BREAKINGVIEWS-China cuts its private sector much-needed slack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Chan Ka Sing

HONG KONG, Dec 9 (Reuters Breakingviews) - China's crackdowns on education and other sectors have crushed businesses like tutoring outfit New Oriental Education & Technology Group 9901.HK. But the $10 billion firm’s recent revival shows Beijing is loosening its grip on the private sector and reshaping it. This policy shift signals the government will lean on entrepreneurs to boost consumption and create jobs.

Since President Xi Jinping imposed tougher regulations across video games, e-commerce, fintech and other sectors in 2020, shares of the country's largest technology companies have still yet to recover fully.

But it is New Oriental that emerged as the poster child for China's "uninvestible" stocks. In 2021, the government abruptly banned for-profit tutoring in core school subjects - its bread and butter business. Its Hong Kong and New York shares nosedived as much as 90% in the following year. That forced founder Michael Yu to dismiss 60,000 employees - nearly 60% of the total at the time - and diversify into e-commerce and double down on what’s left of his education operations, namely, overseas test preparation and non-academic tutoring.

Those efforts have slowly been paying off. Revenue in the three months to August jumped an impressive 31% year-on-year, to $1.4 billion. The company is also forecast to deliver $75 million of earnings in the fiscal year to May, per LSEG, an improvement from the net loss of $144 million in 2022. The stock now trades on 16 times forecast next-12 month earnings, more than Tencent 0700.HK and Alibaba 9988.HK. Thanks to the outperformance, New Oriental officially became part of Hong Kong's benchmark Hang Seng .HSI index on Monday.

Yu also has Beijing to thank. In August, officials included education services as part of a 20-point plan to boost consumption - widely interpreted as a greenlight for the battered industry to grow again. In the latest quarter, New Oriental's non-curricular classes attracted 484,000 enrollments while the number of schools and learnings centres increased to 1,089, compared to 744 two years ago.

In other industries, signs of regulatory easing are showing too. Tencent's domestic games business, and its rivals', are growing again. The recent release of the popular "Black Myth: Wukong" even prompted praise from state news agency Xinhua.

Earlier this year, Yu called on Beijing to improve relations with the private sector in order to invigorate the $18 trillion economy. Other entrepreneurs from Tencent's Pony Ma to Xiaomi's 1810.HK Lei Jun have also voiced similar views. Beijing is finally heeding their advice.

CONTEXT NEWS

Chinese tutoring firm New Oriental Education & Technology Group on Oct. 23 reported revenue of $1.4 billion in the quarter ended Aug. 31.

Separately, HSI Services, which compiles Hong Kong’s equity indexes, announced on Nov. 29 it will include New Oriental in the benchmark Hang Seng Index, effective on Dec. 9.

(Editing by Robyn Mak and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on CHAN/ KaSing.Chan@thomsonreuters.com))