Creative Destruction or Destruction

It is truly stunning to consider the corporate destruction of the past several years in China. Huge public entities in education like New Oriental and TAL Education have been kneecapped, with their business model simply put off limits. An entire industry, after-school tutoring, decimated by executive fiat. A message that children should only receive education directly from schools, which are under the watchful eye of the government.

Regulators struck beginning in June 2020, as New Oriental was preparing to raised money with a secondary listing in Hong Kong. As a result, New Oriental laid off 60,000 workers in 2021, and lost 28 billion in market value. The story is similar for the tech giants, which began to have regulatory troubles in November 2020. The effect on tech companies has been less extreme, but still very destabilizing.

The government used to be highly sensitive to moves that would damage employment. Do they care about employment levels today?

The wave of regulatory crackdowns certainly led to a significant number of people becoming unemployed, it led to the closure of a large number of training centers, along with many, many broken contracts. Employment is reduced, productive office space is reduced. These are not costless. The tech companies, now greatly reduced, are less able to hire and less able to grow.

Much has been made of the high level of youth unemployment in China. What kinds of jobs would these young workers be looking for? That's right, education was once a big, attractive industry that hired young workers coming out of school, along with tech.

The contrast between action and consequences is stark. The government makes radical decisions, and yet the consequences of those decision still seem to come as a surprise. The same people who unleashed the turmoil on markets are now saying in 2023 that they will rely on these same companies for help with employment and growth.

This move has been building for some time. An idea has taken hold that teachers, wishing to maintain their 'lucrative' side gig as after-school tutors, do not teach their regular students as completely as they can. This, so the theory goes, makes their tutoring more essential, guaranteeing the extra income. As far back as 2015, public school teachers were forbidden from having these tutoring side gigs, at least within training centers. Even private tutoring in people's houses is a very gray area.

It is quite stunning to consider that the government felt permitted to make private tutoring illegal. This shows just how few lines there are for this government.

Parents cannot be happy about this change. The theory behind the government's action is that students have too much stress, but the school year, the daily homework and the relentless testing continues. In the government's eyes, all tutoring will cease, and then there will be a level playing field. But parents will know and expect that the wealthy are still arranging tutors for their children, quietly, and they will feel even more pressure. Additionally, one would assume that the cost of tutoring will go up, as larger classes turn into smaller classes and some tutors exit the market out of fear. Demand will be reduced, of course, but supply will be reduced even more.

This all boils down to a long-standing issue in China: The government wants parents to be satisfied with the education their children get, and parents are ultimately not satisfied. The entire rise in English tutoring in China could be reduced to an understanding that Chinese parents want more English education for their children. Most public schools are loathe to expand their English program, what with the need to focus on so many other areas. Political classes and science classes all take precedence to English in the majority of schools.

This radical decision has follow-on consequences: Trust between parents and the government has been broken. Government policy has intruded, really quite deeply, into private family decisions. While some students were certainly overjoyed to be free of these extra classes, many others probably feel cheated. It is unlucky for them that their generation is the one to be punished. All of this really causes a negative feedback loop, where parents trust the government much less, which makes them want to save for an uncertain future, and makes them want to educate their children better for the same reason.

It's important to realize that the Chinese people have enough historic memory to be aware that the government will at times act in very destabilizing ways. Radical government moves destabilize society. They teach people to keep their heads down, in order to be safe. They scare people. This is likely a factor in the large household savings rate in China. No one knows when the government will, once again, embark on some ill-advised course of action, so they must save for that eventuality.

Now the government has decided to focus on Foxxconn, one of the largest private employers in the country. Regulators are raising issues in multiple provinces, certainly not coincidental. Will politics trump employment yet again?