Universities and high schools can now become for-profit
Fudan University, Shanghai © Alamy
November 1, 2017
by Jiadi Yu, IFC
A new law which took effect in September is generating a wave of investor interest in China’s higher education sector.
The law, enacted by China’s Standing Committee of the National People’s Congress last November, lets universities and high-schools establish themselves as for-profits for the first time. All providers operating in the K-9 space must continue to remain non-profit. This is the last major sector of China’s economy to be commercialised, following close on the heels of the health sector overhaul.
Like every other country in the world, China is struggling to close skills gaps in the labour market and to equip its youth with the knowledge they need to thrive in a global economy. Demand for higher education outstrips supply.
China’s public universities are already heavily subsidised and the government has limited room to increase public spending. The new law is aimed at attracting private investment needed to expand access to relevant skills and training. With their close links to industry, many private universities are more responsive to labour market evolutions and have skills-based curriculums.
The opportunity for growth is vast. Today, China’s private tertiary education industry is small, underinvested, and fragmented. Overall, higher education spending is about $149bn, about $135bn of which is financed by the public purse, and the remainder from the private sector. Some 29m Chinese are enrolled in some form of higher education, of which only about 6.3m are enrolled in private universities, a number expected to hit 8m by 2021, according to a Frost and Sullivan report.
Although small, private higher education is growing fast — 8.2 per cent a year — compared with 6.5 per cent annual growth in the public sector, according to government statistics. With 40 per cent of China’s high-school graduates going on to university (either public or private), its tertiary enrolment ratio exceeds the global average of 37 per cent, Unesco figures show.
It outperforms India, at 27 per cent, but lags behind many middle-income countries in other world regions, such as in Latin America (Colombia stands at 47 per cent).
Allowing private universities to operate as for-profit institutions will make it easier for them to raise finance from capital markets and expand, including through M&A activities. Historically these institutions had to be registered as non-profits, limiting avenues for both debt and equity funding. There have already been several successful initial public offerings over the past six months.
In March, Minsheng Education, one of the top 10 private universities for enrolments, with more than 30,000 students, listed on the Hong Kong Stock Exchange. IFC became a cornerstone investor in Minsheng, taking a $25m equity stake. Minsheng is based in Chongqing, a city of 30m people. Because of this supportive policy change, the highly fragmented private education sector has begun to consolidate, facilitated by mergers and acquisitions among the large education groups.
The new law gives for-profit higher education providers full autonomy in setting tuition fees. Currently, the government has a say over fees. It also strengthens the ownership rights of for-profit providers by granting them full freedom to dispose of their assets should their schools cease operating, a freedom they do not presently enjoy. Further, it will allow the for-profit institutions to declare dividends legally.
Most of the investors availing themselves of the opportunities provided by the new law are Chinese. Their focus tends to be on developing bachelor degree programmes. Foreign investors operating in this space are fewer and they tend to partner with the leading public universities in China, such as US-based Duke University setting up a campus in Shanghai in partnership with Wuhan University.
Expanding private education will help the millions of young Chinese who find it hard to get into the public universities. While the public universities generally provide high quality and relatively affordable education, they tend to admit only top-performing students.
Private universities, by contrast, largely focus on enhancing job skills of students with lower entrance exam scores, many of whom come from lower to middle income families. Thus, for students who are not quite at the top of their class, private universities are great avenues for pursuing their ambitions for a degree and putting them in a stronger position to compete for higher-paying jobs.
The new law aims to help alleviate youth unemployment in China as graduates from private universities tend to get jobs quickly. A few top-ranking private universities, such as Xi’an EurAsia University, Minsheng Education and Shandong Yingcai University, have seen more than 90 per cent of their students find jobs within a couple of months of graduating.
Top-tier private universities’ employability rate is high, because they focus on skills such as nursing and geriatric care, early childhood education, software engineers, construction technicians and high-end manufacturing jobs, as well as some specialised programmes, such as railway operations. Employability is an important consideration for us at IFC, as we decide where to invest for the greatest development impact. Strong regulatory oversight and quality standards are equally important as the for-profit education industry develops further in China.
While the law is already transforming China’s university market, a wholesale flip from non-profit to for-profit status is unlikely. Non-profits have plenty of incentives to keep their status. For example, they will continue to receive more favourable tax treatment and have access to cheaper land than for-profits. They may also continue to enjoy certain types of government subsidies.
It will be fascinating to watch how China’s higher education market evolves. Will the public universities continue to attract the top-notch students or will they face stiffer competition? Will the new for-profit entities use their capital infusions to boost enrolment levels? Perhaps most important: will China’s higher education system become better equipped to respond to the labour market’s ever-changing needs? I am confident that it will.
Jiadi Yu is a Principal Investment Officer at the International Finance Corporation, part of the World Bank Group.
This post originally appeared in the Financial Times.