New Oriental is located at West Yintai Campus, Hangzhou City, Zhejiang Province, China on August 2nd, 2021.

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The Chinese government’s sudden crackdown on out-of-school education companies increases costs for many parents and puts millions of jobs at risk.

In a country where parents value a good education – and good grades play a paramount role in determining career opportunities – tens of millions of students across China drown in after-school tutoring every year.

But this summer will be the last when educational institutions legally sell such tutoring programs.

Since the central government officially released the so-called double cut policy last month, local authorities in several provinces such as Shanxi and Hunan have ordered private companies to suspend online and offline tutoring for children from kindergarten through 9th grade.

The policy states that one of its main goals is to alleviate the stress and fear of Chinese parents who want to provide their children with a good education.

The guidelines focus on the nine years of compulsory schooling before high school – from elementary to middle school – and call for academic tutoring companies to be restructured as non-profit organizations.

The policy also prohibits these companies from offering courses on weekends, public holidays, summer and winter holidays – effectively only tuition on weekdays with a limited number of hours.

The scale of the raid is “way beyond expectations,” said Alan Wang, an education analyst with Beijing asset manager Harvest Fund Management.

The industry was preparing for some regulations but was not expecting a restructuring mandate that included a ban on stock market listings, essentially making the sector “non-investable,” he said, according to a CNBC translation in Mandarin.

Some parents will still pay for tutoring courses they can find, which increases shipping costs, he added.

CNBC interviews across the education industry show the new regulations shocked parents and got companies in trouble as millions of employees were prepared for job losses.

Chinese parents struggle for options

If the Beijing local government bans after-school tutoring, a mother surnamed Zhang said she would consider forming a small group with other parents to hire private tutors for her children.

That means hourly rates will rise and parents will make fewer prepayments than they would if they had gone through an institution, said Zhang, who refused to give her first name for privacy reasons.

Zhang said she would go out of her way to help her two children compete for “very limited” quality education in China. The family lives in Beijing’s premier public school district, Haidian, and the older child, who is slated to enter middle school this fall, has about three hours of online group classes each day and one to two hours of one-to-one classes for a week.

That is less than their colleagues in the district who study all day or at least half a day during the summer vacation, said Zhang.

Your younger child, who has just finished the first year of elementary school, spends about half an hour a day doing online group classes. Zhang was hoping to register her daughter for more offline tutoring because staring at the screen damages her eyesight. But the recent raid means it will be almost impossible.

“I think this approach is kind of one size fits all,” Zhang said, according to a CNBC translation in Mandarin.

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After-school tutoring can be costly, but many parents find themselves forced to enroll their children in order to have a chance in the highly competitive college entrance examination system.

Luna Cheng is raising her 13-year-old daughter in Shanghai’s downtown Jing’an district. She told CNBC that she paid about 5,000 yuan ($ 774) for a two-week summer course with about 20 other students that included three hours a day in math.

That is a handsome sum for most households that are also faced with high housing costs.

According to official figures for this year, a rate of 5,000 yuan corresponds to about 71% of the average monthly disposable income of 7,058 yuan for city dwellers in Shanghai.

However, the same rate would far exceed the average monthly disposable income of 3,756 yuan for rural residents working in Shanghai, the data showed, although agricultural workers’ incomes rose faster than urban workers.

In Beijing, the hourly rate for private one-to-one tuition is anecdotally between 500 and 2000 yuan.

Despite the cost, Cheng said she wanted to enroll her daughter for more courses this summer, but her daughter refused to enroll.

“I’m a little scared,” said Cheng. Her daughter will start taking physics class in the fall, and Cheng estimates 90% of her classmates will study for it over the summer vacation. With no extra study time after school, Cheng said she is afraid that her daughter will not be able to catch up, let alone shine in the new subject.

Such fears drive parents in China to spend heavily on after-school tutoring and fuel an emerging industry.

According to a 2020 report by Oliver Wyman, China’s tutoring market for kindergarten children through 12th grade hit 800 billion yuan ($ 123.7 billion) in 2019.

The consultancy predicted the market will exceed 1 trillion yuan by 2025. Growth was further accelerated by the Covid-19 pandemic, especially for online tutoring.

The new policy could even have negative effects in the short term, especially since poor families usually send their children to tutoring schools only because of peer pressure, Claudia Wang, partner at Oliver Wyman and head of the company’s Asian education practice, told CNBC on Monday.

“Now you’ve probably given up,” she said.

Millions of jobs at risk

The consequences reach far beyond entrepreneurs and parents: The future of millions of employees also hangs in the balance.

With education companies struggling to comply with the new guidelines, many companies are likely to be forced to close.

The education services industry will provide about 10 million jobs in China as of January, according to a report by Beijing Normal University and TAL Education in January 2021.

Tutoring centers that focus on academic subjects should move to another industry as soon as possible, Citic Securities, a major Chinese investment bank, said in a July 23 statement to its clients.

The “double cut” is just the beginning and more supportive measures will come to regulate nine-year compulsory education, Citic Securities said. The analysts said the risks for high school education companies are currently not high.

A senior executive at 17 Education & Technology Group – a US-listed tutoring company in China – told CNBC the company plans to cut its workforce in half.

The source asked for resignation when the central government released its tough policies on the sector, but chose to stay longer to help the company realign its business. “Nobody really knows how, though,” he said, according to a CNBC translation in Mandarin.

Other education giants are reportedly preparing to cut their workforce by 30 to 70% depending on how local authorities implement central government regulations and how heavily the company relies on revenue from tuition for kindergarten through 9th grade students Class is dependent.

The ban on tutoring on weekends and during the summer or winter holidays is particularly damaging to companies, as those classes account for more than 65% of class hours at most privately owned tutoring companies, the source said. The ban on these courses means that the majority of employees are no longer needed.

Following potential layoffs, Chen Xiangdong, founder and CEO of Gaotu, said in a letter to employees last week that he was “very, very sorry that we have to make this difficult decision,” according to a report from China’s Finance Department Media Lei News.

However, Wang, the analyst for Harvest Fund Management, said he did not anticipate any major impact from potential job losses as the government likely would have considered employment issues before making the policy decision.

US listed stocks plunge

Some of China’s largest tutoring companies – publicly traded US companies Gaotu Techedu, New Oriental, and TAL Education – were booming before the summer raid.

These three tutoring giants saw double-digit growth in their most recent quarterly earnings reports.

For the quarter ended February 28, New Oriental saw net income jump 29% year over year to $ 1.19 billion, with student enrollments in tutoring and exam preparation courses in academic subjects up 43% to nearly 2, 3 million registrations increased.

During the same period, TAL’s net revenue increased 58.9% year over year to $ 1.36 billion.

Gaotu said net sales were up 49.5% year over year for the quarter ended March 31.

Chinese education stocks listed in the US plummeted on news of the government crackdown, losing more than half of their value that day. New Oriental and TAL have postponed their earnings reporting plans scheduled for this week.

New Oriental, TAL, Gaotu and 17EdTech did not immediately respond to CNBC’s request for comment on this story.

Among the privately held companies, key players like Yuanfudao, Zuoyebang and Huohua Siwei successfully completed multiple rounds of funding and raised billions of dollars during the pandemic. These “mega unicorns” are said to be listed in the United States shortly before the directive is announced.

Companies that managed to go public before the raid are also suffering.

17EdTech, headquartered in Beijing, was listed on the Nasdaq in December at an offer price of $ 10.50. Now the share price is around $ 1.

– CNBC’s Evelyn Cheng contributed to this report.