China Internet ETF Halved By Ed Stock Wipeout

Shares of China’s top education firms were nearly wiped out over the last two days, fueling heavy losses in the broader China internet space.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

The blows keep coming for Chinese internet stocks. After sinking 8.8% on Friday, the KraneShares CSI China Internet ETF (KWEB) tumbled 9.6% on Monday, bringing the fund’s losses to 34.9% since the start of the year and 51.7% since its peak in February.

 

KWEB Price

 

The latest thrashing came in response to new rules from the Chinese government that prohibit certain education companies from going public, being owned by foreigners and even making profits.

Shares of TAL Education Group (TAL), New Oriental Education & Tech Group (EDU) and Gaotu Techedu (GOTU) plunged anywhere from 26% to 34% on Monday. That’s on top of the 54% to 71% drops the stocks saw on Friday.

In just two days, China’s new rules have all but wiped out the equity of these online tutoring companies, which were worth a combined $121 billion at their highs earlier this year. Today the three together have a market value of less than $7 billion.

 

Market Caps For TAL, EDU, GOTU

 

The aforementioned KWEB owns both TAL and GOTU, though the weighting of the two stocks within the ETF’s portfolio has shriveled to less than 1% following their collapse.

CCP Priority

China’s assault on the country’s education companies comes amid a broader crackdown on the country’s corporations, particularly internet firms.

In this case, the Xinhua news agency said that the government was acting to “ease the burden of excessive homework and off-campus tutoring for students undergoing compulsory education.”

Some analysts speculated that Chinese Communist Party (CCP) was reining in the tutoring industry to relieve some of the social and economic pressures of raising children in China.

Based on current trends, demographers expect China’s population to peak in the near future, weighing on the country’s economic growth. The reorganization of the tutoring industry may be an attempt to encourage people in the country to have more children.

Larger Crackdown

The new rules targeting tutoring companies may be one small step toward rectifying what the CCP sees as an important issue, but they are also a part of a larger push to rein in large Chinese corporations.

In addition to the crackdown on education companies, over the weekend, regulators ordered China’s largest firm, Tencent, to end its exclusive music licensing deals with record labels due to competition concerns.

Tencent, its rival Alibaba and others have been fined multiple times under China’s corporate crackdown that began late last year when the government halted the initial public offering of fintech giant Ant Group.  

But what investors perceived as regulations with only modest impact quickly turned into something much more consequential when the government began targeting the country’s ride-hailing giant Didi Chuxing shortly after its ill-timed U.S. IPO in June.   

Didi’s listing in the U.S. was frowned upon by those in power in China who don’t want the company’s sensitive data to be shared with U.S. investors and regulators, and set off a series of harsh measures from Chinese authorities. The company’s app was ordered to be removed from China’s app store, and now Didi is facing an investigation that could result in significant repercussions, including a potential forced delisting.

Going forward, regulators say that any Chinese firm with more than 1 million users must go through a security review before listing its shares overseas. But Didi’s situation raises the question of whether the CCP will allow any Chinese stocks, particularly those in important technology industries, to be listed in the U.S in the future.

The answer to that question will determine whether the $5 billion KWEB can survive in its current form. The majority of the ETF’s portfolio are U.S.-listed American depositary receipts, and even the positions that are listed in China could come under foreign ownership restrictions now or in the future. There are also 55 other ETFs that specifically target China’s markets, and the impact on them remains murky.

When it comes to Chinese stocks, investors now find themselves completely at the mercy of the all-powerful Chinese government.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.