Chairman Rabbit on the Tech and Education Crackdown

“Invest in those industries that align with the major political strategy of the central government and fit the new pattern of future development”

The Chinese government’s push to reform its lucrative education and tutoring industry in the final weeks of July sent the stock prices of various Chinese education companies into a tailspin. The new regulations, which require private education firms to register as non-profits and place restrictions on raising foreign capital, have panicked overseas investors. Ren Yi, aka Chairman Rabbit, the Harvard-educated son of a prominent 80s reformer whose political musings have garnered him a large following in China among those disillusioned by the West’s perceived bad faith (we’ve covered him on ChinaTalk previously), recently discussed the sudden tumult in China’s education industry. His key arguments:

• Investors and foreigners often misunderstand the logic behind the government’s decisions to crack down on certain industries. 

• Competition for access to quality education and after-school tutoring services drives other societal problems in China such as real estate speculation and a low nationwide birthrate.

• Private tutoring services are connected with the contemporary debate over 内卷 neijuan (“involution”), a new term that denotes the frighteningly competitive pursuit for ever-diminishing rewards in society. The high pressure to perform academically could lead to widespread feelings of disaffection.

• Improvements in internet technology coupled with a crackdown on foreign investment in education could reduce the competitive pressure of China’s education system and provide a more balanced and equal distribution of quality education resources.

• A “Chinese model” of governance is more moral than those of its Western counterparts as it focuses on maximizing the well-being of the majority of its population.

See below for a full translation.

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China's Governance and the Politics of Business from the Reform and Reorganization of the Education and Tutoring Industry

Chinese Language Link. Published 7/24 on Chairman Rabbit’s blog. Translated by Tony Louthan with editing help from Callan Quinn.

Education stocks listed overseas plunged in the last week of July, driving down Chinese stocks in other sectors. Overseas investors are pulling out en masse from these heavily regulated sectors that they don't understand.

This piece responds to these events, mainly focusing on the thinking behind government regulatory agencies, and discusses the political logic of top officials in regard to recent reforms.

It is also an opportunity to illustrate some of the new features of the Chinese model in the new era.

1. It is evident that the recent reforms originated from top leaders in order to control the entire process of reform and reorganization for the education and tutoring industry, the scope of which has long exceeded the capabilities of the Ministry of Education. 

The MoE is only one core ministry involved in implementation of plans, while the central government coordinates all the various departments to solve education problems together.

Problems related to the education industry are not simple questions of policy, but are in fact political issues. Questions of education policy belong to the highest level of politics

Over the past few years, there have been many economic policies, industrial policies and social policies, but in the end, they are all questions of politics, with their own set of ethics, logic, values and goals behind them. 

Businesses, markets and even regulators within the system have not been able to understand policy from a political perspective. Slowly, incident after incident, these people, organizations and institutions have realized that policy is not simply policy, but is deeply political.

Let’s take the real estate industry as an example. In 2016, the central government put forward the idea of "housing without speculation" (房住不炒) and increased regulation and control. 

Most people used to think that real estate is the "chamberpot" (a sordid but important sector) of the Chinese economy, crucial in promoting development and adjusting the structure of the economy. These people were always biased towards promoting development, so that when the economy wasn’t performing well, they would encourage the expansion of the real estate industry. 

Most people followed this line of reasoning to understand real estate’s role within the economy. This included enterprises, local governments, some regulators and markets. 

No one was looking at this issue from the perspective of the country’s strategic and political interests, namely:

1. What role real estate should ultimately play in the national economy?

2. Is housing a very important core resource of great strategic and political significance for social stability and harmony and the goal of achieving common prosperity? Should real estate simply be left to market forces to allocate (think Hong Kong)?

3. What are the broader socio-economic impacts of high housing prices? How does it impact the gap between the rich and the poor, the career orientation of young people, consumption capacity, the orientation of enterprises, finance, local governments and birth rate? The country's leaders are looking at the problem from a much more complete perspective. 

4. In earlier years, the film, television, entertainment, and gaming industries have all faced similar types of policies which have led to their reorganization. Many of these reforms start with capital markets (e.g. restrictions on enterprise listing/access to financing), which cause investors and the market to react. 

