News that China’s Communist Party may soon ban education companies from making a profit or raising funds through the stock market sent those stocks crashing Friday and led to a stern investor warning from CNBC financial analyst Jim Cramer.
''They’re killing us,'' Cramer said in a televised segment on the network Friday. ''They know that we own these stocks, and they’re showing no mercy. ... It’s very malice. It’s Stalinist. We tend not to see that.
"I think these are very serious violations that make us realize capitalism is not alive in China. We kidded ourselves that we thought the party was somehow going to want to join the rest of the world in being capitalist. They’re not. This is a dictatorship.''
Chinese regulators said that educational companies like TAL Education Group and New Oriental Education would no longer be able to raise capital through listings on the stock exchange, and could be converted to non-profit companies, causing a more than 50% drop in value for those stocks and single-digit decreases in several others Friday.
''I question every one of those companies,'' Cramer said. ''Any one of them could be vulnerable. You’ve got to go. You can’t own these stocks. I mean, the party may decide tomorrow that Alibaba is charging people too much. So, I don’t know. I think we’re discovering that they’re communists, but they were communist all along.''
According to a Markets Insider report, China is taking the actions because of the expense these tutoring companies bring on parents as the country increases its family birthrate from two children per family to three.
''Making the sector non-profit is just as good as eradicating the industry all together,'' Wu Yuefeng, a fund manager at Funding Capital Management (Beijing) Co., said in a Bloomberg report. ''The regulations on financing are a major surprise and shows that to the authorities, this is a matter of no small importance. In the short term for the sector, any news will be bad news.''
Experts say the new rules and regulations will basically render the entire industry moot, destroying one of the most lucrative investments China has offered recently.
According to the report, some $10 billion in venture capital flowed into the sector last year alone, but now investors are retreating quickly.
''Investors are selling out first and asking questions later,'' Justin Tang, head of Asian research at United First Partners said. ''It’s all being done to reduce (the) cost of education and motivate citizens to raise kids.''
In a published response to Friday’s activity and the ensuing reporting by the media, TAL Education Group, a leading K-12 after school tutoring service, said it's too early to speculate on what might take place going forward.
''The regulations have not been published, and the company has not received official notification of the regulations,'' the statement said. ''It's the company's policy not to comment on market speculations.''
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