$3.7 billion already spent: China’s education system is an investment opportunity”

3/15/2018 12:28:31 PM

There is an abundance of opportunities for foreign involvement in China’s education industry. It is a sector that foreign companies have been eager to invest in, a recent study by Dezan Shira & Associates claims. The conclusion of the firm’s researchers is clear: “Although China undeniably has a strong domestic base for education that is the envy of many other countries, there are numerous niche sub-sectors that overseas educators are well placed to tap into. They have a great appetite for foreign expertise”.

Although foreign investors are not free to invest in China’s education system -  some parts are even off-limits – FDI is showing clear growth. In total, foreign organisations have invested $3.7 billion in the 1892 education institutes that they have established over the years. In 2016 alone, 96 new organisations took roots (investment: $94 million), more than twice the number of institutes in 2015 (38) and almost five times the number of 2014 (20).

Three categories, one is off-limits

China’s education industry is divided into three separate categories. The first one is a no-go area for investors: compulsory education institutions (primary and middle schools) and special training institutions (such as military, police, political, and Chinese Communist Party schools). Foreign investors can invest in pre-school educational institutions, high schools, and tertiary educational institutions in the form of Sino-foreign joint ventures, in which foreign majority ownership is allowed but only when the Chinese party is in a leading position. The principal or key administration officer in such institutions is required to be a Chinese national and the council, the board of directors, or joint administration committee of the school must be majority Chinese.

In contrast to these restrictions, foreign investors are encouraged to invest in sports training and non- academic vocational training institutes (such as IT, accounting, English, etc.), primarily because these industries are considered to have talent shortages.

Club China asked Qian Zhou, Senior Associate of Legal Research & Publications at Dezan Shira, for details.

In your report, you are very positive about the state of education in China. What aspect of Chinese education is the envy of many other countries?

“The industry continues to benefit from China’s demographic dividend, but beyond this, the highly competitive academic environment encourages parents to pay for their kids’ education. Foreign investors in the industry remain excited about the high level of demand produced by China’s demographics and academic environment.”

What makes the Chinese education sector a good investment area?

“The education sector’s market potential has remained positive for foreign investors, while the authorities’ gradual relaxation of investment barriers of certain education sectors has also improved conditions in the industry. Foreign investors are finding it easier to enter the education industry.”

What parts of the sector do you regard as ‘promising’ for investors?

“For-profit training centers are a particularly promising sector for investors. Investors in this sector benefit from consumer demand and complementary regulations.”

In some cases, Chinese shareholders are required by the government to be in the lead of the investment project. Does this produce a showstopper for some investment cases?

“A need for Chinese shareholders does not need to be a deal breaker. Foreign investors should consider working with local partners, who can help their company identify the right local market, navigate local regulations and leverage local talent.”

The report also shows clear limitations, parts of the sector that are off-limits to foreign investors. You mentioned gradual relaxation of investment barriers. Do you expect things to change, limitations to be lifted? What is the trend?

“For the off-limit sectors in education, such as compulsory education (or grades one through nine), it is still a highly sensitive area for foreign investment. This is mainly due to concerns over how educators may portray Chinese identity. While there will likely remain restrictions on education for young people, authorities have gradually reduced foreign investment restrictions in most sectors in the country, albeit with significant compliance requirements.”

These are the numbers on growth of FDI in education:

Newly established 

Number of education institution

Investment value (1 million USD)

2016

96

94 

2015

38

29

2014

20

21

 

Total 

Total number to date

Total investment value to date (1 million USD)

2016

1892

3737 

2015

1796

3531

2014

1758

3481

 

Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. With 25 years of on-the-ground experience, Dezan Shira & Associates has subsequently grown to support 28 offices and over 300 staff in our operations throughout Asia. Our services include pre-investment and entry strategy advisory, comparisons of investment destinations, due diligence, corporate establishment, tax planning, accounting & reporting, treasury administration, financial review, internal audit & compliance, human resource administration & payroll, and ERP & financial system review. 

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