Part 1: Overview of Opportunity and Market

学如登山。

Studying is like climbing a mountain.

Chinese proverb

Introduction

China inspires superlatives. USD 4.24 trillion in retail sales. In 2015 it became the world’s largest consumer market. China has over 1.34 billion people and comprises some 20% of the world’s population. These are consumers who are eager for Western products and services … and few services are more in demand in China than education.

China represents an incredible opportunity for international education institutes, enterprises and schools – a massive and growing middle class; mobile students eager to travel the world; middle class parents planning to send their offspring overseas for university; a strong cultural importance placed on education; industries full of workers needing vocational training in order to stay competitive; being at the forefront of online learning and big data.

There has been a major increase in the amount of capital being invested into the Chinese education sector. Recent years have seen dramatic increases in the number of M&A deals and education related IPOs.

Education is also a hot sector for non-education players seeking to transform themselves. This ranges from internet giants to real estate developers. Another impetus has been China’s internet and mobile revolution which has increased the influence and relevance of online education.

Despite the opportunity, China is by no means an easy market. The education sector is sensitive and tightly regulated. Different cultural norms may mean that Western entities need to tread more lightly in the classroom than they do in their home countries.

Expectations can also be different – Chinese parents say they want their children to have an international education in China but is this true in practice? How can Western education entities remain true to their own ideals and heritage while still operating within China? Cracking the China market can have complex demands and requires the nurturing of long-term relationships and partnerships.

In our experience, Western education companies that are successful in China or with China have 1) understanding and respecting the legal and practical restrictions within China; 2) developed good relationships with the PRC authorities and stakeholders; 3) found the right partners; and 4) are actively engaged in the implementation of their project.

Why is the China education market of interest?

There are a variety of reasons for international education entities to be interested in cracking the China education market.

Reasons include wishing to be involved in a rising China that will no doubt change the world in coming decades; attracting Chinese students to study in the home country (for secondary; for university; for post grad); attracting Chinese researchers and yes … for some … the less lofty goal of generating revenue to support their home operations.

The main ways in which Western education entities are involved with China include 1) attracting Chinese students to study in their home country; 2) licensing or cooperating with a Chinese partner in some way to teach Chinese students in China; 3) investment by a Chinese partner in a Western education entity; 4) collaboration in research; or 5) broader involvement in education such as language training; developing programmes and development; online courses; Edtech or K12 preparation.

Chinese students travelling overseas is a major market. The Chinese Ministry of Education reported that 523,000 Chinese students went abroad to study in 2015. Leading the pack was the United States with over 250,000 students. Other popular choices include Canada; Australia and the UK.

Although educating Chinese students in home jurisdictions can generate large revenues it should be noted that the benefits go far beyond tuition fees. The vast majority of students return home to China and become customers, tourists and cheerleaders for their second home. Others stay and also contribute to trade and investment between the countries. Accordingly, Chinese students overseas can be a multiplier of benefits for the host country.

In respect of co-operating “in country” in education the USA leads in university engagement (in a very fragmented market) and the UK seems to lead in secondary schools (i.e. Dulwich, Harrow, Wellington and Nord Anglia all being well established).

Despite great interest on the part of Western education institutions it seems that the broader education opportunities available in China have still not been fully exploited. Rich seams of opportunity abound especially in online learning; preparation for overseas study, tutoring and Edtech.

Overview of the PRC Education Sector

“In China nothing is impossible … but nothing is easy”

Old China hand saying from the 1800s

For the first 30 years following the founding of the People’s Republic of China (“PRC”), China prohibited any participation by foreign capitalists in its economic development. The first cracks in this wall were planted in the Second Session of the Fifth National People’s Congress in 1979. This meeting marked the start of China’s opening up to the world.

In the span of 40 years China has gone from an insular, small market into the world’s largest and arguably most dynamic one.

Despite these changes China’s open-door policy has always retained a door and sometimes this door is slammed shut on certain sectors or activities. Although, China has opened up in a way that not even the most optimist globalist would have forecast in 1979 the country still maintains specific restrictions on foreign investment/operations within China.

Education is, by its very nature, a highly sensitive sector. However, it is also a sector for which China’s booming middle class has a voracious appetite. Accordingly, to balance the sensitivities against the demand the Chinese authorities have set a legal framework that variously prohibits, restricts, permits and in some cases even encourages foreign involvement in education.

In response international educational entities have variously followed the rules, pushed the envelope or circumvented the rules. In turn the Chinese authorities have generally tolerated certain practices and then occasionally cracked down on specific practices which they find to be particularly egregious.

Education is a sector which has little in the way of published regulation but is much more heavily regulated in practice. To complicate matters further, policies vary from place to place and much will be determined at the local city/district level. Accordingly, it is important to ensure that any planned endeavours not only comply with the published law but that they will also work practically.