But at first, people will still look at individual industries, individual situations and individual cases to understand reform, rather than recognizing the deep political issues at work.

Even more people can not or did not see that China has actually entered a new era and that the current Chinese model is different from the original.

An advertisement for private tutoring classes for primary school students from New Oriental, one of China’s largest for-profit education companies. The bottom line of the picture advertises the company’s “strict assessment mechanisms”

Returning to the subject of this article - the education and tutoring industry - I believe that the overhaul of the education and tutoring industry is following the same process as the regulation of the real estate industry, which demonstrates that education is a big political issue. In pursuing education reforms, leaders subscribe to a much broader logic than financial institutions that involves questions of how education should really be done in China and what kind of position the industry is currently in. Their thinking touches on the following questions:

Is education a core social resource that is important for maintaining social stability and promoting common prosperity? In particular, how can greater equality of opportunity be created for society? Should the earning capacity of a family affect the child's ability to access educational resources? Admittedly, we have a college entrance exam which students prepare for from an early age, but "intervention" (i.e. paying for tutoring services) can still greatly influence a child's ability to learn. And everything from extracurricular classes to buying a house near the school is closely related to a family’s ability to afford such services and resources. Expanding equality of opportunity is important to prevent class entrenchment, enhance social mobility, and maintain the vitality of society.

What should children spend their time on during their formative years (from age 3 through high school)? Does the current system comprehensively promote the development of children’s moral, intellectual and physical qualities? Does this system ensure the mental health and happiness of children who can explore their hobbies and interests, or is it a system that requires students to start preparing for the college entrance exam from the age of 3 and leads to involution?. Will children raised in such a way truly be fit for the future?

What is the content of the education? Is it about core values, about ideology? Should it be regulated and aligned with the Chinese model? This may not have been an issue in previous years, but in today's international geopolitical environment, it is a major issue. China’s leaders will be particularly concerned about what kind of education the children of society's elite are receiving. Is it an imported offshore education, or a Chinese education? If it is an international education, how can we ensure that children feel a sense of  belonging, recognition, understanding, and loyalty to China?

If education is so important, what kind of resources should be allocated to it and what kind of policies should support it? First and foremost, what role should public education play in policy? Should the focus be to provide a high quality, balanced, and free public education? Is it possible to use the internet and emerging technologies to level access to educational resources? Should we let the government procure and coordinate the provision of online classes for the whole country by the top teachers of NPC Central School or Experimental Elementary School No. 2? Or even let these teachers focus their time and energy mainly on web-based teaching, rather than exclusively focusing on the hundreds of students in their schools? Technology and a national education system make these arrangements impossible in any country other than China in 2021. The room for imagination is vast.

The relationship between education and finance is another important consideration. One needs to ask what role social capital should play in the education sector? What role should finance play? Finance and capital must be profit-seeking, and the involvement of finance and capital will definitely make education industrialized, profitable and profit-seeking. Capital support will also lead to more intense and vicious competition in the industry (another example of involution), and affect consumers.

Therefore, the central government wants to cut the link between finance and education to prevent the disorderly expansion of the industrialization of education caused by the unruly expansion of capital. Furthermore, as we see that most education companies are listed outside of China (mostly in the US), I argue that this is not primarily an issue of data security or national security, but rather, as long as the entire chain of capital that drives the industrialization of education is offshore and outside the jurisdiction of the Chinese government, there is no way for China to sever the link between education and finance and achieve its goal of reinventing the education system. Therefore, it is necessary to restrict and limit foreign finance in the education and training industry.

Another important point is the relationship between education and the real estate industry. The Politbureau’s meeting on April 30, 2021 pointed out the need to "prevent speculation on housing prices in good school districts." This was the first time that school district housing was mentioned. School district housing is actually a linkage between education and real estate. Why are the prices in the core areas of prominent cities so high? Because there are educational resources there.

China's national situation is that education resources are localized, and access to good public education resources depends on property and household registration. This is difficult to change in the short term. Therefore, the pursuit of quality education resources will inevitably lead to the pursuit of and competition for real estate in good school districts, which will drive up housing prices. The diagnosis and opinion of the central government is also clear, which is to break the link between education and real estate.

