27 September 2018

New Chinese education law and its potential effect on UK schools

The revised draft of Non-State Education Promotion Law of PRC was issued on 10th August 2018. It has not been formally approved by the government yet, but it is unlikely to change significantly. This issuance has had a big impact on the education field in China.

The first main change is in Article 5. The result of this change is that foreign capital is not allowed in the operation of compulsory education, i.e. the national curriculum.

Article 5 reads “…Foreign-invested companies that are established in China, or organizations that are controlled by foreign entities should not set up, be involved in setting up or actually in control of non-state schools that provide compulsory education….

Compulsory education in China covers a period of nine years, starting when children are six (or seven) years old.  This is roughly equivalent to UK primary school and the first three to four years of UK secondary school.

If this rule is going to be executed strictly, then many primary and junior middle schools in China will be influenced. It is common in China for a primary or junior middle school to cooperate with foreign schools to provide education, especially for language training.  It is not clear what, if any, changes these schools need to take to be comply with the new law when it comes into force. Chinese education investors, however, show no signs of slowing down their dealings with foreign counterparties.

The second main change is made in Article 12.

Article 12 reads “…Company groups who are in operation of schools, should not take control of non-profit non-state schools by merger & acquisition, franchising, or by contract…

Many organizations that operate education by integrating different school resources are listed in Hong Kong. Their stock value has slumped since this issuance, some dropping by over 30%.

The variable interest entity (VIE) structure is believed to be the target of this provision is aiming to control. Behind the VIE structure, some organizations extend their business without limitation.  Some Cayman/BVI-based or Hong Kong-based holding companies indirectly own or control over a dozen schools providing education to different age-group Chinese students.

The third material change is in Article 45. In this article, non-state schools are required to have contracts they signed with others who have an interest in the school to be reviewed by supervising entities, (i.e. Chinese government departments), regarding legality, necessity and compliance.

Article 45 reads “…administrative department of education, administrative department of labour and social security should enhance supervision over contracts signed by non-state schools and other entities who have an interest in the school. Contracts that involve material benefits, or that will be executed over a long period and will be implemented repeatedly should be reviewed and audited regarding legality, necessity and compliance.”

Article 45 is connected with Article 12. Both are aiming to control the unregulated extension of those holding companies that are sharing benefits from non-state schools by participation or actual control of them.  But under Article 45, cooperation contracts might need to be revised by the local branch of the Ministry of Education, which would add time and complexity to any overseas franchising or cooperation agreement.

Of course none of this is new: China’s Ministry of Education has, for decades, tried to influence and reduce, in Chinese education, the commercial element on the one hand and the foreign element on the other hand.  They do not always get their way, but when they do, Chinese education often suffers.  For example, a decade ago all tertiary education projects that had received equity investment by foreign universities were told not to allow the payment of dividends, thus scaring away most potential investors.  It remains to be seen whether the current draft regulation will have a similar deleterious effect on secondary education.  Our guess is that it won’t: the restriction only really affects Chinese investors who have restructured to out their assets offshore, and might require them to restructure again.  However, UK and US schools need to keep a close watch on the new law, and wait to see how it is implemented.

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About the Author
Nicolas Groffman, Partner, Head of International Team
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