🔒 Wall Street gets a Chinese lesson – With insights from The Wall Street Journal

The most recent twist came this weekend when Beijing unveiled draconian new restrictions on the private-tutoring market. This has been a booming industry as middle-class parents invested in extra online classes for their children. Foreign investors tried to get in on the action by buying shares in companies such as New Oriental Education & Technology Group and TAL Education Group listed in New York or Koolearn Technology Holding listed in Hong Kong.

No longer. The new regulation requires companies to convert into nonprofits, and it bans new listings or capital raising. Foreigners are barred from investing in the industry, and there’s a prohibition on foreign curriculum or employment of teachers outside China to deliver lessons remotely. Shares in tutoring companies promptly tumbled.

So did shares in other Chinese companies. The Nasdaq Golden Dragon Index of around 100 large U.S.-listed Chinese firms lost 15% in two days after word of the impending tutoring crackdown emerged late last week, and it’s down some 45% since February.

Investors appear to be figuring out what’s really going on here. Ostensibly the tutoring crackdown is a form of social policy, as Beijing worries that out-of-control tutoring costs discourage parents from having more children. But this is really about the Communist Party’s political control. The Party wants to control what Chinese students study and who teaches them. It can’t tolerate foreigners writing lesson plans through private companies.

This political crackdown is becoming a familiar pattern for foreign investors. Another victim this week is Meituan, a food-delivery service now subject to a new regulation on drivers’ pay and working conditions. The company’s Hong Kong-listed shares have lost about 30% of their value since last week.

Ride-hailing company Didi had barely completed last month’s $4.4 billion IPO when Chinese regulators put the company and others under investigation for data and competitive practices. Beijing is nervous about high-tech companies collecting and profiting from the data on Chinese residents that the Party thinks should be its preserve.

Ant Group, the financial-services wing of entrepreneur Jack Ma’s empire, wasn’t even allowed to list last year after Mr. Ma made disparaging comments about Chinese regulators. Again the message is that Mr. Xi won’t tolerate private competitors to the Party’s economic or political grip on China.

Perhaps investors thought Mr. Xi’s antimarket turn was merely rhetorical, or that reform advocates in Beijing could still win the day. They may also have assumed that once Beijing allowed its companies to sell shares abroad, it wouldn’t reverse course.

Sorry. Under Mr. Xi, earlier rounds of economic reform are proving reversible, and Beijing won’t trouble itself about foreign investors losing money to Beijing’s regulatory caprice. Wall Street is the big loser this week, but the biggest loser will be the Chinese public who are finding that the promise of their country’s economic opening is under threat.

Appeared in the July 28, 2021, print edition.