In terms of progress for the Chinese model, the pandemic on the one hand makes capital-driven online education grow, and on the other hand shows leaders that state-led online education can be an excellent tool to empower all of society, equalize educational resources, and ensure maximum equality of opportunity! Today in 2021, an opportunity to sever the link between education and real estate is coming supported by internet technology and the state system.

An additional aspect is the relationship between education, population and childbearing. Maintaining and promoting stable population growth is an even greater political issue. The high cost of education can reduce the incentive for couples to have more children. There are several factors that contribute to declining birth rates, one being that young people are seeking independent lives and are reluctant to get married. If they don't get married, there is no way for them to have children. The other is that parents who already have children are reluctant to have more. It is believed that the "marginal cost" of an additional birth for this group of already married couples is relatively low, and it may be easier to encourage them to have another child than to encourage young people to marry early and have children. The disorderly development and involution of the education and tutoring industry will indeed greatly increase their opportunity cost and affect their willingness to have children. Therefore, the central government definitely hopes to improve the overall willingness of society to have children by rectifying the education and tutoring industry.

Finally, the relationship between the education industry and other industries must be examined. The disorderly development of the education industry will also squeeze out households' ability to spend money on other industries. The uncontrolled development of this situation will reveal that education will become a huge industry in the national economy.

This huge industry is composed of two aspects: the "college entrance examination industry”, which aims to front-load the competition for college entrance exams from the age of three, and the "international industry”, which aims to prepare students for studying abroad. The former endangers quality education, while the latter threatens ideology. Both tracks lead to “involution” and endanger children's mental health while robbing families of consumer spending and squeezing out resources available to other industries.

The road is named “education”. All the sign posts read “reform”

The Chinese attach great importance to education, and education is at the core of our cultural DNA. As long as these conditions are in place, we will be tirelessly competing for educational resources, which leads to “involution”, and squeezes out other resources. 

In the process, if real estate and finance are the driving forces behind the education industry, education will become "industrialized" and grow out of control. As we can see, the three factors of real estate, finance, and declining birth rates are massive political issues for the country, and education is not only a political issue itself, but is also the link that ties all these factors together. 

Thus, education must be understood as an incredibly important political issue.

What will be the final solution for selecting and identifying talent in China? Will it continue to be the college entrance examination? 

I have previously written an article arguing that entrance examination is the inevitable choice and that college entrance examination is absolutely irreplaceable. As long as there is a relatively open, transparent and standardized mechanism, people can and will prepare for it in advance. As long as enough people do so, and all can find resources relatively easily, it will cause “involution”. 

Finance and real estate, analyzed earlier, are among the driving forces. And if China chooses not to change the college entrance examination system, while still pursuing the reshaping of the education and tutoring industry, what is the way out of this problem? 

The first way out is state control, and rectification of the education and tutoring industry to restrict access to extracurricular tutoring services. The second option is to rely on the strengths of a national education system and internet technology to provide more quality free and balanced educational resources for the majority of the people. 

Can these initiatives completely eliminate extracurricular tutoring? Definitely not. As long as there is a demand for it, it will definitely become part of an underground economy

Can these initiatives completely eliminate extracurricular tutoring? Definitely not. As long as there is a demand for it, it will definitely become part of an underground economy. 

But because education’s systemic ties to finance and real estate have been severed, it will more or less "disappear" from the public view and will no longer be a systemic problem, and will no longer contribute to the society-wide “involution”. And for the vast majority of Chinese households, that will be satisfactory. 

They will instead return to the 80s and 90s (the time when I grew up). Were there counseling and tutoring services then? There were, but they were rare, and it was not a trend to rely on these services, and it was mostly up to the parents to learn about various options. Were parents in charge back then? Some parents were, but it was not necessary for providing children with good education. However there was no "cannibalistic" education industry. 

In this case, most people would only prepare for the entrance exams in high school rather than from early childhood. If the state can provide a balanced, free, quality public education at the primary and secondary levels, I believe most families will be satisfied and happy with the results.

