Market Entry Strategies for Private K-12 School Service Providers in China

By Emerging Strategy

China’s education industry has experienced significant growth in recent years. This is due in part to increasing affluence and a relaxation of the country’s previous rules on the “one-child policy”. Spending on education has been growing faster than the Chinese economy: in 2014, the government’s spending on education totaled RMB 3.28 trillion (around US$512.6 billion) – up 8.04 percent compared to the previous year and accounting for 4.15 percent of the national GDP.

Chinese households now spend 30 percent of their income on education – higher than both Korea (22 percent) and Japan (10 percent). This year, the previous restrictions put on foreign-invested private schools have been largely lifted, though foreign investors are still prohibited to directly engage in certain sensitive fields such as compulsory education, military and China Communist Party schools.

One of the fastest growing education market segments in the country is K-12 (kindergarten through 12th grade). In China, private education institutes account for 31 percent of the country’s total education sector, with preschool institutes accounting for close to 90 percent of private education. Moreover, the amount of international schools registered in mainland China has soared in the past 12 years from 22 to 597, making China the largest country in the world for number of international schools. A rising number of wealthy Chinese parents are willing to spend a fortune on the Western-style curriculum and a better English learning environment offered in an international school.

RELATED: Pre-Investment and Entry Strategy Advisory from Dezan Shira

China’s Education System and Entry Barriers for Foreign Investors

China’s Ministry of Education is authorized to issue laws and policies regarding setting up a private school in China. China’s school education includes pre-school, primary school, middle school, high school, university and college, as well as graduate school education.

• Pre-school education/Kindergarten: for children aged three to five years old

By 2015, a total number of 139, 300 private kindergartens had been established in China. Foreign investors are allowed to invest in joint-venture pre-schools led by a Chinese party, meaning that the headmaster or the chief administrator in a foreign-invested education institution must be a Chinese national. Moreover, the Chinese party must account for half of the members in the board of directors or the joint management committee.

• Primary School and Middle School: from first grade to ninth grade

Primary and middle schools are usually run by local educational authorities with free tuition, although there are some private schools owned by enterprises and individuals. In 1986, the Chinese government officially implemented the “nine-year compulsory education” policy, which requires all Chinese children to receive nine-year basic education in primary school and middle school. Although foreign investors are not allowed to set up wholly foreign-owned primary or middle schools to enroll Chinese nationals, they may enter the market by cooperating with a Chinese private school or establishing an international school, which will be discussed later in this article.

• High School: from 10^th grade to 12^th grade

As with the restrictions on the pre-school education market, foreigners investing in this section need to start up as a joint venture and the school must be led by a Chinese party.

Not for-profit private schools enjoy the same tax exemption polices that apply to public schools. Notably, foreign students can only apply to international schools approved by the Ministry of Education.

Options/Entry Strategies for Foreign Investors

Based on the Guidance Catalogue for Foreign Investment, foreign investors are prohibited to set up police schools, military aviation schools and political party schools. Despite the restrictions imposed on foreign-invested private schools, there are three viable options for investors looking to enter China’s K12 education market.

Foreign-invested Kindergartens and High Schools

As mentioned before, foreign investment is allowed in the private pre-school and high school education market, given that the school is led by a Chinese party.

Joint-Venture International Schools

Though not allowed to be directly engaged in China’s compulsory education system, foreigners may, however, cooperate with a private Chinese school and enroll Chinese students. As stipulated by the law, the school must meet the government’s rigid requirements for the campus area and facilities. They must follow China’s compulsory education rules in designing curriculums for primary and secondary students, which can be relatively flexible when designing high school curriculums.

Maple Leaf Educational Systems (MLES), established in China’s northeastern port city Dalian in 1995, is the first and largest Canadian offshore school in China. With a curriculum endorsed by the British Columbia Ministry of Education, MLES today operates 46 schools from pre-school to high school in 11 cities throughout China, serving over 17,700 students.

Wholly Foreign-owned International Schools for Expatriate Children

In 1995, China promulgated the “Regulations on International Schools for Expatriate Children (JIAO ZONG [1995] No.130),” which stipulates that foreign companies, institutions, branches of international organizations legally established in China, as well as foreign individuals residing in China, may apply to the education bureau for the establishment of an international school. However, these schools are limited to foreign passport-holders, and investors may not set up branches. They are also required to submit the name list of their teaching staff and enrolled students to the Ministry of Education each year.

Concluding Thoughts

Satoko Okamoto, Director at Emerging Strategy, comments: “China’s education sector can appear opaque and unsuitable for foreign investment. The country’s government attaches importance to keeping education free from privatization, which has resulted in parts of the sector being either restricted or outright prohibited from foreign participation. However, with an informed entry strategy and a thorough due diligence conducted beforehand, foreign enterprises can access certain parts of China’s hugely profitable K12 market and quickly see a massive ROI. With Chinese households currently spending more on education than ever before, now is an opportune time to consider investment.”

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