What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the past few months, the chinese government has been cracking down on many of its domestic industries. The most extreme case has been just in the past few days. It has been reported that the government is completely banning the for-profit education sector. Private education is big business in china, with the industry raking in 100 billion dollars per year in revenues.

The crackdown is viewed as an existential threat for the publicly traded education companies. New oriental education boasted a market cap of more than 30 billion dollars just a few months ago. It has since declined 90 percent and has almost achieved penny stock status. Tau education group had a market valuation of more than 50 billion dollars at its peak in february and has since lost more than 95 percent of its value wall.

Street vets is paying close attention to the unfolding situation with towel education entering the top 10 tickers mentioned on the forum. These are just two of the biggest publicly traded education companies, but there are many other examples. The general fear about the government's crackdowns has tanked the entire chinese tech sector. Well, i think, when you look at you, make an industry, a for-profit industry into a non-profit industry.

That's confiscation, i sometimes wonder, is he picking on the companies that have big positions in the united states? Yes, i think he is crushing portuguese to a certain extent. He is, but i mean yeah. There are so many different things that somebody else is saying. Well, listen! They're trying to figure out what the benefit to society is of these new economy companies, something by the way, we're kind of doing here too sometimes right and maybe they're coming up well, not much, but maybe they don't like the fact that larry chen was worth.

I don't know 25 billion in that you know 18 billion dollars worth 250, but they don't. I don't think they like billionaires over there. Miss communist country billionaires are kind of glaring. Do you see the deutsche bank excellent piece on china? Education called final toast and he said the education companies is basically going to become not-for-profit.

You see some of his price targets. He's got one uh got you, but i mean 97 to three dollars: that's a reduction yeah! That's a reduction and they've gotten absolutely crushed. Carl. Now some of it goes back to their their hopes, for the chinese are going to start having more children, because it's so expensive to raise kids and they're, trying to figure that out.

So who has the money i mean remember? Their society is very similar to ours, which is really amazing, because it's communist, where, if you have the money, you can get your kid to have better tutoring than other kids and and that's kind of like our country, and they don't want it to be. Like our country right, our country, the rich kids, get tutored, they go to the good schools in china. It's the same thing and she doesn't like that in this video we'll look into why the government is doing this and how far these crackdowns are likely to go. China's education system is extremely competitive because there are so many students competing for a limited number of spaces at universities.

Education is taken very seriously and getting into a good university is viewed by many as the only way to escape poverty to give their children an advantage. Many parents hire private tutoring companies to provide extracurricular exam preparation. The cost of tutoring can range from thousands to tens of thousands of dollars per year. In recent years, private tutoring has become almost ubiquitous and children will fall behind if they don't do any extracurricular studying.

This has forced poor families to spend exorbitant amounts of money on for-profit education. It has become something of a rat race, with the studying culture becoming more and more competitive, but has been great for the private education companies who make billions of dollars in profits every year. Besides a direct financial burden on families, the educational race also contributes to china's decreasing birth rate, with the cost of education so high, most parents can barely afford just to raise one kid to sustain a level of population. The average couple must have at least 2.1 kids.

The fertility rate has declined significantly over the past 20 years as a result of the one child and later the two-child policy. Recently, the government has been concerned about the population becoming too old and relaxed restrictions to allow three children per couple, but most parents can't afford to have three kids anyway, even if it is allowed. This is a big problem, as it means the population will continue to age. We made a video about the economic consequences of an aging population.

The link is in the description below the crackdown on for-profit. Education is likely an indirect way to boost the lagging birth rate. The question now is: how far will the government be willing to go with this crackdown and will it be successful at reducing educational expenses for families? The current reporting is that the government will ban these companies from making any profit, which would obviously make their shares worth. Nothing, the stock market seems to be pricing in a pretty high probability of this actually happening and shares are down close to 90 percent.

Although this video is not financial advice, we'll still look at how likely this worst case scenario is for the stocks. According to draft regulations seen by the financial times, the chinese government will require existing education companies to register as non-profits and no new education agencies will be allowed to open. They would ban education companies from raising money through ipos. They will also establish official guidelines on how much tutoring classes can cost to make sure the companies can't make any profits.

The chinese for-profit industry is worth an estimated 100 billion dollars and employs well over 1 million people. New oriental education alone employs almost 100 000 people. Shutting down these companies overnight seems rather unlikely, as this would cause a massive increase in unemployment and be a major hit to economic growth. It's possible.

They could let the companies keep operating, but just not making a profit. They could charge prices barely enough to pay the tutors salaries and other expenses. This would allow most of the employees to keep their jobs, but the stocks would be worth nothing. It's also possible.

They could water down the proposed regulation such that the companies are still allowed to operate profitably. It's very hard to predict exactly what will happen, because the government may change the regulations before they are implemented. China is not the first country to crack down on for-profit education. South korea had a similar crackdown in the 1980s similar to china.

South korea has a highly competitive education. Culture and parents spend huge amounts of money on so-called cram schools throughout the 70s cram schools would price gouge the students. They would often bribe teachers at real schools to pass along answers to upcoming exams. They'd give the answers to the paying students at the cram schools and give them an unfair advantage.

In 1980, south korean president chun do hwan and the for-profit cram schools saying the unfairly burden, poor families with high fees and create inequality. The ban was widely considered to be a failure, because wealthy parents just hired private tutors for their kids at home. Also many cram schools continue to operate in secret when there is so much pressure for the kids to get into top universities. Parents will almost always find a way around the regulations.

In the 1990s, the courts ruled that the ban was unconstitutional and the for-profit cram schools were once again allowed to operate. While there have been some regulations limiting class hours and tuition fees, they have proved hard to enforce in practice and most cram schools operate with impunity. If china does ban these for-profit education companies, it would seem unlikely to stem the problems of low birth rate in exorbitant education spending, similar to what happened in south korea. In the 1990s, chinese parents would likely hire private tutors, which may even be more expensive than the current after school classes.

It will also only have a limited effect on birth rate. The low birth rate is largely caused by cultural factors such as increasing gender equality. In the workplace is not something that can be solved by banning for-profit education, but this doesn't mean the chinese government won't follow through on their proposal to ban profits. The communist party can pretty much do whatever it wants and to say that these education stocks are risky.

Is an understatement: alright, guys that wraps it up for this video? What do you think about the chinese education crackdown? Do you think the education stocks will be worth anything? Let us know in the comments section below, as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.