Bullish on Nonprofit Schools? In China, the Market’s Ripe for Exploitation

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March 2, 2017; BloombergQuint

Fresh off the heels of Snapchat’s initial public offering last week, China’s hot new stock is…a nonprofit? Well, not exactly. The case of the China Yuhua Education Corporation, which made its trading debut last month, is complicated, at least by our American standards.

BloombergQuint recently reported that two of Hong Kong’s largest IPOs this year have been Chinese nonprofit school operators, which caused us to do some digging into how and why the communist country’s education sector is so ripe for investment.

The China Yuhua Education Corp. is now one of four Chinese school companies that have stock traded in Hong Kong. It operates one university and two dozen K-12 schools in a province in central China. According to BloombergQuint, the schools can’t distribute profits or pay dividends, but the operators’ income can be funneled out of the mainland via offshore vehicles (known as “variable interest entities”).

Operating through that gray area, private school companies have tapped into a lucrative business. China’s education needs are huge, and the rigid curriculum of state schools has prompted parents to seek alternatives. Beijing has been encouraging private providers to fill the gap….Because of their nonprofit status, school operators can’t raise fees without government permission, but they do get cheap land and pay low tax, similar to public-sector schools.

However, the private school landscape may change come September, when companies will have the option of switching to for-profit organizations, which might offer more control over fees and assets but possibly fewer government privileges and higher land and tax costs. Private schools were banned from teaching 1st through 9th grades last fall when the Chinese government attempted to rein in the vast sector (affecting some 12 million children), which was marked by varying quality and results. Critics saw the ban as an overreach into what the schools could teach, reflecting a government campaign against “Western values.”

Let’s remember, as NPQ has explored extensively, China’s NGO sector is much different than ours.

Scholars dispute whether China’s nonprofit sector constitutes a genuine civil society, given the strength of government control, limitations on political activity, and interventions in NPO activities and goals by the current authoritarian regime… Hopefully, the government will eventually rescind the law that makes all unregistered NPOs (USOs) illegal simply for existing, and focus legal restraints on NPO activities that are actually harmful to people.

And, China was cited just last week in the U.S. State Department’s Human Rights Report for a 2017 law that placed foreign-operated NGOs under the supervision of the Ministry of Public Security, designating the organizations as a “national security threat.”

So far, however, it appears that nonprofit schools have yet to be tied up in the challenges facing foreign NGOs.—Anna Berry