China to clamp down on for-profit tutoring - document

China will turn its vast private tutoring industry largely into a not-for-profit sector in a harsher-than-expected crackdown, according to a government document widely circulated on Friday and verified by Chinese magazine Caixin.

News of the policy change, which also restricts foreign investment in the sector, threatens to decimate China's $120 billion private tutoring industry and triggered a heavy selloff in shares of tutoring firms including New Oriental Education & Technology Group and Koolearn Technology Holding Ltd. All institutions offering tutoring on the school curriculum will be registered as non-profit organizations, and no new licenses will be granted, according to the document, which says it was distributed by China's State Council, or cabinet, to local governments and are dated July 19.

Reuters could not independently verify the document. China's State Council did not immediately respond to a request for comment. Tutoring institutions would be barred from raising money through listings or other capital-related activities, while listed companies would be banned from investing in such institutions, according to the document, which Caixin said authenticated from education bureau officials in Beijing and several other cities.

The policy would also bar foreign investors from investing in China's curriculum-based tutoring businesses through mergers and acquisitions, franchises, or variable interest entity (VIEs) arrangements, according to the document. VIEs are a commonly used structure to circumvent rules restricting foreign investment in certain industries. After-school tutoring is also prohibited during weekends, public holidays, and school vacations, the document said.

"Such rules are tougher than market expectations, and we expect a material impact on future business and capital market activities of listed (education) companies," China International Capital Corp (CICC) said in a note on Friday. New Oriental's Hong Kong-traded shares slumped as much as 50.4% to their lowest since its listing late last year. Scholar Education Group and Koolearn Technology Holding Ltd both tumbled nearly 30% in Hong Kong.

Education stocks also witnessed a sell-off in mainland China, with an index tracking the sector dropping nearly 5%. Major U.S.-listed Chinese education companies include New Oriental, TAL Education Group, and Meten Edtechx Education Group.