The Legal Framework – Much like love education is a flexible term and may mean different things to different people. For the purposes of this article we consider the below activities to be covered by the term “education” – the table below outlines how the authorities treat such activities:

Type of Education FDI Treatment Comments
Kindergarten/Pre-school Restricted Sino-foreign contractual joint venture led by Chinese party[1]; highly regulated and clearly prohibited from going public
Arguably permitted

There has been a boom in developing APPs and digital content for pre-school children.

Unlike kindergartens, early childhood education centers provide mostly parent-children activities rather than academic education. In practice foreign investment is tolerated.

Primary and secondary school (grade 1 to 9) for locals Prohibited This sector is off limits to foreign capital or control.
High school for locals Restricted Sino-foreign contractual joint venture led by Chinese party
Foreign Passport Holder Private School Permitted There has been a tendency, especially among celebrities, to have their children study at international schools (for foreign passport holders only). In practice, approval from education authorities is still a prerequisite and only a few prestigious foreign educational institutions have managed to obtain such approval.
For Profit School Prohibited

Private schools for local Chinese students are largely off limits. Generally, international entities can either: establish a new private school with a Variable Interest Enterprise “VIE” (basically a nominee company controlled by the foreign investor); or more commonly co-operate with an existing school.

Cooperation can be tailored to a large degree. In the pas some foreign education entities set up special departments within an existing school. However, these arrangements are increasingly rare.

More typical arrangements include use of brand; support on curriculum; providing management support; input on corporate governance; advising on educational issues, providing teachers etc.).

In some cases foreign education entities that see a large market for various services or operations within China then they may wish establish their own private education consulting company to service the China market. The establishment of a consulting company is straightforward and relatively inexpensive.

Restricted but opening up

Chinese students face enormous pressure in relation to school. As the system is very test-oriented K12 tutoring is extremely popular. Several tutorial entities have already gone public through VIE structure such as TAL Education Group (NYSE: TAL).

Legally, tutoring centers for academic purpose must be in the form of a Sino-foreign contractual joint venture and be approved by the education authorities. However, there have been recent rumblings by Chinese authorities that the restrictions on foreign investment in this part of the education sector will likely be loosened.

University Restricted

Western countries, such as the UK, have been increasingly successful in attracting Chinese students to come and study bachelor degrees, master degrees, and doctoral programmes.

However, such programmes are not exclusively occurring in the UK. UK universities and other higher education bodies are also participating in China based programs.

Legally it is possible to establish such entities as a Sino-foreign contractual joint venture provided the JV is led by Chinese party. Foreign involvement in Chinese higher education has had a somewhat testy time in recent years with regulators ending many partnerships between local and foreign universities. The tougher times reflects an overall concern by Chinese authorities to limit foreign influence in education and also an attitude on the part of Chinese students as they positively view their own domestic universities. Although many admire an overseas education they believe such overseas education should take place … overseas. Accordingly, some view international programmes in China with suspicion.

Legally possible to establish Sino-foreign joint-venture universities. However, in practice approvals are no longer forthcoming. Foreign universities are currently limited to single-degree joint programs or joint institutes hosted by a Chinese university. In addition, the Chinese regulators generally require joint undergraduate programs to have Chinese students spending at least three years in China rather than splitting time the evenly between China and the overseas location. As the time in China is subject to cost controls by local education bureau this effectively caps tuition rates.

Training for art, sports and science & technology skills Restricted

Increasing numbers of children are taking art, sports and science and technology classes.

From a strict legal perspective such entity should be in the form of a Sino-foreign contractual joint venture. However, many foreign education entities run such operates via a consulting company established in China. The main advantages being no requirement for a Chinese JV party as well as very simple approval process.

Vocational Training Encouraged Interest in vocational education is still high. Companies which provide accreditation for professional or vocational qualifications will see increasing demand. Opportunities also extend to designing content; providing curriculum; and training
Business training Restricted Most non-academic business training for adults adopt the form of Sino-foreign joint program based in universities.
Language training Restricted One of the trailblazers New Oriental (NYSE: EDU) led the way for the expansion in the language training market. This market is for both children and adults.
Special training (i.e. school of the military, police, politics and Chinese Communist Party) Prohibited Surely you would have guessed that this would be off limits!
Online learning, MOOC[2] Restricted There has been a boom in developing online learning course in China. There is no specific law with regard to foreign investment in online learning market. However, it would be prudent to expect regulation would apply equally to offline education as it does to K12 tutoring, language training, etc. It should be noted that it is practically difficult for foreign invested enterprises to obtain an ICP license. These restrictions have led some to use a VIE structure (i.e. use of a nominee structure).
Student recruitment Arguably permitted Restrictions with regard to student recruitment agencies vary from place to place across China. In most cases the educational entity will establish a consulting company in China.
Consulting company Permitted In some cases if the foreign education entity perceives there being a large market for such arrangements it may establish a private education consulting company to service the China market. The establishment of a consulting company is straightforward and relatively inexpensive.
Edtech Depends on actual business Cutting edge technology is always welcome by the China market – sometimes the Chinese legislator may have other views. This is currently the hottest sector.