China: May You Live In Interesting Times…

...or so the ancient Chinese curse apparently goes. The China K-12 education sector has presented huge opportunities for investors and international operators and it is obvious why. China is the largest country in the world by population, with latest World Bank figures reporting a population of 1,371,220,000 as at the end of 2015. Roughly 13% of its population are of school age. Although traditionally school education has been provided free of charge and by the State, this changed back in the late 1980s as non-Chinese nationals, unable to access State education and with an increasing amount of disposable income, created an opportunity for private schools, and the increasing internationalisation of China's main economic hubs – Shanghai, Guangzhou and Beijing – saw an expatriate workforce keen to provide best in class private and international education to their children.

In 2016 we now see 555 international schools in China, second only to the UAE, and with a number of well-known UK school brands operating (including Dulwich College, Wellington College and Harrow). Current growth projections are predominantly built around an expectation that an increasing amount of Chinese nationals will want to, and be able to, send their children to private schools teaching both the Chinese compulsory education curriculum and international curricula.

For international school operators and investors looking to bring international school brands to China, there are two main opportunities in China:

  1. International Schools for children of foreign personnel (International Schools) - these can be for profit, and can teach international curricula, but can only admit foreign passport holders. No Chinese nationals can attend. Foreign investors and operators can wholly own these types of schools.The market for International Schools is mostly confined to opportunities in the main international hubs, like Shanghai. Stiff competition and enough current supply make opportunities challenging. Investors and operators shouldn't be put off, especially if the school concept has a particular USP or is targeting an otherwise under supplied price point or niche. But competition for admissions will be fierce.There has also been an increasing "grey area" around admissions, with a number of International Schools pushing the boundaries on enrolment of Chinese nationals with foreign residency visas, encouraged by local education bureaus laissez-faire approach.
  2. Dual curriculum schools (Dual Curriculum Schools) - these can admit both Chinese nationals and foreign passport holders, but have to operate two streams of education. One for Chinese nationals teaching the State curriculum from Grade 1 (UK year 2) to Grade 9 (UK year 10), and the other stream for (a) foreign passport holders and (b) for Chinese nationals in Kindergarten/nursery (including UK FS1 to Year 1) and then again from grade 10 (UK year 11) onwards. Foreign ownership is only permitted if it is in joint venture with a Chinese partner.

The biggest opportunities lie in tapping into the domestic demand for Dual Curriculum Schools. This also opens up other regions of China for possible school sites, as most of the large cities in China have very little (if none) expatriate families.

All very interesting. But as that old Chinese curse hints at, "interesting" should probably read "challenging" in this modern era, and the Chinese K-12 education sector has just become a bit more challenging for investors and school operators looking to tap into the domestic demand for quality international education. The recent developments that are potentially affecting these opportunities are:

  • Amendments to the Private Education Law 2013

First of all the good news. The amended law now confirms for the first time, that schools (and indeed any education institution) can be operated "for profit". Schools teaching non-compulsory education, i.e. pre-grade 1 and post-grade 10 can operate for profit. International Schools, which by their definition do not teach China's compulsory education can be for profit. For profit schools can determine their own tuition fees.

However, schools teaching China's compulsory education (Grades 1 to 9), i.e. Dual Curriculum Schools, must be not for profit.

Although we expect that this will have an impact on investor appetite for dual curriculum schools, there are a number of structuring options available which can potentially mitigate this. Private investors and owners of schools in Hong Kong and India (where schools must be established as charities) have had to deal with this requirement for a number of years, and lessons can be learned from their approach.

The amended law will come into effect on 1 September 2017, and will apply to existing and new schools. Existing schools therefore have 9 months to restructure themselves to become compliant.

The amended law confirms that schools operating as not for profit must have their tuition fees approved by the Government whereas for-profit schools are free to determine their tuition fees, without any supervision. The amended law also specifies that not for profit schools shall have the same preferential tax policies as State schools.

  • Shanghai Municipal Education Commission's position on international curricula.

We understand from recent press reports that the Shanghai Municipal Education Commission recently met with representatives of international and Dual Curriculum Schools in Shanghai, as well as district education bureaus to re-confirm its position on international curricula.

The education commission has not introduced any new rules or regulations, but rather reminded schools that they must comply with State laws and regulations and have told district education bureaus to heighten their oversight of international curricula being taught in Shanghai.

We understand that this could be as a result of a number of international schools and Dual Curriculum Schools flexing their entry requirements to allow more Chinese nationals to enrol.

The Education commission also stressed that State rules on national education, i.e. the teaching of Chinese history, constitution, law and morals should be followed, even in international schools. This is a requirement in other jurisdictions, such as the UAE, where Arabic language, Islamic Studies and soon moral education, are required to be taught in international schools.

There is also concern that this could see Dual Curriculum and International Schools restricted in what international subjects are taught.

At the time of publication it is too early to say what impact these developments will have on schools in China, although it is fair to say that the K-12 sector is going through a period of uncertainty and investors and school operators should be cautious when considering opportunities before the true extent of the impact is known. Clyde & Co's global education team is on hand to help steer operators and investors through this "interesting" time.

May you live in interesting times...

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Ross Barfoot
Stephen McKenna
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