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Putting the ‘I’ in education: why we’re investing in disrupting the education system in China

MAY 2018

Alicia Gregory, Head of Private Equity, MLC

 

For millions of mainland Chinese students, long days filled with rote memorisation and high-pressure testing are part of everyday life. But as the Chinese economy continues to grow, a middle class has emerged and they have different expectations of the education system for their children that the existing Chinese system simply doesn’t meet.

These individuals have started to embrace an English-based, western-style education system which aims to develop essential skills such as critical thinking and innovation, and seeks to nurture the strengths of each child, rather than label them as ‘good’ or ‘bad’ students based on exam results.

 

Promoting individualism in the communist state

Education has always been a tightly regulated area in China, as it can directly influence the next generation and facilitate social mobility. Although in China there is an overall trend towards deregulation, years 1 through 9 are defined as a ‘mandatory education period’ which remains tightly controlled by the government.

However, the for-profit sector has really started to take off in China. Deloitte describes China’s education industry as ushering in a “golden age”, with expansion in terms of both industry size and market activity.1

Private school penetration has increased from 11% in 2009 to 19% in 2016 as private schools have started to become accepted as mainstream in China. While private schools for local Chinese children must follow the government curriculum for years 1 to 9, they are not as tightly controlled by the government and have more freedom to design programs, improve facilities and charge higher tuition fees. Indeed, private education has been encouraged in China, in part to bridge the shortage of public funds and resources.

 

Rising demand for second languages

Within the growing demand for private schools is an increasing interest in bilingual international schools. While at face value it would appear at odds with state-controlled education, by encouraging the development of local private international schools, the Chinese government can still have some influence over the curriculum and still benefit the domestic economy. This remains far more palatable than losing these students, who would otherwise move to overseas high schools to study.

In 2013 the Chinese government introduced policies that encouraged private schools to launch international curriculum programs under a set of specific rules and guidelines. This has seen total enrolments at international schools in China grow from 177,000 in 2014 to around 245,000 in 2017.2 Though China’s economic growth rate is slowing, the desire of middle class parents to send their children to bilingual international schools continues to grow, mainly because they believe that a high quality education is an investment in the future of their children.

Also in 2013, the Chinese government relaxed the one-child policy to stimulate the birth rate. This policy should result in the student population steadily increasingly, further supporting demand for international schools.

 

Types of international schools in China

International schools in China can be broadly divided into two categories:

1. Traditional international schools for expatriates: these schools have historically dominated the international school market, charging around US$40,000 pa and catering mainly for expats living with their families in China. They can only accept children of foreign nationals. These schools are usually lightly regulated when compared to schools for local children, especially in terms of the curriculum. Since 2010, the demand by traditional expats has stabilised and slowed down, as a lot of expatriate families have left China.

2. Bilingual schools for domestic students: these schools can accept children of Chinese nationals, offering an integrated program of both Chinese and foreign education. They target upper-middle class families in China that are willing to pay premium fees, of around US$15,000-35,000 pa, in order for their children to receive high-quality education and eventually study at high profile universities abroad. The curriculum is usually an international one recognised by global educational institutions, emphasising English fluency and well-rounded development. Facilities are better at these schools, with smaller class sizes of around 25 students per class compared to around 50 per class across the broader industry.

These bilingual schools for domestic students have emerged to try to fill the gap in the market for quality education that prepares Chinese students to be well-rounded and active participants in the global economy. This segment is one of the fastest-growing in the Chinese educational sector, growing at nearly twice the pace of the already rapidly expanding private education market. J.P. Morgan sees a trend of shifting focus from expat schools to domestic bilingual schools3, as demand for high quality domestic kindergarten to year 12 (K-12) international schools from Chinese students will exceed supply.

 

Quality continues to be the ultimate differentiator

China has a cultural predisposition for spending on a child’s education, as historically two-income families have focused resources on only one child. Recent changes in government policies discouraging conspicuous consumption has also resulted in more income becoming available for socially and politically acceptable spending such as education. Education spending is often cited as the second or third highest category of family spending after housing and food.

While there are many factors families consider when selecting a school, education quality continues to be the deciding factor.

Many parents scramble to enrol their children in the best kindergartens, which then leads to the best elementary schools, high schools and, finally, universities, with many hopeful of a place at an Ivy League school in the US, Oxford or Cambridge in the UK.

The MLC Private Equity team are strong supporters of the education industry, not just for its attractive market dynamics, but also because its ability to transform people’s lives has financial implications for our investors.

While we’re aware the investment case may not play out exactly as we expect, we’ve deliberately focused on backing only the highest quality educational institutions. We have invested in an emerging network of six schools in China which has achieved among the best academic results of all international schools in Shanghai.

Like many of the top private international schools, these schools focus on the education of values and responsibilities and nurturing students’ individual personalities and creative developments, rather than an exam-oriented style of education. Their success is already attracting significant international interest. Yale is in discussion with the schools to be their exclusive partner in China to set up joint-branded kindergartens – a clear testimony to the schools’ focus on providing a quality education for their students.

 

1 ‘Golden age of China’s education industry’, Deloitte, May 2016.

2 China Maple Leaf Educational Systems Limited Annual Report 2015/16; Frost & Sullivan Report 2017.

3 J.P. Morgan Securities (Asia Pacific), China Education Service Sector, June 2017.

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