools are growing at 15-20%, with the premium segment growing the fastest.


This willingness to spend more for higher quality is driven by perception of value, success rate for outcomes including acceptance to top-tier foreign universities, expectations on outcomes and brand reputation, especially in English proficiency, where legacy brands like Harrow International School, Dulwich College and Westminster School are in demand.


China’s regulations categorize K-12 education service providers as either non-profit or for-profit. Non-profit entities are mainly schools that provide full-time curricular education. For-profit entities include private schools, academic extracurricular tutoring, and non-academic extracurricular tutoring.


In recent years, the K-12 education market has grown rapidly. This resulted in raised social anxiety among parents and students seeking to gain an edge.


In 2021, China’s central government enacted tough rules regulating and restricting the private tutoring market. One example is the clampdown on the for-profit curricular tutoring industry from July 24, 2021. This policy affects both online and offline tutoring service providers.


A significant demand for better education and supplemental learning still exists as both parents and schools seek a competitive edge for their students. Large players might shift their business focus to new frontiers like extracurricular tutoring and vocational education, both of which were not impacted by the above-mentioned regulatory changes.


In China’s Education Modernization 2035 plan, one of the six key points is to significantly improve vocational education. In pursuit of this plan, China is building the world’s largest vocational education system to tackle the country’s labor shortage problem.


Vocational schools are gaining increasing government support and seeking international cooperation in vocational education and career development. On the other hand, parents and students at vocational schools still prefer higher academic degree programs.


The Chinese education sector had a tough year in 2022. The industry experienced local regulatory changes in the private after-school tutoring sector, while COVID-19 restrictions forced students to adjust their ways of studying by adapting to online learning on various technology platforms.


The long-term impact of COVID-19 on education is expected to lead to an increase in spending on digital infrastructure and new models utilizing the new tools available in digital education.


Thanks to a still high demand, the total revenue of China’s education technology (EdTech) market continues to rise, after reaching approximately US$75 billion in 2022, according to the US International Trade Administration (USITA)


Due to the industry’s high demand for service experience, professional technical services, solid sales channels and other factors, small enterprises and new entrants also face high industry barriers.


China’s education technology market entered a stage of rapid growth from 2017 to 2020, with total revenue increasing from US$46.4 billion to US$61.1 billion, with a compound annual growth rate of 9.6%. In 2020, due to the COVID-19 outbreak, the growth rate from 2019 to 2020 was lower than in previous years but still showed an increasing trend, according to USITA.


Chinese consumers, who traditionally display an “online first” eagerness, are willing to engage with digital education, driving the proliferation of online models.


China has 250 million school-age children and an internet penetration level of approximately 60%. These 150 million ‘online children’ collectively consume nearly 280 million hours of screen time daily and, of this, almost 45% – or 120 million hours a day – is educational.


Additionally, growing device proliferation plus internet penetration means that a large pool of untapped learners in tier three to five tier Chinese cities are skipping offline training centers and going directly online. Experts agree that there is a growing integration of online and offline learning methods, which represents an opportunity for providers offering services and enrichment programs in either mode.


The Online Merge Offline (OMO) model of education refers to a business model that reshapes the entire education chain through technological innovation and organizational change, and then achieves online and offline integration.


For example, New Oriental has launched the dual teacher model and TAL has launched Xueersi online schools. For institutions, OMO is one of the key means to achieve product differentiation, and reduce customer acquisition costs; OMO does not specify a precise boundary and scope, as each institution explores its own solutions under the OMO model based on its own understanding of technology and education, according to iResearch Inc.


Hardware equipment sales are the largest component of China’s education informatization market, accounting for 39% of revenue in 2020, followed by integrated IT solutions and software services accounting for 28.1% and 26.4%, respectively.


Integrated IT solution providers in the education information market are mainly engaged in integrating hardware and software products and bundling their integrated IT solution services to customers in several regions.


The demand for STEAM education and training has seen the booming creation of training programs and startups offering out-of-school courses in coding, robotics, and 3-D printing, attracting the attention of publishers, toymakers, and app developers.


STEAM-related courses are not only in demand for older children and students; rising middle-class incomes and fears of intense future competition for college admissions and jobs are leading parents to pay substantial sums for STEAM-related education for even young children.


Additional EdTech firms with solutions that focus on formative assessments are emerging, due to a growing demand for personalized learning. Methods that supplement the traditional curriculum, especially those specialized in test taking, are becoming more popular.


EdTech companies are embracing the opportunities to create apps for preschool and kindergarten students.



The mobile education texting-for-homework-help/crowdsourcing market has expanded to include a handful of firms that have developed crowdsourcing apps/web platforms to allow students to answer each other’s questions or to engage quickly with a teacher/expert for help.


Localization is one of the biggest challenges for EdTech firms. Many of them must adapt their technology to a specific market, whether it be language, standards, curriculum, etc., which as a result increases cost. This may deter some from entering smaller markets with unique languages or specific curriculum standards and requirements.


