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China shares tumble on regulatory clampdown; education firms selloff heavily

SHANGHAI: Chinese shares fell sharply to their lowest levels this year on Monday as investor worries over the impact of government regulations kneecapped the education and property sectors, after Beijing barred for-profit tutoring in core school subjects.

The searing sell-off sent Hong Kong-listed Scholar Education Group shares crashing more than 43%. Hong Kong stocks of New Oriental Education & Technology Group Inc plummeted over 41% after U.S. shares lost over half of its value on Friday. The company provides tutoring and test preparation services in China.

Sub-indexes tracking education and related sectors declined sharply. The CSI Education Index ended 9.31% down at its lowest close in 16 months and the Hang Seng Tech index slumped more than 5.5%, nearly erasing all gains since its inception in July 2020.

The shakeout in China’s $120 billion private tutoring sector follows Beijing’s announcement on Friday of new rules barring for-profit tutoring in core school subjects to ease financial pressures on families. The policy change also restricts foreign investment in the sector through mergers and acquisitions, franchises, or variable interest entity (VIEs) arrangements.

Louis Tse, managing director at Wealthy Securities in Hong Kong, said the curbs were needed to prevent “chaos” in a profitable sector.

“The Chinese government…in a way it’s right, they want to put a heavy hand and try to regulate that industry to make it more acceptable,” he said. “Of course investors….I won’t say they suffer. They won’t earn that much anymore.”

China’s blue-chip CSI300 index fell 3.22% to end at its weakest close since December, the Shanghai Composite Index declined 2.34% at a more than two-month closing low, and the Shenzhen Composite fell 2.28%.

Both the Shanghai and Shenzhen indexes were hit by heavy foreign-investor selling. Refinitiv data showed outflows of more than 9 billion yuan ($1.39 billion) from A-shares on Monday.

In Hong Kong, the Hang Seng index slipped to its weakest level since Dec. 28 and was last down 3.48%. The Hang Seng China Enterprises index tumbled 4.16%.

Government efforts to rein in an overheated property sector also spooked investors on Monday, sending the CSI 300 Real Estate index down 6.13% to its lowest close since September 2015, while the Hang Seng Properties index fell 2.58%.

Media reports that China’s central bank has ordered lenders in Shanghai to raise the rate of mortgage loans for first-time homebuyers followed a statement from the housing ministry on Friday that China will strive to clean up irregularities in the property market in three years.

Shares in China Evergrande Group, the heavily indebted developer whose financing difficulties have stoked broader apprehensions about the outlook for the property sector, fell 6.34%. Evergrande shares have fallen by a third this month, and are down more than 54% this year.

Fellow developer Country Garden Holdings Co dropped 2.30%.

“We believe China’s economy, and specifically its financial system, will face significant risks in coming months due to the unprecedented tightening measures applied to the property sector,” economists at Nomura said in a note Monday. – Reuters

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