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China’s expected edtech clampdown may chill a key startup sector

When it comes to control, the Chinese government doesn't mind wiping out a few dozen billion dollars in market cap here and there. That's not a great system.

News that China’s government may force domestic tutoring-focused companies to go non-profit is taking a huge bite out of the value of several technology companies. Bloomberg notes that the value of companies like New Oriental Education & Technology Group and TAL Education are tumbling in light of the news, which would constitute merely the latest salvo against tech companies in the autocratic country.

New Oriental’s Hong Kong-listed shares fell 44.22% in after-hours trading after the non-profit news broke, while NYSE-shares of TAL are off an even sharper 51.75% in pre-market trading. With Yahoo Finance listing a roughly $13.8 billion market cap for TAL ahead of its impending declines at the market open, billions of equity value are about to get deleted. The list goes on: China Online Education Group is off 39.97% in after-hours trading, for example.

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A new decision by China’s government to exert more control over a sector of its domestic economy should not surprise. And we shouldn’t be shocked that online tutoring is in the country’s targets; today’s news is a follow-up to prior regulatory action in the sector from earlier in the year.

As China has become synonymous with edtech startup in recent years, the news impacts more than just public companies. The expected rules change may also hit a host of private, venture-backed companies.

For example, what will happen to Yuanfudao? The company was valued at $15.5 billion last year, offering what TechCrunch described as “live tutoring, an online Q&A arm and a math problem-checking arm.” Will the company see its wings clipped?

Or how about Zuoyebang, which raised $1.6 billion in a single round last year? TechCrunch wrote that Zuoyebang offers “online courses, live lessons and homework help for kindergarten to 12th grade students.” Is it in trouble as well?

All this comes on the same day that shares in Zomato began to float, with the Indian online food delivery company seeing its shares close up nearly 65% in their first day’s trading. TechCrunch has viewed the Zomato IPO as a possible bellwether for the larger Indian startup market, and the results augur well for other growth-focused, loss-making unicorns in the country.

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