The 2015 results from a PISA survey of elementary school students from Beijing, Shanghai, Jiangsu and Guangdong Province. Chart shows hours spent per week studying by chinese students (red column) compared with the international average (orange column).

Education is a large political issue, and behind the central government's proposed policy there is a system of top-level ideas, thoughts and logic. The central government's recent regulation of many other industries/businesses has its own top-level logic. 

Companies and market participants must understand the government’s logic in order to understand the new era of China.

The "involution" of education supported by the disorderly expansion of capital can absolutely suffocate society, making it dead and lifeless. At the same time, it fails to create healthy and future-ready talents. 

When it comes to education, East Asian societies influenced by Confucianism also have this problem. Japan is the country with the most severe problem of "involution". In the end, the seriousness of "involution" means that young people fear society and may even commit suicide.

 So let's look again at the Chinese model of the new era and its characteristics:

1. China has a strong ability to contain capital, and this has to do with our nationwide system of holding the country together and the socialist DNA within our system. If the theme of Western politics is more about the conflict between individuals or public society and the government, our politics is more about the conflict between capital/interest groups and the public’s best interest.

2. China's goal of maximizing the well-being of the majority of the population, and achieving greater equality of opportunity and common prosperity is related to our traditional culture and our contemporary socialist system. We have chosen Marxism and sinicized it precisely because it fits in with much of our tradition.

3. Traditional Chinese culture still sees the country as an organic, living symbiotic society, and wants to talk about harmony. Nowadays, we do not engage in class struggle and do not divide the population, but still emphasize that the whole country is one piece of the puzzle and that everyone does his or her own job for the country. Chinese capital and enterprises are also part of the country and society, and should participate in the "two hundred year struggle” (quote from the report of the 15th National congress of the Communist Party in 1997).

4. China is actually a moral society, that is, there is a higher, more abstract code of ethics and logic behind everything. It is our guiding spirit. Political parties, governments, politicians, and even laws, regulations, and policies are all subject to these high morals, which are what the people aspire to follow. They come from our civilization, cultural tradition, and social moral philosophy and consensus, but of course they change gradually over time. Leaders and governments have to discover this consensus and use it to determine the way and path of governance for our country and society. This system transcends above the law and does not operate within the bounds of our legal system. Law plays only an instrumental role in our governance.

The Chinese model that I discuss is very difficult for Westerners to understand. They can only understand things from a system of explicit and legal rules. They believe in the Western practice of "that which the law does not prohibit, one can do”. Laws and rules can not be adjusted arbitrarily, and the government should not have any subjectivity and arbitrariness. 

Chinese political ethics, the pursuit of higher morals, and the instrumentalization of law, as mentioned above, is absolutely beyond their understanding. They can understand the law, but because they are not part of the same civilization and tradition as we are, they do not know the high morals we are pursuing and what the goal of this pursuit is.

Through my previous analysis of real estate and education industry policies, we can actually see that our government is using decades and centuries of perspective to plan our society and develop governance strategies, with clear values, ideas and logic behind them..

“It is very difficult to understand the government’s logic without being in China, and foreign investors see only arbitrariness and uncertainty”

14. Foreign investment leaving China is the impact of China's recent implementation of new industrial policies for the internet, education and other industries. Because of the introduction of policies that make overseas investors even more unable to understand China, they choose to exit, at least temporarily. 

This process, at least in the short term, will be painful for companies already listed abroad and those looking to obtain offshore financing, and may involve considerable friction and cost.

But for the Chinese government, which is following a long-term approach and working on a 100-year plan, all this is less important. Moreover, cutting off overseas capital from problematic industries or core businesses is not only not a big deal, but a policy goal in itself.

In fact, as long as you can understand China and understand the central government's philosophy of governance and top-level logic, you should see that there is a lot of certainty behind China's investment.

Li Shimo (Eric Li) gave a speech at the end of last year, "Read Qiushi and Make Investments", in which he emphasized these things. There used to be a saying, "go to the countryside, go to the frontier, go to the place where the motherland needs you most." 

In fact, now do the same for investment and business. Invest in those industries that align with the major political strategy of the central government and fit the new pattern of future development.