Chinese shares slumped on Monday as investor worries over the impact of government regulations kneecapped the education and property sectors, after Beijing barred for-profit tutoring in core school subjects.
The searing sell-off sent Hong Kong-listed Scholar Education Group shares crashing more than 43% in morning trade. Hong Kong stocks of New Oriental Education & Technology Group Inc lost over a third of their value after U.S. shares plummeted more 50% on Friday. The company provides tutoring and test preparation services in China.
Sub-indexes tracking education and related sectors declined sharply. The CSI Education Index was last down 9.73% and the Hang Seng Tech index slumped 5.89%, touching its lowest level since Aug. 12, 2020.
The shakeout in China's $120 billion private tutoring sector follows Beijing's announcement on Friday of new rules barring for-profit tutoring in core school subjects to ease financial pressures on families. The policy change also restricts foreign investment in the sector through mergers and acquisitions, franchises, or variable interest entity (VIEs) arrangements.
Louis Tse, managing director at Wealthy Securities in Hong Kong, said the curbs were needed to prevent "chaos" in a profitable sector.
"The Chinese government...in a way it's right, they want to put a heavy hand and try to regulate that industry to make it more acceptable," he said. "Of course investors....I won't say they suffer. They won't earn that much anymore."
The crackdown on tutoring firms follows a tightening grip on China's internet sector that has rattled global investors. Beijing launched a data-related cybersecurity investigation into ride-hailing giant Didi Global Inc just two days after it raised $4.4 billion in a New York initial public offering.
China's blue-chip CSI300 index hit a more than 10-week low and was last down 2.89%, the Shanghai Composite Index declined 2.18%, having earlier hit a two-month low and the Shenzhen Composite fell 2.2%.
Both the Shanghai and Shenzhen indexes were hit by heavy foreign-investor selling. Refinitiv data showed outflows of 6.2 billion yuan ($956.24 million)from A-shares as of midday on Monday.
In Hong Kong, the Hang Seng index slipped to its weakest level since Dec. 29 and was last down 2.91%. The Hang Seng China Enterprises index fell 3.66%.
Government efforts to rein in an overheated property sector also spooked investors on Monday, sending the CSI 300 Real Estate index down 4.82%, while the Hang Seng Properties index fell 2.32%.
Media reports that China's central bank has ordered lenders in Shanghai to raise the rate of mortgage loans for first-time homebuyers followed a statement from the housing ministry on Friday that China will strive to clean up irregularities in the property market in three years.
Shares in China Evergrande Group, the heavily indebted developer whose financing difficulties have stoked broader apprehensions about the outlook for the property sector, fell 7%.
Evergrande shares have fallen by a third this month, and are down more than 54% this year.
Fellow developer Country Garden Holdings Co dropped 2.18%.
"We believe China's economy, and specifically its financial system, will face significant risks in coming months due to the unprecedented tightening measures applied to the property sector," economists at Nomura said in a note Monday.