The other 261 Chinese companies listed in the US (those on the NYSE alone have a market cap of about £1.1tn) are facing another existential threat – expulsion from US capital markets in 2024 unless they comply with the US Security and Exchange Commission’s new auditing standards. In May the SEC announced 80 NYSE-listed Chinese companies in their sights (inc. 17 Education & Technology Group Inc., China Online Education Group and RISE Education Cayman Ltd), with more likely to be under scrutiny including those like MENTEN, listed on NASDAQ.
The trade war between China and the US is a huge issue that we seem to overlook in edtech, yet it has been coming for almost 20 years, starting with the ENRON scandal that cost investors $11bn back in 2001. This led to the 2002 Sabines Oxley Act that required all publicly-listed companies (domestic and international) to allow US regulators (SEC) to inspect their accounts and audits. Chinese companies and their government have fought a rearguard action to avoid this by arguing it is illegal in China and a national security issue. What finally tipped the US government and regulators into action was the bankruptcy of Luckin Coffee for literally cooking its books after its 2019 NASDAQ IPO raised £515m. This led Congress to pass a law in 2020 preventing any Chinese company from listing in the US unless it complied with the SEC’s auditing requirements.
The complexities – geopolitical, economic and regulatory – of China’s trade war with the US (and countries like Australia) are huge, but it’s reasonable to assume that China is pushing local companies not to list on major foreign exchanges like the NSX/NYSE/LSE but to do so within China, i.e. in Hong Kong. In edtech circles you don’t hear much about this, but having edtech companies owned or controlled by listed Chinese companies is an issue both in terms of transparency and more particularly for users (schools, students and families) for data privacy and security.
For a practical example, consider NetDragon’s 2015 acquisition of Promethean and 2018 acquisition of Edmodo. While in the US both companies will be required to meet various state and federal regulations (e.g. Children’s Online Privacy Protection Act – COPPA) the recent expose by Human Rights Watch and The Signal Network about adtracking software and spyware in edtech products, shows compliance by edtech companies globally is weak with little if any enforcement. It doesn’t take much of a search to find UK schools who use Edmodo, some as their core Learning Management System. Where does the underlying data for this end up and with whom? Some, indeed most, probably ends up in China, where companies are legally required to hand it over to the government. For Chinese students this impacts on their Social Credit System (SCS), whose rapidly evolving data metrics can and will directly impact their entire life. For foreign students there is unlikely to be much direct impact from SCS, but that data will still be of real interest to and possible use by Chinese authorities and others.
Increasingly governments are waking up to the security and political challenges posed by Chinese companies in areas like edtech as well as to the impact of Chinese students studying in Western countries. Australia’s trade war with China is a fundamental policy shift around the impact and influence of Chinese money on Australian schools and universities, and from there on national security, as it is about trade complaints related to agricultural products.
For investors in Chinese edtech/edu the looming US regulatory crackdown by the Federal Trade Commission might have an existential impact that may also be felt in the UK if the Information Commissioner’s Office (ICO) ever gets serious about privacy in edtech, but as Human Rights Watch’s report shows, they aren’t!
The business of investing in edtech/edu is always tough, but for Chinese companies things are likely to get much harder.