By Mia Yiqiao Jing

China’s recently released law regulating foreign non-governmental organizations (NGOs) raised fresh doubts about foreign investment into higher education. The law, which takes effect in January,regulates educational institutions with operations in China and affects the entry strategy of new investors.

Powered by China’s rapid increase in student enrollment, more  foreign education providers are looking to invest in China China’s increasingly affluent population is willing to pay more tuition to enroll at foreign education institutions, which are generally seen as more prestigious. However, Sino-foreign educational institutions have long been subject to special scrutiny in China; 70 percent of Sino-foreign education applications were rejected in 2011. The new law is likely to further complicate the industry for foreign education providers.

The Sino-foreign education industry

As of March 9, 2015, there were 60 Sino-foreign institutions and 1,052 projects active in China’s higher education industry.  According to the Ministry of Education (MOE), the United Kingdom is the biggest source of foreign education investment, with 233 joint programs with Chinese universities, while the United States  takes second place with 169 programs. Approximately 94.5 percent of foreign investors formed education projects in Chinese universities, with computer science, accounting, and global economics as the most popular undergraduate programs.  Provinces with a high GDP per capita, such as Beijing, Shanghai, Zhejiang, and Jiangsu province, rank highest for the number of Sino-foreign education programs.

Current regulations on foreign investment

There are three ways to enter the Chinese higher education industry: as an independent institution in cooperation with a Chinese university, as a college affiliated with a Chinese university, or through a joint education program. Upon establishment, both the foreign and Chinese parties must submit identification, criminal records, and sources of funding documents.

According to the Regulations on Foreign-Chinese Cooperation in Running Schools, the president or principal administrator must be a Chinese national, who manages the board of trustees, implements financial budgets and activities, and takes charge of quality control. The MOE oversees any changes made by the joint institution, and any imported teaching materials must be  government approved.

The NGO Management Law and Sino-foreign education industry

While Sino-foreign education institutions are not the direct target of China’s new NGO Management Law, the law contains provisions that further restrict their involvement in educational exchange in China.

The entry of for-profit foreign schools will be strictly prohibited under the new law. Because of the vague definition of “non-governmental” and “non-profit” foreign NGOs, there is a risk that the marketing and funding activities of not-for-profit education providers will also be affected.The law states that in addition to supervision by local authorities, foreign NGOs will also be reviewed by the Public Security Bureau and all financial documents must be available to the State Council. Foreign education providers are affected as well; the law gives the State Council the power to review their activities such as registration, licensing, recruitment, operations, and education programs.

Complying with the NGO Management Law

Because the NGO Management Law doesn’t clearly indicate which practices are considered ”for profit,” foreign investors should communicate with the MOE to ensure their planned education programs and events don’t violate regulations. It is also recommended that foreign investors regularly communicate with local governments to understand their area-specific development strategies,  which will help alleviate local scrutiny.

Historically, local governments subsidized most Sino-foreign universities.. For example, the Ningbo government provided RMB 1.5 billion for the founding of the University of Nottingham Ningbo China, and the Pudong government gave away land for NYU Shanghai. Mutual understanding is key between foreign investors and local governments to reduce costs.This will be especially true under the NGO Management Law comes.

Prospect for the future

In line with China’s 2010-2020 Innovation Society Plan, Sino-foreign education will continue to be seen as a means to boost China’s knowledge economy.

Traditionally, Sino-foreign universities have targeted China’s more affluent coastal cities. However, the Chinese government is emphasizing high-quality education services for children in rural areas and migrant families with lower household income. In addition, the MOE is supporting morelocal governments from middle and Western China in education development, by giving  foreign investors more opportunities in thoseless saturated markets.

The Chinese government is also trying to expand the pool of  expertise in atmospheric science, disaster management, ecology, and environmental engineering. Joint education programs targeting these subjects are expected to have a promising future in the country’s higher education industry.

While the NGO Management Law stands to further impede foreign investment into China’s higher education market, the Chinese Sino-foreign education industry is still expected to expand overall. In order to ensure that their investment is worthwhile, foreign education providers will have to look closely at a number of influencing factors, including the location of their institution or program, the subjects it teaches, and the setup and structure of their partner.

About the author: This article originally appeared in China Briefing, a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email [email protected] or visit www.dezshira.com.

Posted by Mia Yiqiao Jing