Companies with a limited budget for marketing could find the right local partner to gain market exposure. Other ways to gain awareness in the marketplace are through e-commerce or targeting private schools and parents.


Newcomers need to create a good brand image and relationships to establish strong sales channels. After years of operation, existing education IT solution service providers have generally established well-known brands in the regions in which they operate and have strong relationships with educational institutions.


EdTech firms must comply with Chinese legislation on privacy and data transfer.

Regulatory restrictions are one of the most challenging issues faced by education companies in China.


Until 2021, after-school tutoring was the most active and lucrative segment, attracting capital investment and representing a US$ 112 billion industry. Private education providers, such as TAL, Gaotu and New Oriental, had more than 80% revenue from K9/K12 academic subject tuitions in 2020.


In 2021, the Ministry of Education introduced several new measures, banning the tutoring of children under 6 years of age, ordering K-12 after school tutoring operators to be non-for-profit entities, creating the new standard for Chinese proficiency in language education, teaching reform guidelines for PE and health education, and promoting vocational education.


The impact of policy changes in after-school tutoring was massive. The challenge for investors centers around the inability to invest in key, high growth sectors of Chinese education while for operators in segments with high regulatory overhang, the main challenge is access to growth capital.


Continued regulatory tightening is creating downward pressure on stock prices in these segments, on top of already softening Chinese equity markets.


Of the 30 largest listed global education companies, only seven are Chinese – down from nine in 2019. In contrast, post-IPO stock prices for higher education and vocational training space players have been more resilient.


The fast-growing ELT industry, for example, may bear some of the most negative impacts, especially due to restrictions on recruitment of foreign teachers, since most premium online and offline providers rely on native English-speaking tutors.


On the other hand, vocational education has been the new driving force in the industry. Favorable policies are boosting further development in this area, which in turn will provide opportunities for fast growing companies which can participate in activities such as training for skilled work in new materials development and advanced manufacturing.


The revised Vocational Education Law upgraded the status of this segment. The law now encourages traditional secondary schools to offer courses on vocational education subjects. Consequently, vocational education graduates should enjoy equal education and career opportunities.


The revision states that China should have a modern vocational education system by 2025, and by 2035 it should have a world-leading vocational education system. As a result, the social status of technical and skilled workers should be greatly improved.


The law also contains multiple provisions encouraging international cooperation, including the establishment of Sino-foreign cooperative education projects and expand exchange platforms. These provisions encourage Chinese vocational education schools to go abroad alongside the globalization of Chinese companies.


The rapid growth of vocational training has led to thousands of new market entrants, most of them domestic players. While prospects for commercial collaboration can be plentiful, foreign companies and investors should carry out stringent due diligence before entering any new partnership.


Quality education and vocational education are encouraged by the Chinese authorities, which opens a potential transformation path for training companies previously focusing on after-school tutoring. Education hardware – combined with data and software services – continues to expand to provide accurate learning analysis and personalized teaching design functions. Some transformations go far beyond education to influence other industries.


Foreign companies with a presence in China that got trapped in the regulatory changes of 2021, may face a difficult situation, unless they devise a plan to cope with the changes and improve their business resilience to continue to profit from this market.


The number one principle remains a focus on core competencies with market repositioning. To achieve this, companies must adhere to strategy and adapt tactically. The best advice is to re-evaluate the market and adapt the China strategy. Compared to wait-and-see, proactive approaches are the only way for sustainable growth.


For companies to reshape and succeed in China’s education market, it’s important to stay informed of provincial governments’ action plans and to understand how international education is changing in the country.

Another aspect to consider is the guidance document recently issued by the State Taxation Administration (STA), outlining several currently effective tax reliefs designed to aid the growth of the education sector.


The Guidance on Preferential Tax Policies to Support the Development of Education (the Guidance), lists 28 preferential tax policies supporting the development of this area. They can be categorized into three types:



  • Tax incentives supporting various education and teaching activities;

  • Tax incentives reducing the operating costs of educational institutions; and

  • Tax incentives encouraging social forces to actively invest in education.

Foreign businesses with a presence in China’s education sector can benefit from these tax incentives to reduce operating costs.


The Guidance states that the following are exempt from value-added tax (VAT): educational and teaching activities provided by schools engaged in academic education; services provided by Sino-foreign cooperative schools, enterprises held by vocational schools engaged in relevant business activities, services provided by nurseries and kindergartens, and educational services provided overseas, among other.


The document also includes tax incentives for reducing the operating costs of educational institutions. Real estate and land of schools, nurseries, and kindergartens for their own use are exempt from property tax and urban and township land use tax.


Despite the regulatory burdens, China remains one of the world’s most vibrant education markets and presents a range of opportunities for investors.

 

Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms. Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

 

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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.

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